Five essays on performance and structural rigidities in European labour markets

Five essays on performance and structural rigidities in European labour markets

Gilles Mourre

PhD thesis submitted for the degree of Doctor in Economics and Management

under the supervision of Khalid Sekkat (ULB) and Eric Strobl (École Polytechnique, Paris)

Members of the jury: André Sapir (ULB), Frank Walsh (University College Dublin), François Rycx (ULB) and Pierre-Guillaume Méon (ULB)

Academic Year 2008-2009

Solvay Brussels School of Economics and Management (SBS-EM)

Université Libre de Bruxelles

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TABLE OF CONTENTS

Acknowledgements 7

General introduction 9

Chapter I. Labour Market Institutions and Labour Market Performance: a Survey

of the Literature 21

1. Introduction 23

2. Stock and flows approaches to equilibrium unemployment: theoretical effects of

institutions 25

2.1 The stock approach 25

2.2 The flow approach 27

2.3 Complex effects of institutions from a theoretical standpoint 28 3. Labour market institutions and labour market performance in the empirical literature 30

3.1 Direct impacts of labour market institutions 30

3.2 The interactions between labour market institutions and macroeconomic shocks 32 3.3 The interactions between labour market institutions themselves 33 3.4 Institutions matter but no full consensus on the role of each institution 35 4. Institutions as the outcome of an endogenous process 35

4.1 Legal theory 36

4.2 The social conflict view 37

4.3 The efficient institutions view 39

4.4 Rationale for “inefficient” configuration of labour market institutions 40

5. The policy design at the macro- and micro-level 42

5.1 The design at macro-level: bargaining institutions and policy packaging 42 5.1.1 Bargaining institutions and wage setting: is decentralised bargaining better? 42

5.1.2 Broadening the reform package? 46

5.2 The detailed design of labour market policies at the micro level 47 5.2.1 The trade off efficiency/equity: does it exist in all cases? 47 5.2.2 Key role of incentives: conditionality, monitoring, sanctions 48 5.2.3 The need of targeting active policies towards groups at higher risks 49 5.2.4 The good functioning of institutions in charge of implementing labour

market policies 50

6. Conclusion 50

Annex: Figures and tables 52

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Chapter II. Underutilisation of labour in (continental western) Europe: a detailed

GDP accounting perspective 57

Summary of the main findings 59

1. Introduction 63

2. The GDP accounting analysis and key methodological issues 65 2.1. A supply side approach and different concepts of labour utilisation 65

2.2. The value-added and caveats of the approach 68

2.3. Computing a comparable indicator of labour quality: the initial education of

labour 72 3. Where do European countries stand now in terms of labour utilisation level and

how does this affect per capita GDP level? 76

3.1. Accounting for the level of living standard and labour utilisation:

a multiplicative breakdown 76

3.2. Aggregate findings 81

3.3. Results across countries 85

4. Contribution of labour input to economic growth 89

4.1. Accounting for the growth of GDP and labour utilisation: an additive breakdown 89

4.2. Main findings at the aggregate level 94

4.3. The different importance of labour input growth across countries 98

5. Conclusion 105

Annex 1: Data description 107

Annex 2: Additional country results of GDP accounting in level 110 Annex 3: Additional country results of growth accounting 114

Chapter III. Did the euro area experience a change in its aggregate employment

pattern in the late 1990s? 117

Summary of the main findings 119

1. Introduction 123

2. Estimation of a standard employment equation 125

2.1 Theoretical framework 125

2.2 Data used 127

2.3 Estimation method 128

2.4 Detailed estimation results of a standard employment equation 131

3. Is there any evidence of a structural change in the euro area in recent years? 135

3.1 Instability of the standard employment equation at the end of the sample 135 3.2 Quality of dynamic simulation and forecasting performance when allowing for a

break in the standard employment equation 137

3.3 The role of traditional determinants when allowing for a break 140

4. Testing the robustness of the break 141

4.1 Robustness of the break while also considering the very recent period 2002-2005 142 4.2 Robustness of the break while considering hours worked or employment in

full-time equivalents 144

4.3 Taking account of heterogeneity across countries 147

4.4 Comparison of findings with existing studies 149

5. What factors account for a change in aggregate employment pattern in recent years? 151 5.1 Changes in the sectoral composition of euro area employment 152

5.2 The importance of labour market institutions 153

5.3 The role of active labour market policies 157

6. Conclusion 159

Annex: Additional tables 161

Chapter IV. Why do Europeans work part-time? A cross-country panel analysis 163

Summary of the main findings 165

1. Introduction 169

2. Some theory: the factors influencing part-time employment 171

2.1 Business cycles 171

2.2 Labour market institutions 174

2.3 Other structural variables 177

3. The framework of the empirical analysis 178

3.1 Estimation strategy 179

3.2 Data 183

4. The effect of the business cycle on part-time employment in the short to medium run 184 5. The influence of institutions and other structural variables on the part-time

employment rate in the longer run. 188

5.1 Using a panel of OECD countries with general labour market institutions 188 5.2 A panel of EU countries with additional institutional and structural variables 189 5.3 The relative importance of the business cycle and institutional and structural

variables: a contribution analysis 192

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6. Conclusion 194

Annex 1: Data 195

Annex 2: Econometric results 199

Chapter V. Wage compression in Europe: first evidence from

the structure of earnings survey 2002 209

1. Introduction 211

2. Origins and effects of wage compression: a literature survey 212

3. Data 217

4. Theoretical framework: a simple labour-demand model 220

5. Econometric strategy 225

6. Econometric results 228

6.1 Wage compression across occupations 228

6.2 Wage compression across educational attainments 232

7. Conclusion 239

General conclusion 241

Key messages 254

References 255

Acknowledgements and disclaimers

A Ph.D. thesis is generally not a smooth ride across theory and empirics and requires a lot effort and dedication. However, it cannot be achieved without the contributions of a number of people whose advice, encouragements and helpful comments were valuable in the finalisation of the project. First and foremost, I would like to thank my two supervisors, Khalid Sekkat (ULB) and Eric Strobl (École Polytechnique, Paris), who have accepted to supervise my PhD, have given me a lot of autonomy and have put a lot of trust in my approach of the work. It has been an honour to work under their supervision, which has contributed to deepening my knowledge in various areas. Their advice and support have made this thesis possible and enjoyable. My sincere gratitude also goes to André Sapir (ULB), Frank Walsh (University College Dublin), François Rycx (ULB) and Pierre-Guillaume Méon (ULB), who did me the honour of accepting to be members of my PhD Jury. I would also like to thank my co-authors on two chapters, Alfonso Arpaïa (chapter I) and Hielke Buddelmeyer and Melanie Ward-Warmedinger (chapter IV) for their trust at the start of the project and for their excellent and friendly collaboration. I also wish to warmly thank Ariane Szafarz for trusting me, welcoming me at Solvay Business School and at CEB and giving me the opportunity to be amongst the happy few PhD students to present their work at the Joint Doctoral Day between ULB and University Panthéon-Sorbonne in November 2006 (Quatrième journée de collaboration scientifique entre les Ecoles Doctorales en Gestion de l'Université Paris I - Panthéon - Sorbonne et de l'Université Libre de Bruxelles). My thanks also go to Aurélie Rousseau, who kindly helped me on the administrative side on many occasions. A special tribute should be paid to Gaëtan Nicodème and Salvador Barrios, who warmly and strongly encouraged me to engage in doctoral studies and gave me valuable advice throughout the process. Gaëtan, who successfully submitted his PhD dissertation to Solvay Business School in 2007, informed me about doctoral studies at ULB and showed me the way. I have also benefited on some chapters from valuable discussions with Alfonso Arpaïa, Declan Costello, Giuseppe Carone, Véronique Genre, Franck Sédillot, Gwenaël Le Breton, the late Maarten van de Staat, Neale Kennedy, Ilan Tojerow and others whom I may have forgotten.

The usual disclaimers apply. The views expressed in this PhD thesis and all individual

chapters are those of the author and his co-authors only. No responsibility should be attributed

to the European Commission.

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GENERAL INTRODUCTION

Five essays on performance and structural rigidities in European labour markets

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Background

Structural rigidities in Europe, especially in continental Europe, have been blamed for being responsible for weak labour market performance, especially compared with the United States. The widespread belief is that rigid institutions cause high unemployment, especially in a world where economies are increasingly globalised. However, in reality, this allegedly

"common knowledge" appears too crude and misleading since strong and constraining labour market institutions could coexist with good labour market performance, provided that the former are well-designed and set the right structure of incentives to encourage employment, such as in the Scandinavian model. Moreover, good performances in the labour market need to be defined not only in terms of low aggregate unemployment rate but also in terms of high participation and high number of hours worked per person, while paying attention to the exogenous demographic component of labour inputs, say, the size of working-age population.

Beyond aggregate variables, attention should also be brought to the heterogeneity and segmentation of European labour markets and, in particular, to the sharp difference in employment performance across ages, skills and gender groups and to the different labour market statuses, e.g. full-time employment versus part-time jobs.

The variation of labour market responses to common shocks across industrialised countries in the late 1970 and early 1980s has been widely documented. While in some countries those common shocks led to only a temporary deterioration in their unemployment prospects, others saw high and persistent unemployment even when the shocks faded away.

This differentiated performance suggests the existence of country-specific structural factors, which may influence the responses to symmetric shocks. Similarly, the unemployment drop observed in several euro area countries since the second half of the 1990s occurred with no signs of price and wage inflation and then are considered by many to be of structural nature (Decressin et al. 2001, Garibaldi and Mauro 2002). The different patterns of unemployment

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Important disclaimer: the views expressed in this PhD thesis are those of the author only. No responsibility

should be attributed to the European Commission.

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development across European countries can often be related to the specific pace at which labour market reforms were introduced (Arpaïa et al. 2005).

The interest in labour market rigidities is not limited to academic analysis. Since the launch of the OECD Job Strategy and the EU European Employment Strategy, a growing consensus has also emerged amongst policy makers that the “rules of game” of the labour market need to be adapted to new challenges such as demographic ageing, fast technological changes and rapid swings in the international division of labour. This is a prerequisite for reaping the benefits of a changing socioeconomic environment and avoiding its potential pitfalls.

The thesis investigates the role of structural rigidities in recent labour market performances in Europe through various and complementary angles in five essays, presented as different chapters. By structural rigidities, we mean a lasting feature caused by a set of institutions, which prevents a market from operating freely. The approach is essentially empirical and macro-economic, while the scope of the analysis is definitely European, which is technically reflected in the use of either euro area aggregates or panels and cross-sections of European countries.

Literature on labour market institutions: importance of interaction, endogeneity and micro- economic features behind macro performances

The first essay or chapter ‘Labour Market Institutions and Labour Market Performance: a Survey of the Literature’ surveys the latest developments in the economic literature on the intricate and complex link between labour market institutions and labour market performances. It selectively reviews the theoretical arguments and the empirical evidence of the literature on labour market institutions. Although explanations of these different unemployment behaviours across countries are numerous in the economic literature (see Blanchard 2005 for a review), there is a growing consensus about the key importance of labour market institutions in influencing labour market performances. For example, Bruno and Sachs (1985) relate the differences in labour market performances across countries to the interaction between country-specific bargaining structures and common supply shocks.

Eichengreen and Iversen (1999) argue that, in order to initiate and sustain economic growth,

labour market institutions should be able to adapt to rapidly changing production technologies

and an increasingly heterogeneous labour force, and that the failure to introduce institutional reforms that could overcome collective-action problems in the labour market is considered as one reason for poor labour market performance. Similarly, Blanchard (2005) refers to the poor fit between labour market institutions and the macroeconomic environment as the main characteristic of the evolution of the French labour market since the Second World War.

Economic institutions are important because they affect the structure of economic incentives in the society (Acemoglu 2005).

From a theoretical perspective, the literature on labour market institutions often takes a

“stock” approach to labour markets (i.e. looking at the number of people with a given labour market status). However, a “flow” approach (i.e. looking at the transition between two labour market statuses) can also be useful in understanding why the effect of certain institutions on performance is uncertain or at least multiple (Mortensen and Pissarides 1999). The chapter briefly describes these approaches.

When considering the complex link between labour market institutions and labour market performances, the chapter digs into several relevant dimensions. The labour market institutions certainly affect labour market outcomes directly (Layard and Nickell 1999), but their ultimate effect might also result from their interaction with macroeconomic shocks (Blanchard and Wolfers 2000) and with other institutions (Coe and Snower 1997, Belot and Van Ours 2004). The chapter also considers the lessons of the literature not only on the importance of institutions in general but also on the role played by specific institutions.

The literature generally treats labour market institutions as exogenous, that is, taken for

granted. Attention has shifted recently towards understanding the underlying causes of

specific institutional arrangements, as a prerequisite for reforming them. The chapter gives an

overview of this important debate and reviews the main theories, namely the legal theory, the

social conflict view, the efficient institutions approach and the rationales for “a priori

inefficient” configurations of labour market institutions. In doing so, it casts light on the

relationships between the efficiency of the redistributive policies - via taxation - and the type

of protection provided - on the job or in the market (Acemoglu and Shimer 1999, Blanchard

and Tirole 2008). The substitution between policy instruments opens the issue of the best

choice of policies under specific institutional or economic conditions (see for instance Strobl

and Walsh 2002, Genre et al. 2003).

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The literature on labour market institutions highlights the great importance of an efficient policy design. The chapter endeavours to identify general principles for achieving an efficient policy design at both the macroeconomic and microeconomic level. At the macroeconomic level, one of the key issues is the advantage of a reform package as opposed to the sequential implementation of reforms (Dewatripont and Roland 2005). Regarding the microeconomic level, the chapter explores potentially important dimensions, namely, the possible existence of a trade-off between efficiency and equity, the key role of incentives and their different forms, the need for targeting active labour market policies towards certain disadvantaged groups and the existence of well-functioning public institutions as the prerequisite for implementing labour market policies efficiently.

The merit of ex post analyses of market rigidities: ex post performance revealing the poor functioning of institutions

A first way to identify the existence of rigidities in the labour market is indirect and consists in scrutinising the “ex-post” performance of the labour markets, i.e. the current level and recent growth. Two strands of studies examine the underutilisation of labour in Europe. A third vein of empirical literature investigates the lasting improvement in the labour market (mainly in employment) seen in some EU countries since the mid-1990s, taking a longer time perspective, generally going back to the 1970s.

The first vein of studies focuses on the poor labour market performance in terms of

unemployment and tries to relate it to labour market rigidities and the ill-functioning of

institutions in Europe, using cross-sectional or panel data analysis. This branch of the

literature initiated by Scarpetta (1996) and extended by Blanchard and Wolfers (2000), Belot

and Van Ours (2004) and Nickell et al. (2005) and attributes the rise in unemployment in

Europe to inadequate institutions or/and their interaction with adverse macroeconomic

shocks. Some recent studies extend the analysis beyond unemployment to employment

performance (Garibaldi and Mauro 2002, Mourre 2006, Bassanini and Duval 2006). These

studies use cross-sectional or pooled time-series data techniques and regress labour market

performances on indicators of labour market institutions to account for the difference in

labour market outcomes across countries. However, the results of these studies are often

unclear or not robust, partly due to multicolinearity problems and to the general difficulty to

measure institutions with macro-indicators.

The second vein of literature uses a GDP accounting approach, very often in terms of growth rates (so-called “growth accounting”) rather than level, so as to better understand the poor use of labour resources in the EU15. The GDP accounting methodology is based on a production function framework and is derived from the seminal work of Solow (1956) on the neoclassical growth theory and of Jorgenson (1995) and Jorgenson and Griliches (1967) on the empirical decomposition of growth. To date, a wealth of studies is available for EU15 member states and OECD countries (Scarpetta et al. 2000), large EU countries (Barrell et al.

2007), various developing countries (Senhadji A. 2000) and the central and eastern EU members states (Arratibel et al. 2007). This literature strand on GDP accounting could be related to a wider vein of policy research investigating the reasons for slow growth in Europe and the way to unleash the growth and employment potentials in the near future (Aghion et al.

2004, Pisani-Ferry and Sapir 2006, Sapir 2007).

The second chapter ‘Underutilisation of labour in (continental western) Europe: a detailed GDP accounting perspective’ falls exactly under this second vein of literature. It consistently examines the labour underutilisation in all EU27 countries (including Cyprus, Malta, Bulgaria and Romania) in the most recent period (1995-2006) employing a comparable GDP accounting approach both in levels (per-capital GDP gap) and in terms of GDP growth rates. The chapter will help cast light first on the factors behind the utilisation of labour in the EU27, such as the demographic or labour market component, and second on the consequences of labour utilisation on existing income differences across member states and on economic growth. The caveats associated with this approach are nonetheless duly recalled (Barro 1999).

We resort to different concepts of utilisation of labour. When it comes to GDP per capita,

we use the concept of labour utilisation per se, i.e. total hours worked per capita. It can be

divided into a demographic component (i.e. working-age population over total population)

and a labour market component (i.e. total hours worked per working-age person). Turning to

GDP growth, we use the concept of total labour input (i.e. total hours worked in the

economy), which can also be split between a demographic component (i.e. working-age

population, aged 15-64) and a labour-market component (i.e. total hours worked per working-

age person). Two reference benchmarks are employed to qualify the current labour utilisation

as insufficient or, to put it differently, as “underutilisation”.

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For sake of clarity, the chapter first comments on developments at the aggregate level, i.e.

the EU15, the new member states and the euro area. However, the paper highlights the most pertinent country-specific results and the country dispersion of labour utilisation. It tentatively identifies several patterns of labour utilisation. It also discusses the interactions among GDP components and the possible trade-offs between labour utilisation and labour productivity.

The merit of the paper is four-fold. First, its scope is wide, owing to its comprehensive geographical coverage and its consideration of both starting condition and recent progress.

Recent developments could indeed only be assessed by considering the starting condition.

Second, the accounting methodology offers a more detailed decomposition of labour input (including demographic variables and age- and gender-specific participation) than often found in the literature, which generally gives a stronger emphasis on productivity at the expense of labour. Third, it also attempts to (partly) capture the impact of labour quality, that is, the initial education of labour, which is often lumped in with the Solow residual, commonly named Total Factor Productivity. Last and not least, this GDP accounting analysis meets the broader policy need to identify the underperformances of European economies and, thus, the main key economic challenges faced up by each country. This is crucial for policymaking and, in particular, with regard to the Growth and Jobs Strategy - commonly called Lisbon strategy - which provides the EU with a framework for policy coordination that supports the process of structural reform at national level with a view to raising growth and employment potential. A detailed GDP accounting approach fulfils the policy requirement to have a consistent assessment benchmark against which the starting position and progress of the EU economies can be measured and assessed.

The third chapter ‘Did the euro area experience a change in its aggregate employment

pattern in the late 1990s?’ corresponds to a third strand of studies, which takes a longer

term-perspective and uses time-series econometric techniques to explain changes in labour

market performance. These studies often focus on recent employment growth to cast some

light on the reasons for the strong improvement of labour market performance in many

European countries in the late 1990s. Applying a new panel error-correction technique, Hahn

(2004) shows that the long-term structure of labour demand is broadly equal across OECD

countries over the period from 1970 to 2000. However, the adjustment speed of employment

to the long-run equilibrium is much higher in countries with flexible labour markets, such as

the US and UK, than in most EU15 countries, which display broadly similar adjustment

speeds. Some other studies focus on specific aspects to explain the improvement in net employment creation, such as wage discipline in EMU (Pichelmann, 2001) or the change in employment composition (ECB 2002a). Using panel data on employment for seven European countries in the period 1981-1994, Morgan (2001) shows that, while the long-run level of labour demand in terms of total hours worked (but not in terms of number of persons employed) can be increased by more employment security (measured by a survey of employers), the latter can considerably slow down the dynamic adjustment of labour demand in the short run. Some more comprehensive studies attempt to survey all the factors likely to account for the higher job intensity in Europe (European Commission 2000 and 2004, Decressin et al. 2001, Garibaldi and Mauro 2002). The geographic focus varies across these studies (EU countries, large euro area countries or OECD countries).

The third chapter continues in this vein by analysing the determinants of employment for the euro area as a whole, without neglecting the great deal of heterogeneity across countries.

It takes a longer perspective (1970-2005) and mostly makes use of time-series analysis to explore whether the labour market has been more job-intensive in the euro area since the second half of the 1990s than in the previous decades.

From a methodological point of view, the chapter follows the approach of Fagan, Henry and Mestre (2001), who estimated an aggregate dynamic employment equation for the euro area with an error correction mechanism. However, it offers several innovative features.

While Fagan et al. ran their equation up to 1997 only, this chapter thoroughly examines the pattern of employment in 1997-2001 and checks whether this pattern still holds in more recent years (2002-2005). Second, the chapter uses a more adequate theoretical framework, namely, a CES production function with two factors and constant returns to scale, instead of a Cobb- Douglas production function. This allows one to derive a labour demand specification that caters for the possibility of an elasticity of substitution between labour and capital different from zero. Third, the chapter carefully tests the presence of a cointegration relationship between the explanatory variables. Lastly, many robustness tests are carried out to ascertain the existence of a break. In particular, the occurrence of break is tested by taking hours worked and employment in full-time equivalent as dependent variables instead of employment in headcount.

The ratio of employment growth to real GDP growth indicates that real GDP growth was

more job-intensive in the late 1990s and early 2000s, standing at 0.6, compared with 0.4 in the

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late 1980s. Moreover, the ratio of employment growth to real GDP growth became higher in the late 1990s in the euro area than that recorded in the US and the UK. What could account for this development? Is it just the effect of a cyclical boom? The chapter argues that the traditional determinants (GDP growth, labour cost developments, trend productivity) do not fully explain the strong employment growth recorded in the euro area in the recent period.

Sound econometric evidence, mainly based on time-series analysis but also on panel data analysis, suggests that the recent employment performance is related to a structural change in the aggregate employment behaviour in the euro area.

Looking further, in order to explain the factors underlying this change, the chapter runs a cross-sectional analysis that compares country-specific breaks in the employment equation with changes in institutions and active labour market policies in the late 1990s. This latter approach can be associated with the above-mentioned first branch of the literature, initiated by Scarpetta (1996), which uses a cross-section or a panel of countries and regresses labour market performance on indicators of labour market institutions to account for labour utilisation differences across countries.

The main point of this chapter is to find out the key factors behind the changes in labour market performance and to distinguish the standard determinants (business cycle and wages developments) from structural changes, which are not explained by those determinants and are therefore identified as “residuals”. These changes could be related to deeper modifications in institutions and/or other structural factors, which are often called “labour market rigidities”.

Like the second chapter, this chapter typically carries out an ex post analysis of the institutional and structural features of the labour market: those features are apprehended indirectly through the existence of different labour market performances across countries – in the second chapter – or the change in performances overtime – in the third chapter.

Focus on two labour market features characterising European labour markets: part-time employment and wage compression

The last two papers of the thesis directly focus on specific labour market institutions or

structural features characterizing many European labour markets: the increasing use of part-

time employment and the compression of wages. These provide an “ex ante” and direct

analysis of important labour market institutions or structural features.

The fourth chapter ‘Why do Europeans work part-time? A cross-country panel analysis.’ carries out a careful examination of the main drivers of part-time employment, using a panel of EU15 countries. Whereas the share of part-time employment in total employment fell slightly in the US during the late 1980s and 1990s, it increased strongly in the EU15.

Part-time employment is a substantial issue. First, labour performance cannot only be gauged from a pure aggregate perspective, looking at employment in headcount. The composition of employment also matters a great deal. The chapter examines the compositional issue from the viewpoint of the working time status. The promotion of part- time work may be an important measure through which the flexibility of labour markets can be increased, even though this type of job is sometimes associated with lower hourly wages and less favourable career, training and wage prospects. On the labour demand side, it may allow employers to adjust hours worked to cyclical conditions more easily, facilitating the adjustment of production and labour costs. On the labour supply side, part-time work may increase the labour market choices open to individuals and may thus improve social welfare.

Second, part-time employment has material but differentiated effects on labour market aggregate performances. While it certainly contributes to decreasing average hours work per person, it might raise the participation in the labour market (especially for women) and limit unemployment rise (particularly in downturn), which is likely to result in a positive overall impact on total labour input – measured in terms of total hours worked. This is stressed in the second chapter on labour utilisation, which shows that the rising female participation is often accompanied by declining average hours worked per person employed. The second chapter then offers the “part-time story” as a possible and partial explanation of this development.

The third chapter on the break in employment pattern shows that total employment growth (in terms of persons employed) in the 1990s benefited from the development of part-time employment in the European countries. This was seen technically through the weaker magnitude of the break in employment equation when the employment is measured in terms of full-time equivalent or total hours worked compared with employment in headcount.

However, the “job sharing” permitted by part-time job developments cannot explain all the increases in employment in headcount.

This fourth chapter bridges a gap in the literature since, to the best of our knowledge,

there has been no paper until now that systematically looked into the macroeconomic

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determinants of part-time jobs (business cycle and institutions) using pooled-time series econometric evidence at the EU15 level. However, the chapter can be related to a bunch of studies that make the comprehensive description of part-time employment developments based on macro-data and include sociological and institutional qualitative evidence (Smith et al.1998; Delsen 1998; OECD 1999, Walwei 1998). In this vein, some papers focus on international comparisons (Lemaitre et al. 1997, Buddelmeyer, Mourre and Ward 2005a) and attempt to understand the reason why part-time work is so low in some countries such as Spain and Portugal (Ruivo et al. 1998) or so different across countries (Pfau-Effinger 1998).

However, most of the studies available on part-time employment belong to another branch, which relies on micro-econometric analysis based on firm surveys. Those studies attempt to identify the microeconomic and individual determinants of part-time work (Haskel 1997;

Houseman 2001), to illustrate the role of part-time work as a flexible work arrangement (Haskel 1997, Farber 1999, Barrett and Doiron 2001), or to explain the transition between part-time jobs and other labour market states (Blank 1994, O’Reilly and Bothfeld 2002, Buddelmeyer, Mourre and Ward 2005b).

Against this general backdrop, the fourth chapter has three precise purposes. First, it reviews the determinants of part-time employment, as identified by the economic literature.

Second, it aims to determine both the (short-run) effect of the business cycle and the (long- run) influence of structural factors on the development of part-time employment, using a panel of EU-15 countries. This could incidentally cast some light on whether part-time jobs have been used as a flexible work arrangement by firms in the EU15, as has been shown for some specific countries and sectors. Third, the main objective of the paper is to measure the relative importance of each determinant of part-time employment over time. This justifies the macro perspective of the chapter and its comprehensive approach (encompassing a large set of determinants), since the relative contribution of the relevant factors – of macroeconomic, policy, structural and institutional nature – could not have been estimated with a micro analysis or with a study focusing only on one specific driver of part-time employment.

The fifth and last chapter entitled ‘Wage compression in Europe: first evidence from

the structure of earnings survey 2002’ proposes a method to estimate the magnitude of

wage compression, which appears to be a noticeable feature of many labour markets in

Continental Western Europe. Although this point is beyond the scope of the paper, the

compressed wage structure in Europe is often mentioned to be at the root of the relatively low

employment rate seen in specific groups in the European Union, such as youth, women, older workers and the low skilled, while the prime-age employment rate is much higher and broadly similar to that of the US (Dolado et al. 2001).

Economic theory offers two non-mutually exclusive types of explanation for the existence of wage compression. The first one considers wage compression as being caused by exogenous labour market institutions such as minimum wages (which affect the lower end of wage distributions by setting a floor) and by any institution which contributes to raising the reservation wage, such as generous unemployment benefits (Koeniger et al. 2005). The second type of explanation identifies endogenous causes for wage compression, for instance in an imperfectly competitive labour market with heterogeneous workers and firms (Booth and Zoega 2002). Ample empirical evidence gives support to the endogenous determination of wages, suggesting that employers pay different wages to similar workers, which potentially allows wages to deviate from productivity in some cases. Either employers pursue different wage policies or high-wage firms manage to attract more able workers (Krueger and Summers 1988, Genre, Momferatou and Mourre 2005, Abowd et al. 1999, Abowd and Kramarz 2000a and 2000b).

In statistical terms, the empirical dispersion of wage distribution is often claimed to be much lower in Europe than in the United States (Bertola, Blau and Kahn 2002a). In economic terms, “wage compression” means the difference in wages across workers or firms in Europe that does not reflect the (wider) difference in productivity. This mismatch can be understood in a static way comparing the level of relative wage and relative productivity, but also in a dynamic way as the ability of relative wages to swiftly respond to shocks affecting relative productivity. Wage distribution is also one of the channels through which some institutions, particularly those shaping the wage setting, impact labour market performances (Bertola and Rogerson 1997).

Wage compression is defined in economic terms here, as the lower difference in wages

across workers or firms compared with the difference in productivity. The purpose of this

chapter is to examine wage compression in Europe using the publicly available data on wages

derived from the Structure of Earnings Survey 2002 (SES 2002). Although the public

database, available on the Eurostat website, only reports group-specific averages and not

individual data – accessible only in the “safe-room” in Eurostat or via the (restricted)

participation in the LEED project, its main advantage is to allow one to control for the

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composition of the workforce when examining wage dispersion. Given the cross-sectional and

“snapshot” nature of SES data, the paper only investigates the static dimension of wage compression.

The paper considers the existence of wage compression both across occupations and

across educational attainments for the European Union as a whole (EU27). As relative

marginal productivity cannot be observed across occupations or levels of education directly,

the methodology is based on the derivation of a labour demand model, which is estimated by

means of cross-sectional econometric analysis.