Employment Patterns in OECD Countries

This paper explores the impact of policies and institutions on employment and unemployment of OECD countries in the past decades. Reduced-form unemployment equations, consistent with standard wage setting/price-setting models, are estimated using  cross-country/time-series data from 21 OECD  countries over the period  1982-2003.  In the "average" OECD country, high and long-lasting unemployment benefits,  high tax wedges and stringent anti- competitive product market regulation are found to increase aggregate unemployment. By contrast, highly centralised  and/or coordinated wage bargaining systems are estimated to reduce unemployment. These findings are robust across  specifications, datasets and econometric methods. As policies and institutions affect employment not only via their  impact on aggregate unemployment but also through their effects on labour market participation -  particularly for  those groups "at the margin" of the labour market, group-specific employment rate equations are also estimated. In  the "average" OECD country, high unemployment benefits and high tax wedges are found to be associated with lower employment prospects for all groups studied, namely prime-age males, females, older workers and youths. There is also evidence that group-specific policy determinants matter, such as targeted fiscal incentives. The paper also finds  significant evidence of interactions across policies and institutions, as well as between institutions and macroeconomic conditions. Consistent with theory, structural reforms appear to have mutually reinforcing effects: the impact of a given policy reform is greater the more employment-friendly the overall policy and institutional framework.  Certain more specific interactions across policies and institutions are found to be particularly  robust, notably between unemployment benefits and public spending on active labour market programmes as well as between statutory minimum wages and the tax wedge.  Finally, it is shown that macroeconomic conditions also matter for unemployment patterns, with their impact being shaped by policies.