This paper examines the potential contribution of unemployment hysteresis theories to the understanding of the Belgian labor market. It gives an overview of the Belgian labor market, reviewing the indexation system and the wage bargaining process. It estimates models of wage determination using aggregate data (1970-90) and firm-level panel data (312 manufacturing firms during 1978-84).
The time-series results suggest that there is strong persistence in unemployment and that it occurs primarily because the long-term unemployed cease to exert downward pressure on wages. The results also show that the suspension of indexation during 1982-86 had a significant and negative long-run impact on real wages. Furthermore, the two-yearly bargaining round and the indexation system induce long lags in wage determination.
The panel results provide evidence of insider power in wage determination but also indicate that the industry-wide and national unemployment rates continue to play a role in wage determination. However, as with the time-series results, this impact diminishes when the proportion of long-term unemployed increases.
The policy implications are threefold. First, the finding that the long-term unemployed exert no downward impact on wages points to the usefulness of tightening up the benefit system in order to encourage the unemployed to seek jobs, and of providing targeted training and employment opportunities. Second, insider power in wage determination needs to be reduced to help employment generation by, for example, reducing hiring and firing costs or removing entry barriers to new firms. Third, insider power suggests the need for flexibility in applying indexation during a recession to prevent layoffs that, given an insider wage setting, would become irreversible. Recent initiatives, including the introduction of a competitiveness norm for indexation and labor market programs aimed at the long-term unemployed and the young, such as the plan d’accompagnement and the plan d’embauche des Jeunes, are consistent with these policy implications.