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This paper was presented at the conference Le Nuove Frontiere della Politica Economica, held at the Ministero del Tesoro in Rome in June 1999. We thank Francesco Giavazzi, Alessandro Penati, and especially Guido Tabellini for suggesting some of the questions addressed in this paper; Charles Bean, Giuseppe Bertola, Olivier Blanchard, Eduardo Borensztein, Martin Hardy, Kornelia Krajnyak, Eswar Prasad, Paolo Sestito, and participants in the conference and in seminars at the International Monetary Fund for helpful comments and suggestions; and Paula Adams, Mario Nava, and Stephen Nickell for helping us obtain the various data sets.
Recent cross-country studies on the sources of unemployment include Nickell (1997), Scarpetta (1996), and Nickell and Layard (1998) on the empirical side; and Bertola (1998) and Mortensen and Pissarides (1998a,b) on the theoretical side
This paper focuses on net job creation. Davis and Haltiwanger (1998) survey existing studies on gross job creation and destruction. Garibaldi et al. (1997) analyze the impact of labor market policies on gross job flows in OECD countries.
As is well known, individuals who are not working are recorded as part of the labor force (and therefore as unemployed) only if they are actively looking for a job. However, especially in high unemployment countries such as those of Continental Europe, the low likelihood of finding a job may imply that many people will have stopped actively searching for one (the “discouraged worker” phenomenon); conversely, many people may declare that they are actively searching for a job when in fact their search effort is minimal.
The ongoing policy debate has suggested that these dimensions may be relevant in determining overall job market performance. At the same time, most existing theories of the labor market focus on aggregate employment and unemployment.
Cross-country analyses of differences in wage formation and wage dynamics include Freeman and Katz (1995) and Davis (1992). Bertola and Ichino (1995) and Bertola (1998) argue that the different employment performance of the United States and Europe may be attributed to differences in wage flexibility and job security provisions.
A sample period spanning almost two decades ensures that cyclical effects will not distort cross-country comparisons.
Blanchard (1997) and Caballero and Hammour (1998) have recently argued that heightened demands by the trade unions beginning in the late 1970s led to considerable substitution of capital for labor in Europe.
Considering an even shorter sample period, some countries’job creation performance seems to have changed considerably in recent years. In this regard, Spain is particularly striking, having displayed average employment growth of about 3 percent since 1995. However, it is still early to tell to what extent this merely reflects cyclical factors.
Appendix I reports the simple formulas used for the accounting exercises carried out in this section.
This section analyzes the OECD ISDB data set, which consists of employment data for 11 economic sectors in 11 countries between 1982 and 1994. Although the country coverage is more limited than in section II, the sample includes rapid job creators both among the high-performing non-European countries (Australia, Canada, and the United States) and in Continental Europe (the Netherlands), as well as some of the slowest job creators in Europe (such as Italy, France, and Sweden).
Table 5 also shows that some countries’contribution of the government sector to overall job creation was relatively high, notably 0.4 percentage point per year in Canada and France.
The most important limitation is that shift-share analysis assumes that an unfavorable initial composition of employment (say, a large share of agricultural employment) cannot be corrected by an adjustment in relative wages (i.e., a decline of relative wages in the agricultural sector). But of course in general equilibrium this adjustment would take place. Another limitation is that it is not clear which sectors would have been the most successful if their initial geographical distribution had been different.
In each panel, the line goes through the median growth rate among countries (sectors) for a given sector (country), when sectors (countries) are on the horizontal axis.
Panel B would look very similar if Italy was replaced by France, for example.
Studying the same questions in a variety of equilibrium models of the labor market, Pissarides (1998) has shown that tax cuts affect employment only if they alter the ratio of net wages to unemployment compensation.
Using a similar approach, Nickell (1997) finds evidence of an association between total taxation and unemployment, but not between payroll taxes and unemployment.
That view is also supported by the small flows into and out of unemployment in European countries compared with those observed in North America (see, for example, Blanchard, 1998). At the same time, gross job creation and destruction in continental European countries are as high as in North America. Bertola and Rogerson (1997), Boeri (1999) and Garibaldi (1998) interpret the evidence on these gross flows. Blanchard and Portugal (1998) compare the experiences of Portugal and the United States.
Their view is also consistent with developments in the labor share of income in the major industrial countries, as also documented by Blanchard (1997).
The methodology is similar to that recently applied by Nickell (1997) and Layard in Nickell (1998) in their studies on unemployment differences across OECD countries. Scarpetta (1996) runs similar regressions on small panel data sets, but adopts a more structural approach.
An alternative procedure that would exploit the time series information in the data to a greater extent would be to run dynamic panel regressions with fixed effects in which the ratio of employment to working-age population be imposed to be constant in the long-run leaving no role for policy variables in the long run. However, this exercise is not conducted because the focus of this paper is on medium run developments.
The OECD is currently in the process of updating the EPL ranking used in the present paper. The new measures, which are not officially available yet, display some variation over time, reflecting reform efforts in some countries. Preliminary regression results obtained with the new measures are very similar to those reported above.
This is essentially ordinary least squares corrected for the fact that three successive observations for each country cannot be treated as independent random draws.
The only exception is specification 5 in Table 10, which includes payroll taxes instead of total taxes.
Section 5 is based on data from Eurostat, the statistical agency of the European Union. Switzerland, a European country that displayed rapid employment growth in the 1980s, is not analyzed here because of data limitations. It is worth noting, however, that Switzerland has relatively low taxation, union density, and employment protection.
Owing to data limitations, Figure 8 relates to the number of employees, rather than total employment (i.e., it excludes the self-employed). The contribution to employment growth of the self-employed was very low in countries such as Spain and relatively high in countries such as the Netherlands.
Bentolila and Dolado (1994) provide further detail on the impact of the reforms of the early 1980s in Spain.
Another 12 percent were in school or suffered from illness, and the remaining 10 percent did not give a reason for having a part time job.
The remaining 21 percent were in school or suffered from illness.
Another 29 percent did not give a reason for having a temporary job; and 24 percent were under training contracts or in a probationary period.