A Narrative Database of Major Labor and Product Market Reforms in Advanced Economies
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

Contributor Notes

This paper describes a new database of major labor and product market reforms covering 26 advanced economies over the period 1970-2013. The focus is on large changes in product market regulation in seven individual network industries, employment protection legislation for regular and temporary workers, and the replacement rate and duration of unemployment benefits. The main advantage of this dataset is the precise identification of the nature and date of major reforms, which is valuable in many empirical applications. By contrast, the dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank. It should also be seen as work in progress, for researchers to build on and improve upon. Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and were predominantly implemented during the 1990s and 2000s.

Abstract

This paper describes a new database of major labor and product market reforms covering 26 advanced economies over the period 1970-2013. The focus is on large changes in product market regulation in seven individual network industries, employment protection legislation for regular and temporary workers, and the replacement rate and duration of unemployment benefits. The main advantage of this dataset is the precise identification of the nature and date of major reforms, which is valuable in many empirical applications. By contrast, the dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank. It should also be seen as work in progress, for researchers to build on and improve upon. Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and were predominantly implemented during the 1990s and 2000s.

I. Introduction

Labor and product market reforms rank high on the policy agenda in advanced economies, against the background of persistent weak growth and limited scope for macroeconomic (fiscal and/or monetary) policy tools to address it. The specifics vary with the context, but broadly involve: reducing administrative burdens and barriers to entry in product markets, including in the areas of retail trade, professional services, and some network industries; easing hiring and dismissal regulations for regular workers; increasing the ability of and incentives for the non-employed to find jobs by reducing the level or duration of unemployment benefits, or by increasing the resources for, and the efficiency of, active labor market policies; cutting labor tax wedges; targeted policies to boost the employment rate of underrepresented groups in the labor market, including youth, women, older workers and, in some countries, migrants.

Since the 1990s, leading international policy institutions and academic scholars have put in a major effort to measure and compare countries’ policy settings in these areas, including primarily the OECD (e.g. OECD indicators of product market regulation and employment protection, used for example in Nicoletti and Scarpetta, 2003, Bassanini and Duval, 2009, or, more recently, Egert, 2016) but also, in selected areas and for both advanced and non-advanced economies alike, ILO (employment protection legislation database), IMF (e.g. the product market, trade, domestic and external finance indicators in Ostry et al., 2009, used for example in Giuliano et al., 2013, or Prati et al., 2013) and World Bank (e.g. the Doing Business project, building in part on the work of Botero et al., 2002, and Djankov et al., 2004).

In parallel to the voluminous literature using cross-country time-series policy indicators, and to enhance identification strategies, academic researchers have increasingly studied the impact of specific reform events, such as large policy changes in specific countries. These events lend themselves more naturally to the use of empirical techniques—such as differences-in-differences in outcomes between treated and non-treated groups, regression discontinuity design, propensity score matching or the synthetic control method—that have been helping researchers get closer to a causal interpretation of the link between policies and outcomes.2 Having detailed information on major policy changes in the areas of labor and product market regulation in advanced economies can also help advance knowledge in other related areas, including: (i) the dynamic effects of these reforms—an under-researched issue that has been gaining prominence in policy and academic debates (see e.g. Cacciatore et al., 2016a,b; Draghi, 2015; Eggertsson et al., 2014; IMF, 2016; Krugman, 2014; Rodrik, 2015); (ii) the political economy of these reforms—an area in which limited research so far has relied predominantly on large changes in OECD indicators as an indirect way to identify major reforms (see e.g. Buti et al., 2010; Duval, 2008; Hoj et al., 2007).

In principle, major reforms could be identified through, and their magnitude be inferred from, large changes in existing indicators of the stance of various labor product and market regulations or, even better, by retrieving available information about the underlying reforms that drove such changes. This is not straightforward in practice, however. For example, there is no readily available information about the nature and date of the policy measures that underpin observed changes in OECD indicators of labor and product market regulations. Furthermore, at present such information cannot, or if so only partially, be retrieved in a number of relevant areas. In part, this is likely to reflect the fact that indicators produced by institutions and academic scholars were primarily conceived to measure and compare policy stances across countries at particular points in time, rather than to document in detail past changes in stance, i.e. reforms (or counter-reforms). As regards labor market institutions, other databases such as the European Commission’s Labref, the Fondazione Rodolfo de Benedetti-IZA database, and the ILO’s EPLex database, provide some direct information about the nature and date of government measures. However, they have relatively short time-series coverage and, importantly, do not attempt to identify which measures, among the many historical actions taken by any country within any particular area, should be regarded as economically meaningful a priori.

The alternative of identifying major reforms only through large changes in existing policy indicators is not fully satisfactory either, for two reasons. First, it requires setting up criteria, or a more or less ad-hoc statistical procedure, to identify breaks in the data that should be considered as large and/or abrupt enough to indicate a major reform—as opposed to minor policy changes, or no reform; in areas such as product market regulation or employment protection legislation, which are multi-faceted and have no natural measurement metric (unlike, say, a tax rate), this difficulty is compounded by the inherent degree of arbitrariness in the choice, scoring and weighing of the relevant dimensions (sub-components). Second, in any event, this approach does not help document the precise nature of the reforms.

Against this background, a new cross-country time-series database of major historical reforms in product and labor markets could be of great use to researchers and practitioners alike. This should be particularly the case in those areas where measuring the policy stance is most challenging and existing information on major reforms is currently scarce or incomplete. For advanced economies, prime candidates include product market regulation and employment protection legislation, and to a lesser extent unemployment benefit systems.3

This paper presents a new database on major reforms in the areas of product market regulation, employment protection legislation and unemployment benefit systems for 26 countries over the period 1970-2013.4 The data are provided in an accompanying electronic file. For product market regulation, the focus is on reforms in seven key network industries covered by the OECD’s indicators of regulation in energy, transport and communication (ETCR), namely air transport, electricity, gas, postal services, rail transport, road transport and telecommunications. For employment protection legislation, we distinguish between historical reforms that touched on regular contracts and those that affected temporary work. As regards unemployment benefits, changes in the initial replacement rates and those in the duration of benefits are considered separately.

The dataset is built in two steps. First, for each of the 26 advanced economies and each of the aforementioned policy areas, we record all legislative and regulatory actions mentioned in all past OECD Economic Surveys—the regular country surveys published by the OECD—published over the period 1970-2015. Second, among all those actions, we identify major measures (liberalizing and tightening reforms) as those that meet at least one of three alternative criteria: (i) a narrative criterion based on OECD staff’s judgement on the significance of the reform at the time of adoption; (ii) whether the reform is mentioned again in subsequent Economic Surveys, as opposed to only once when the measured is adopted; (iii) the magnitude of the change in the corresponding OECD indicator, when available.

The main advantage of this dataset is to identify, document, and provide the implementation date of, major reforms in the areas covered by this paper. As flagged above, this is highly valuable in many empirical applications, of which several recent and forthcoming IMF papers provide examples (e.g. Bouis, Duval and Eugster, 2016; Gal and Hijzen, 2016; IMF, 2016; Duval and Furceri, 2017; Duval, Furceri and Jalles, 2017; Duval, Furceri and Miethe, forthcoming). For example, in a simple application to the cross-country time-series estimation of the macroeconomic effects of major reforms, we illustrate the gains from using our database rather than others typically used in this strand of the literature on structural reforms.

At the same time, it should be acknowledged that the criteria we apply to identify major reforms, as transparent as they are, are not the only possible option—there is no single, objective way to distinguish between major and minor reforms. Furthermore, we do not distinguish among different major reforms—all of them are treated equally, even though some have likely been more important than others in practice. Finally, by design, our dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank.

This dataset should be regarded as work in progress, for researchers to build on and improve upon. The quality and accuracy of the information gathered through web search varies across countries, time periods and areas of reform, and in a handful of cases no relevant information could be found altogether at this stage. Furthermore, the approach taken here could, in principle, be extended to other relevant areas not covered here but for which relevant information can be found in OECD Economic Surveys, IMF reports and similar sources, such as, for example, product market regulation in retail trade and professional services, further dimensions of unemployment benefit systems (e.g. benefit conditionality), active labor market policies and other areas of reforms such as on domestic and external finance.

Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and the majority of them were implemented during the 1990s and the 2000s.

The remainder of this paper is structured as follows. Section 2 describes in detail the methodology used to construct our database of major product and labor market reforms, and discusses both the pros and cons of using this database versus others in various contexts. Section 3 provides a few stylized facts on major reforms across areas, countries and over time. Section 4 presents an application to the cross-country time-series estimation of the macroeconomic effects of selected major reforms that illustrates the empirical gains from using our database rather than others typically used in the literature. An appendix lists all individual reforms featured in the database, which is also provided in electronic form online.

II. Methodology

A. Database construction

The database currently covers seven product market regulation areas (one for each of seven network industries, which include air transport, electricity, gas, postal services, rail transport, road transport and telecommunications) and four labor market regulation areas (employment protection legislation for regular workers, employment protection legislation for temporary workers, unemployment benefit replacement rates and the duration of unemployment benefits). In a first step, we identify all legislative and regulatory actions related to product market regulation, employment protection legislation and unemployment benefits mentioned in any OECD Economic Survey for any of the 26 countries over the entire sample.5 Several hundreds such actions are identified overall.

In a second step, for any of these actions to qualify as a major liberalizing or tightening reform one of the following three alternative criteria has to be met:

  • (1) The OECD Economic Survey uses strong normative language to define the action at the time is taken, suggestive of an important measure (for example, “major reform”). In this respect, the methodology is related to the “narrative approach” used by Romer and Romer (1989, 2004, 2010, and 2017) and Devries et al. (2011) to identify monetary and fiscal shocks and periods of high financial distress.

  • (2) The policy action is mentioned repeatedly across different editions of the OECD Economic Survey for the country considered, and/or in the retrospective summaries of key past reforms that are featured in some editions, which is also indicative of a major action;

  • (3) When available, the existing OECD indicator of the regulatory stance in the area considered displays a very large change (in the 5th percentile of the distribution of the cumulative change in the indicator over three years—to accommodate possibly gradual phasing-in of otherwise major reforms). The OECD indicators used for this purpose are the seven indicators of product market regulation in the seven network industries mentioned above, the employment protection legislation indices for regular and temporary workers, and the average unemployment benefit replacement rate over a five-year unemployment spell across a set of hypothetical workers with different income and family statuses (see e.g. OECD, 2016). In some cases, OECD indicator values are not available—for example, employment protection legislation indicators are available starting only from the mid-1980s for most countries, and later for some—but the reform would meet the 5th percentile criterion if the indicator’s scoring system were applied; it is then scored as a major reform.

When only the third condition is met, an extensive search through other available domestic and national sources, including through the internet, is performed to identify the policy action underpinning the change in the indicator.

As noted above, the approach considers both liberalizing and tightening reforms. Therefore, for each country, the reform variable in each area takes value 0 in non-reform years, 1 in liberalizing reform years, and -1 in tightening reform years. In the absence of fully comprehensive information on reform announcement dates, the database focuses on implementation dates. Given its annual frequency, as a rule, major reforms that are implemented during the first half of a given year t are assigned to year t, while those implemented during the second half of year t are assigned to year t+1. Judgement calls are made when a major reform results from two or more measures taken at different points during a given year or are spread across two years. This is the case when a major reform results from the combination of two distinct policy actions taken at different, but close dates—for example, a cut in barriers to entry and a reduction in public ownership in a given network industry.

B. Strengths and limitations

Table 1 provides an illustrative example on how the three criteria mentioned above guide the identification of major reforms and “counter-reforms” in the area of product market regulation, employment protection legislation, and unemployment benefits. In some cases, the major action goes beyond the scope of available indicators (e.g. telecoms deregulation in the United States as a result of the antitrust lawsuit against AT&T, which was not a government measure and as such is not captured by the existing OECD indicator), or pre-dates the period over which the OECD indicator is available (Italy’s 1970 “Workers’ Statute”), but language used to describe it in the Country Survey makes its importance clear. In other cases, the available OECD indicator does not capture the full scope of the measure (1994 overhaul of the unemployment benefit system in Denmark). In other cases, the qualitative information drawn from the Country Surveys coincides, and is fully consistent with, the observed change in the value of the corresponding OECD indicator (1995 employment protection legislation reform in Spain).

Table 1.

Country Examples of Reforms Identified According to Different Criteria

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More broadly, compared to indirect methods that would infer major reforms only from changes in OECD or other alternative policy indicators, our approach: identifies the exact timing of major legislative and regulatory actions; identifies the precise reforms that underpin what otherwise looks like a gradual decline in OECD policy indicators without any obvious break (for example, the series of reforms that took place in the telecommunications industry in many countries in the mid-late 1990s); captures reforms in areas for which OECD indicators exist but may not cover all relevant policy dimensions (for example, unemployment benefits beyond a five-year unemployment spell); covers a longer time period in some policy areas, such as employment protection legislation; documents the nature and timing of the legislative and regulatory actions that underpin observed large changes in OECD indicators—in cases where the latter are the main, or even the only source of identification of a major reform.

Compared with other existing databases on policy actions in the area of labor market institutions, such as the European Commission’s Labref, the Fondazione Rodolfo de Benedetti-IZA database, and the ILO’s EPLex database, the approach taken here allows identifying a rather limited set of major legislative and regulatory reforms, as opposed to a long list of actions that in some cases would be expected to have little or no bearing on macroeconomic outcomes. The times series coverage of the database is also much longer.

These important strengths of the database come with limitations, some conceptual, others practical. On a conceptual level, as transparent as they are, the criteria we apply to identify major reforms are only one amongst several possible options—there is no single, objective way to distinguish between major and minor reforms. Furthermore, we do not distinguish among different major reforms—all of them are treated equally, even though some have likely been more important than others in practice. Yet two large reforms in a given area (for example, employment protection legislation) can involve widely different specific actions in practice (for example, a major simplification of the procedures for individual and collective dismissals, respectively). Finally, by design, the reform database provides no information regarding the stance of labor and product market regulations.

The dataset is preliminary and should be regarded as such. In cases where extensive web search had to be performed to identify the nature of the reforms—primarily when the latter were not mentioned in any OECD Economic Survey and instead were inferred only from a large change in the corresponding OECD policy indicator—the quality and accuracy of the information gathered sometimes varied, and in a handful of cases no relevant information could be found altogether at this stage. The focus and quality of the information featured in OECD Economic Surveys has also varied across areas, countries and, perhaps most importantly, over the years—typically becoming more detailed over time as regards the coverage of structural reforms. This implies that the quality of the current database is likely to be stronger for the recent decades (1990s, 2000s and 2010s) than for older ones (1970s and 1980s).

III. A few stylized facts on reform patterns

All major reforms in the database are documented in the 10 tables reported in the Appendix that cover each of the product and labor market areas highlighted above. Figures 13 present stylized facts on reforms—that is, decreases in regulation/liberalizing measures—and counter-reforms—that is, increases in regulation/tightening measures.

Figure 1.
Figure 1.

Number of Major Reforms and Counter-reforms (26 advanced economies, 1970-2013)

Citation: IMF Working Papers 2018, 019; 10.5089/9781484338698.001.A001

Figure 2.
Figure 2.

Distribution of Major Reforms and Counter-Reforms Across Time

(26 advanced economies)

Citation: IMF Working Papers 2018, 019; 10.5089/9781484338698.001.A001

Figure 3.
Figure 3.

Number of Major Reforms and Counter-reforms by Country (1970-2013)

Citation: IMF Working Papers 2018, 019; 10.5089/9781484338698.001.A001

Major reforms appear to have been more frequent in product markets than in labor markets in the last decades. Figures 1A and 1B, which provide the total number of reforms and counter-reforms identified in the sample, illustrate this heterogeneity of reforms efforts across regulatory areas. In the area of product market regulation, major reforms have been most frequent in telecoms and airlines. As regards labor markets, major changes in employment protection legislation have been more common than major changes in unemployment benefit systems (Figure 1, Panels A and B). In addition, tightening reforms have been less frequent in product markets than in labor markets over the last four decades; there have been only 4 tightening-reform cases in product market regulation—that is, just about 1 percent of the total number of major actions, while in labor market regulation over 1/3 of the total number of major actions were tightening reforms.

Liberalizing reforms have been predominantly implemented during the 1990s and the 2000s (Figure 2, Panels A through D). This is most striking for product market reforms, which were clustered around the late 1990s and early 2000s, partly reflecting the EU-driven liberalization process in European countries over this period (see Appendix tables). In labor markets, tightening measures mostly took place in the 1970s, followed by a gradual shift towards liberalizing reforms starting from the 1980s. This pattern holds true for both unempoyment benefit systems and employment protection legislation.

In terms of geographical distribution, EU countries took more actions than non-EU countries on average, reflecting to a large extent the greater scope for action in the former group (Figure 3, Panels A through D). While in product markets the frequency of reforms was generally similar across country groups, in labor markets southern European countries (e.g. Portugal, Spain) took many more significant actions, particularly towards easing employment protection legislation for both regular and temporary workers (Figure 3, Panels B and C). Concerning unemployment benefit systems, several countries increased or maintained the generosity of their systems during the 1970s and early part of the 1980s before reducing it later on (Figure 3, Panel D). Reforms touched roughly equally on replacement rates and duration.

Finally, both product and labor market reforms have been more frequently implemented during periods of positive economic growth (Table 2). At the same time, recessions being rare events, the frequency of labor market reforms carried out in bad times was actually substantially higher than the frequency of bad times in the sample (over 20 per cent versus about 13 per cent).

Table 2.

Percentage of Reforms by Area in Good and Bad Times

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Source: authors’ calculationsNote: good and bad times defined simply as positive and negative real GDP growth in a given year, respectively. Bad times account for 13 percent of the total number of observations for real GDP growth.

IV. An empirical application

As previously discussed, one important advantage of this dataset is the precise identification of major reforms and their implementation date. This is particularly valuable in many empirical applications, including to assess the dynamic (short- and medium-term) effects of reforms.

To illustrate the usefulness of the dataset for such empirical analysis, we compare the output and unemployment effects of the reforms identified in the database with those obtained using: (i) gradual changes in the OECD product market regulation (PMR), employment protection legislation (EPL) and net replacement rate indicators; (ii) large jumps in the OECD indicators, which aim to capture indirectly major reforms.6 The empirical methodology underpinning these results is described in Duval and Furceri (2017), and Duval, Furceri and Jalles (2017).

Starting with product market reforms, the analysis shows that the product market reforms identified in the dataset have a statistically significant (at 5 percent) positive impact on output over the medium term, of about 1¾ percent on average four years after the reform (Figure 4, Panel A).7 In contrast, the estimated short-to-medium-term effect is not statistically significant when using either the change in the OECD’s PMR indicator or when considering a dummy variable that takes value one for a large change in the indicator (Figure 4, Panels B and C).

Figure 4.
Figure 4.

The Average Effect of Major Product Market Reforms on Output (%)

Citation: IMF Working Papers 2018, 019; 10.5089/9781484338698.001.A001

Note: t=0 is the year of the reform; dotted lines denote 90 percent confidence bands. Estimates based on Duval and Furceri (2017), using here the latest version of the dataset.

Similarly, reforms that reduce the income replacement rates of unemployment benefits are found to have statistically and economically significant, as well as long-lasting effects on the unemployment rate (Figure 5, Panel A). In particular, a major unemployment benefit reform identified in the present paper is found to reduce the unemployment rate by about 1¼ percentage points on average four years after the reform. In contrast, no statistically significant short-to-medium-term impact could be detected when considering gradual changes or large declines in the OECD’s net initial replacement rate (Figure 5, Panels B and C).

Figure 5.
Figure 5.

The Average Effect of Major Unemployment Benefit Reforms on the Unemployment Rate (percentage points)

Citation: IMF Working Papers 2018, 019; 10.5089/9781484338698.001.A001

Note: t=0 is the year of the reform; dotted lines denote 90 percent confidence bands. Estimates based on Duval and Furceri (2017), using here the latest version of the dataset.

Finally, major reforms of employment protection legislation for regular workers are found to have short-to-medium-term effects on employment, but these depend on business conditions (Figure 6, Panel A): in an expansion, reforms appear to have a sizable positive and statistically significant impact on employment, whereas they significantly reduce employment in a recession—the difference in the response across the two economic regimes is statistically significant.8

Figure 6.
Figure 6.

The Average Effect of Major Employment Protection Legislation Reforms on Employment (%)

Citation: IMF Working Papers 2018, 019; 10.5089/9781484338698.001.A001

Note: t=0 is the year of the reform; dotted lines denote 90 percent confidence bands. Estimates based on Duval and Furceri (2017), using here the latest version of the dataset.

No significant effects are found in either expansions or recessions when using either changes or large jumps in the OECD’s EPL indicator (Figure 6, Panels B and C).

A Narrative Database of Major Labor and Product Market Reforms in Advanced Economies
Author: Mr. Romain A Duval, Davide Furceri, Bingjie Hu, João Tovar Jalles, and Huy Nguyen
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    Number of Major Reforms and Counter-reforms (26 advanced economies, 1970-2013)

  • View in gallery

    Distribution of Major Reforms and Counter-Reforms Across Time

    (26 advanced economies)

  • View in gallery

    Number of Major Reforms and Counter-reforms by Country (1970-2013)

  • View in gallery

    The Average Effect of Major Product Market Reforms on Output (%)

  • View in gallery

    The Average Effect of Major Unemployment Benefit Reforms on the Unemployment Rate (percentage points)

  • View in gallery

    The Average Effect of Major Employment Protection Legislation Reforms on Employment (%)