Institutions and Labor Market Outcomes

Arizona State University, Scottsdale AZ

Investigators

Abstract

This project studies how labor market institutions affect labor market outcomes such as the level of unemployment, the duration of unemployment spells and wages. The divergence of European and American labor market experiences over the last twenty-five years in the presence of sharply different labor market institutions has motivated many earlier studies on this topic. This research finds that previous studies have overlooked a key channel through which labor market institutions affect labor market outcomes. In particular, this research finds that the uncertainty inherent in the hiring process is key to understanding how labor market institutions such as employment protection and wage compression affect outcomes. This finding also allows us to understand the differential evolution of European and American labor markets over the last twenty-five years. As the role of manufacturing began to diminish resources were shifted into new activities. Job creation in these new activities involved much more uncertainty than job creation using the established technologies that were embedded in activity in the manufacturing sector. As a result it is during this period that the European style labor market institutions started to have a large effect on the performance of European labor markets relative to the United States.