|Oleg Badunenko, University of Portsmouth:
“Labour Market Flexibility and Growth”
Labor market regulations are seen as an important culprit for economic growth.
Labor markets in many economies though have been liberalized over last decades.
The major intent of this research is to analyze whether the change in the la-
bor market rigidity (the level of labor market regulation) has contributed to the
productivity growth. By its nature, this is cross-country study, which is based
on widest sample available. The period chosen is from 1970-2014, the time of
potential gains from labor market liberalization.
We use a production frontier framework and extend the decomposition of Kumar
and Russell (2002) (KR hereafter), Henderson and Russell (2005) (HR hereafter),
and Badunenko and Romero-Avila (2013) to decompose productivity growth into
components attributable to efficiency change, technology change, and factor accu-
mulation. The major result of KR’s tripartite decomposition of output per unit of
PRODCH = EFFCH x TECH x KLACC, (1)
where EFFCH is the eciency change, TECH is the change in technology, and
KLACC is the change in capital per unit of labor or capital deepening, is that
the most of the productivity growth is due to capital deepening from 1965-1990.
KR’s decomposition was extended by HR to quadripartite decomposition:
PRODCH = EFFCH x TECH x KLACC x HACC, (2)
where HACC is the contribution from human capital accumulation. During the
same time period, HR found that if human capital is not ignored, the part of
contribution of physical capital deepening is in fact the contribution of human
capital accumulation. In this paper, we suggest a quintipartite decomposition:
PRODCH = EFFCH x TECH x KLACC x HACC x LMFCH, (3)
where LMFCH is the change in the labor market exibility.
The Finding of this exercise can be summarized as follows:
– physical capital deepening was the predominant driving force behind pro-
ductivity growth from 1970-1995 and remains strong during 1995-2014;
– labor market regulation change contributing next to nothing during 1970-1995
becomes second important force of economic growth during 1995-2014;
– labor market regulation change benefit relatively rich more than relatively
poor nations, implying that it is as useful to conduct policies to liberalize
labor market in rich countries as it is in relatively poor countries;
– the contribution of labor market regulation change on growth is stronger for
less liberalized countries. This means that nations where labor market rigidi-
ties are the greatest would be greatly rewarded for easing these rigidities.