Lessons and Policy Implications for the Lisbon Strategy
INFER Advances in Economic Research series
Chapter 7: The Impact of Institutions on the Employment Threshold in European Labour Markets, 1979–2001
Christian Dreger 7.1 INTRODUCTION Rigidities in national labour markets are widely seen as responsible for the weak employment performance in Europe. The average unemployment rate in the EU15 is around 8%, and is predicted to be stable at this level for the near future. According to OECD measures, a substantial part is due to long term unemployment: 45 (60)% of the unemployed are unemployed for longer than 12 (6) months. Despite a gradual decline since the mid 1990s the rates are highly persistent. Actually, long term unemployment rates exceed the US level by a factor of 4. The high unemployment rates are accompanied by lower employment and participation rates.1 After a rise in the 1990s, EU15 employment rates are 65%, which is not far below the Lisbon goal (70%). But, the gaps are wider for young people, older workers and women. Due to the weak economic recovery, the rise in the employment rate will not continue in the near future. At the same time, differences within the EU are larger than the difference between the EU average and the US. Long term unemployment rates exceed the average especially in Germany, Italy and Spain. Employment rates are relatively low in Belgium, Greece, Italy and Spain. The correlation between the long term unemployment and employment rate is –0.8 over the last decade. Hence, the unemployment problem is not caused by higher participation. To some extent, labour market institutions may account for this outcome. Rigid institutions can reduce the chance of flexible...
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