Differences in Flexibility of Labour Markets in OECD Countries – the Topsis Method

Agnieszka Ertman
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Agnieszka Ertman: University of Bialystock

Oeconomia Copernicana, 2011, vol. 2, issue 3, 43-64

Abstract: Flexible labour market can be defined as the market with capability to adapt to changing economic conditions so as to keep high employment rate, un-employment and inflation low and ensure continued growth in real incomes. Labour market flexibility has a significant influence on employment level in the economy. Some economists believe that higher level of protection in the labour market is accompanied with lower employment rates in the economy. Low labour market flexibility is a contemporary problem of many economies. Lack of flexibility in this market is often associated with regulation of labour market in such areas as social insurance, minimum wage, legislation relating to employment protection and the strength of trade unions. EPL index (Employment Protection Level) is a basic measure indicating degree of labour market regulation. The index was created by the OECD experts and is used for international comparisons. The article aims to examine a degree of labour markets flexibility in OECD countries and identify position of Poland compared to other OECD members. TOPSIS method (Technique for Order Preference by Similarity to an Ideal Solu-tion) is applied to achieve the goal. This method consists in creating synthetic index and calculates the distance of each object between the ideal solution and negative ideal solution, and then linear ordering of researched objects. Synthetic indicator of labour market flexibility was calculated using 11 variables, among which institutional variables such as restrictiveness of employment protection, tax wedge, trade union density or percentage of part time workers in total em-ployment dominated. Synthetic index also covers variables describing labour market performance e.g. employment rate of young and older workers or long term unemployment rate as they indicate a speed of labour market’s responsive-ness on external changes.

Keywords: labour market flexibility; wage flexibility; employment protection level (EPL); TOPSIS method (search for similar items in EconPapers)
JEL-codes: J20 J21 J28 J30 (search for similar items in EconPapers)
Date: 2011
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