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Shaping earnings instability: labour market policy and institutional factors

Denisa Sologon () and Cathal O'Donoghue ()

No 2012-06, LISER Working Paper Series from LISER

Abstract: The concerns regarding the economic insecurity stemming from earnings instability and volatility have been gaining momentum in the contemporary political discourse. If earnings instability/volatility is a proxy for risk, for risk-averse individuals, increasing earnings instability/volatility bears substantial welfare costs. Using the European Community Household Panel and the OECD labour market indicators, we explore the cross-national differences in earnings instability and earnings volatility across 14 European countries in the 1990s and the relationship between earnings instability/volatility, labour market institutions and macroeconomic shocks by means of non-linear least squares. Earnings instability is measured by the variance of transitory earnings, and earnings volatility by the standard deviation of the two-year changes in log earnings. Evaluated for the average country, we find that the employment protection legislation, the degree of corporatism and the deregulation in the product market are associated with a lower earnings instability and a lower earnings volatility. The institutions are found to shape the distributional effects of macroeconomic shocks on earnings instability and earnings volatility. The institutions which counteract the adverse effects of macroeconomic shocks on both earnings instability and earnings volatility, are a high corporatism, deregulated product markets and generous unemployment benefits. The institutions which counteract the adverse effects of macroeconomic shocks only on earnings volatility are the employment protection legislation and low tax-wedges on labour.

Keywords: economic insecurity; earnings instabiloty; labour market institutions; labour market policies and institutions (search for similar items in EconPapers)
JEL-codes: C23 D31 J08 J31 J50 J60 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2012-02
New Economics Papers: this item is included in nep-lab
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