Nickell’s conclusions on various labour market institutions are as follows.

Labour Taxes. There is some evidence that overall labour tax rates have a short-run, and possibly a long-run, impact on unemployment rates. On the growth front the evidence is not robust and there is no strong reason to believe that total labour tax rates have any significant effect. Since major cuts in the tax burden are hard to achieve without significant social upheavals, such as moving health or pension provision into the private sector, an alternative strategy is to restructure the tax system so that provisions like health or pensions are paid for by a mechanism which largely mimics a private insurance system. This will add to the likelihood that such taxes are shifted wholly onto labour, thereby minimizing any negative effects on unemployment.

 

• Labour Standards and Employment Protection. There is no evidence that stricter labour standards or employment protection lead to higher unemployment. Employment protection does, however, raise long-term unemployment and lower short-term unemployment, by reducing the rate of flow out of and into unemployment. As far as growth is concerned, there is no reason to believe that stricter labour standards or employment protection lower productivity growth rates - indeed maybe the reverse.

 

• Unions, Wage Setting and Minimum Wages. The existence of strong trade unions can be expected to raise unemployment and lower growth rates except under certain circumstances. First, their harmful impact on unemployment can be offset if unions and firms can co-ordinate centrally over wage setting. Second, their harmful effect on growth rates can be offset if management and unions adopt a more co-operative and less adversArial,Helvetica,Sans-Serif stance. The difficulty here is the tendency for co-ordinating or co-operative endeavours to be unstable unless there are supporting institutions, (such as local employers’ federations in Germany).

 A key factor forcing management and unions to adopt a co-operative stance is external competitive pressure. This suggests that encouraging high levels of product market competition is an important way of eliminating the negative effects of trade unions. This can be achieved both by standard competition policy and by removing anti-competitive product market regulation, which is a commonplace in much of the service sector in many OECD countries. Finally, the effects of minimum wages, at current levels, are minimal except perhaps in France.

 

• Social Security Systems. Generous and long-lasting unemployment benefit entitlements remain commonplace in Europe and these generate higher unemployment. Strikingly, the only big difference between US unemployment and European unemployment is in long-term unemployment, and this is largely explained by the long period for which benefits are available in Europe with few strings attached. The impact of generous benefits can be offset by active labour market policies and a strictly operated system (e.g. a strict work test).

 

• Skills and Education. Institutional differences have not been very important in determining the unemployment and wage responses of different OECD countries to the recent substantial shifts in demand in favour of skilled workers. Different movement of supply and demand seem to explain most of the relevant features.

To conclude, the key labour market institutions on which policy should be focused are unions and social security systems. Encouraging product market competition is a key policy to eliminate the negative effects of unions. For social security the key policies are benefit reform linked to active labour market policies to move people from welfare to work. By comparison, time spent worrying about strict labour market regulations, employment protection and minimum wages is probably time largely wasted.

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Stephen Nickell is a Professor of Economics at the Institute of Economics and Statistics at University of Oxford and a Research Fellow in CEPR’s Human Resources programme.