Firms perceptions and the role of labour market reforms in Europe during the crisis: microeconomic evidence from the Wage Dynamics Network survey

Transcription

1 Firms perceptions and the role of labour market reforms in Europe during the crisis: microeconomic evidence from the Wage Dynamics Network survey Mario Izquierdo, Theodora Kosma, Ana Lamo, Fernando Martins, Simon Savsek 1 Abstract The paper analyses the effectiveness of the labour market reforms that were implemented in various EU countries during the recent crisis. We use qualitative data from a cross-country firm-level survey conducted in in 25 EU countries. This data set contains information on firms perceptions regarding the easiness to adjust labour input and wages in 2013 compared to the pre-reforms period. On the basis of these perceptions we analyse the effectiveness of labour market reforms and relate the easiness to adjust labour input and wages to firm and worker characteristics, i.e. firm size, sector, skill composition of firm, composition of by contract type and bargaining structure. We find that firms in countries that implemented wider labour markets reforms perceive it easier to adjust labour input and wages after the reforms. We also find that firm firms employing a higher share of skilled are less likely to find it easier to adjust wages and lay off, which is consistent with the efficiency wage theory. Further, firms applying agreements concluded at the firm level find it easier to adjust wages in 2013 than in 2010 and therefore seem to have benefited from the reforms in the system of wage bargaining. Very preliminary and incomplete Please do not quote 1 Bank of Spain, Bank of Greece, European Central Bank, Bank of Portugal, European Central Bank respectively. We thank the participants of the Wage Dynamics Network meetings for their helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect those of their respective institutions. 1

2 1. Introduction Labour market rigidities tend to make firms adjustment difficult, this being more evident during a significant downturn in economic activity when firms need to adjust in order to survive. During the recent crisis output declined and unemployment increased significantly across Europe. This led some European countries to adopt significant labour market reforms in order to increase firms ability to adjust to shocks and increase competitiveness. Indeed, the business cycle is likely to influence the implementation of reforms. For instance, Annett (2007) argues that a crisis can spur initial reforms as policymakers can justify the need of these reforms but the continuation of reforms will depend on whether these reforms can initiate a growth rebound. While many European countries adopted various labour market measures to facilitate the reaction to the falling output and unemployment, the most significant reforms were implemented in the southern European countries, i.e., Greece, Portugal, Spain, that were mostly affected by the recent crisis. These reforms aimed mainly at increasing the ability of firms to adjust their labour input by reducing employment protection and at making the adjustment of wages easier by reducing the centralization of wage bargaining and giving prominence to the wage bargaining at the firm level. This paper sheds some light on the effectiveness of these reforms drawing on a large European firm survey data set that was conducted in 25 EU countries during the second half of 2014 and the beginning of 2015 in the context of the Wage Dynamic Network (WDN), a research network organized by the European System of Central Banks (ESCB) and focusing on identifying the sources and features of wage and labour cost dynamics. The survey collected information on how firms adjusted wages and employment to the various shocks and on the impact of labour market reforms on firms ability to adjust. 2 This paper contributes to the literature by providing comparable information across countries on the effectiveness of reforms. It uses as the basis for the analysis firms perceptions about the impact of reforms on their ability to adjust labour input and wages. Generally, reforms are evaluated on the basis of indices created by classifying the various elements of the underlying legislation (e.g. the OECD s EPL index). However, these indicators do not provide any information regarding the actual application of measures and effectiveness of reforms. Our survey covers this gap as it has asked firms directly about their actual experience with reforms. Firms answers will enable us to evaluate whether the changes in legislation had a noticeable impact on firms actual ability to adjust. Therefore, the information collected through this survey is likely to supplement the information provided by more objective indices especially on the aspect of actual implementation and effectiveness of reforms. Our results show that recent reforms have been quite effective. In particular, we find that firms in countries that have reformed their labour markets significantly find it easier to adjust labour input and wages now and attribute it mainly to the reforms of labour laws. We also find that firm characteristics matter for perceptions and firms employing a higher share of skilled are less likely to find it easier to adjust wages and lay off, which is consistent with the efficiency wage theory. Even if the legislation allows it a firm may not be willing to cut wages and lay-off as this would make future hiring of good 2 Denmark, Finland and Sweden are the only three EU countries not covered by the WDN3 survey. 2

3 quality more difficult. Further, firms applying agreements concluded at the firm level find it easier to adjust wages. 3

4 2. Survey design and sample This survey is the third one conducted in the context of the Wage Dynamics Network. 3 It is a useful dataset for the analysis of firms adjustment during the crisis since it also provides information on various firms characteristics and the institutional and economic environment in which the firms operate. As in the previous two waves, the countries conducting the survey used a harmonised questionnaire that contained a core set of questions asked in all countries and a set of non-core questions asked only in some of them. The harmonised design of the survey results on a cross-country data set that provides comparable information on firms adjustment during the crisis. The third wave of the WDN survey (WDN3) was conducted by 25 EU countries between the end of 2014 and the first half of This wave collected information from over 25,000 firms in manufacturing, energy, construction, trade, market services, financial intermediation and, for some countries, non-market services. A description of the sample by country is provided in Table A1 in the Appendix. The sample used in this paper covers 23,226 firms (firms with less than 5 are excluded as well firms in non-market services sectors). The distribution of this sample across sectors and size categories is provided in Tables A2 and A3 in the Appendix. 3 The first wave of the WDN survey (WDN1) was carried out by 17 national central banks (NCBs) between the end of 2007 and the first half of It collected information on wage setting at the firm level during a period of economic stability and relatively stable growth, namely In summer 2009, ten NCBs conducted a more focused follow-up survey with the specific aim of understanding firms reactions to the initial stage of the crisis ( ). 4

5 3. Main labour market reforms and descriptive statistics As already mentioned, labour market reforms took place in many countries. However, since labour market outcomes differed significantly across countries, the composition of the measures adopted also differed. During the initial phases of the crises, i.e , many EU countries adopted measures aimed at maintaining employment (i.e. employment subsidies, subsidised training programs, short-time work schemes), providing a safety net for the vulnerable (i.e. extension of unemployment benefits) and reducing labour cost (i.e. suspension of wage indexation schemes). As the crisis progressed in those countries characterised by structural inefficiencies, more in-depth reforms were adopted with the aim of making labour markets more efficient and increasing firms ability to adjust to the shocks affecting them. The structural measures adopted in the countries mostly affected by the crisis involved mainly a reduction in employment protection legislation and changes in the structure of wage bargaining with the aim of making the adjustment of wages easier. For instance, employment protection was reduced in Estonia, Greece, Spain and Portugal. In Greece, the structure of the bargaining system has also changed; firm-level agreements can now prevail over sectoral/occupational agreements giving firms the ability to adjust labour conditions and labour costs according to their needs. In the same vein, in Spain, a widening of opt-out clauses gave firms more leeway to diverge from higher level agreements that generally account for average developments in wages and may restrict the ability of firms to adjust to idiosyncratic shocks. In Portugal more stringent criteria for the extension of collective wage agreements were introduced and working time adjustment has become easier with the creation of the working time accounts. Ireland and Cyprus were countries also much affected by the crisis. In Ireland, however, labour markets were already fairly flexible before the crisis therefore the range of measures adopted were in no way similar to those adopted in countries like Greece, Spain and Portugal. In Cyprus, the labour market measures taken involved mainly employment subsidies, training schemes and the suspension of the wage indexation scheme in the private sector. 4 4 For a detailed analysis of the main labour market reforms taking place in the EU countries during the recent crises see Izquierdo et.al (2017), Annex 2. 5

6 3.1 Firms perceptions about the easiness to perform certain actions In order to collect information on the effect of reforms on firms ability to adjust to shocks the third wave of the WDN survey asked them to indicate whether it had been easier or more difficult to perform a set of adjustments in 2013 than in More specifically, firms were asked whether: it had become easier or more difficult to lay off (collectively, individually, temporarily and for disciplinary reasons); it had become easier or more difficult and to adjust working hours and hire ; it had become easier or more difficult to move to other positions or other locations; it had become easier or more difficult to lower the wages of incumbent workers and offer new lower wages; In each case firms were asked to provide a response on a five point scale: 1=much less difficult, 2= less difficult, 3=unchanged, 4=more difficult, 5=much more difficult. 45 Chart 1: Easier to lay off (% of firms) AT BE BG CY CZ DE EE ES FR GR HR HU IE IT LT LU LV MT NL PL PT RO SI SK UK Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses. Charts 1 to 4 show that a significant share of firms in many EU countries answer that it has become less difficult or much less difficult to perform each of the above actions. In particular, 6

7 in the countries, where the most structural measures were taken, i.e. Greece, Spain, Portugal, the proportion of firms reporting that it has become easier to perform the above actions is significantly higher than that of the other countries. For instance, around 39% of firms in Greece and 29% of firms in Spain and Portugal say that it has been easier to lay off. 5, 6 Also, in Greece 63% of firms report that it has become easier to lower the wages of incumbents, while 80% say that it has become easier to offer new workers lower wages. In Spain and Cyprus, a significant proportion of firms also state that it has become easier to adjust their wage bill. The proportion of firms reporting that it has become easier to adjust hours, hire, move to other places and positions is also significant in the countries adopting the most significant labour market measures. In the other EU countries, the share of firms finding it easier to perform most of the above actions is around or lower than 20%. However, many firms in these countries consider that adjusting working hours has become much easier than other strategies. This is expected since hours adjustment in the form of short-time work schemes was a widely adopted strategy during the crisis. 60 Chart 2: Easier to adjust hours and hire (% of firms) AT BE BG CY CZ DE EE ES FR GR HR HU IE IT LT LU LV MT NL PL PT RO SI SK UK Easier to hire Easier to adjust hours Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses. 5 Firms are asked to answer whether it is less difficult or much less difficult to lay off collectively, individually, temporarily and for disciplinary reasons. For expositional purposes, Chart 1 provides the average proportion of firms across the four channels. 6 The question was slightly different in the Slovenian questionnaire as it included an extra option. Therefore, in the following charts the figures for Slovenia are not exactly comparable to the rest. 7

8 90 80 Chart 3: Easier to adjust wages (% of firms) AT BE BG CY CZ DE EE ES FR GR HR HU IE IT LT LU LV MT NL PL PT RO SI SK UK Easier to adjust the wage of incumbents Easier to adjust the wage of new hires Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses Chart 4: Easier to move ( % of firms) AT BE BG CY CZ DE EE ES FR GR HR HU IE IT LT LU LV MT NL PL PT RO SI SK UK Easier to move in other locations Easier to move in other positions Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses. 8

9 % firms Chart 5: Change in the easiness of adjusting employment BE DE FR AT MT LU UK LT LV SK IE BG EE IT RO CZ H HR PL SI NL CY ES PT GR Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses % firms Chart 6: Change in the easiness of adjusting wages BE DE FR AT EE LT LU UK MT LV IT HU SK RO BG IE CZ PL HR PT SI NL ES CY GR Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses. 9

10 Lay off collectively Table 1: Most frequently cited reason for the ability to perform the following actions (modal answer) Lay off individually Lay off for disciplinary reasons Lay off temporarily Hire Adjust working hours Move to other locations Move to other positions Adjust wages of incumbents Offer new lower wages CZ EE /2* 4 4 ES GR HR /4* 4 4 HU IT LU PL RO Source: WDN3. 1=reform of laws, 2=law enforcement, 3= changes in the behaviour of unions, 4= changes in the behaviour of individuals. * Two reasons are cited most frequently. 10

11 The effectiveness of the labour market reforms is further illustrated in Charts 5 and 6 that present the difference in the share of firms believing that it had become easier to adjust labour input and wages in 2013 as compared with 2010 and the share of those who believed it had become more difficult. 7 In general, the difference is positive for countries that have implemented significant reforms. This implies that the share of firms that found it easier to adjust wages in 2013 is larger than that of firms that found it more difficult. Another question, which was however not included in all countries questionnaires, allows us to relate firms perceptions about the easiness to perform certain actions with reforms. The survey asked firms to indicate the factors influencing their answer to the question on how easy it had become to perform certain actions. More specifically, firms were asked which of the following four factors made it easier or more difficult to perform the above actions: a) reforms of labour laws, b) law enforcement, c) a change in the behaviour of trade unions, and d) a change in the behaviour of individuals. Answers to this question are available only for ten countries (the Czech Republic, Estonia, Spain, Greece, Croatia, Hungary, Italy, Luxembourg, Poland and Romania). Table 1 shows the modal answer, i.e. the most frequently cited reason for firms answering that it had become easier to perform an action. For those countries that have significantly reformed their labour markets, i.e. Greece and Spain, the most frequently cited answer when it comes to the ability to adjust labour input and the wage bill is the reform of labour laws. In Estonia, where employment protection was significantly reduced, firms frequently cite labour reforms as the factor making it easier for them to adjust their labour input. Regarding the adjustment of the wage bill, in the other EU countries that have not significantly changed the way wages are set, the most frequently cited reason is changes in individual behaviour. This is to be expected, since in an environment of uncertainty workers are more likely to accept lower wages in order to save their position or enter the labour market. Interestingly, a significant share of firms in many EU countries believes that the situation has remained unchanged. (see, Charts 7 and 8). 8 This is so, even in countries like Greece, Spain and Portugal that have significantly reformed their labour markets. To shed more light into this issue we will in the next section try to uncover the possible interaction between firms perceptions and firms characteristic that may explain why labour market reforms may 7 For expositional purposes, Chart 5 provides the average proportion of firms across the all the employment adjustment channels. Similarly, Chart 6 provides the average proportion of firms across both wage adjustment channels, i.e. adjustment of the wage of incumbents and new hires. 8 Chart 7 provides the average proportion of firms across the all the employment adjustment channels. Similarly, Chart 8 provides the average proportion of firms across both wage adjustment channels, i.e. adjustment of the wage of incumbents and new hires. 11

12 not benefit all firms equally. Also, we will explore further whether perceptions are also influenced by firms actions, i.e. whether firms that have actually adjusted find it easier to adjust. It may be the case that firms that did not adjust may say that they find the situation unchanged. Chart 7: Difficulty to adjust employment 2013vs2010 FR MT BE LV LU DE CZ LT AT SK UK RO SI PL EE HU IT IE HR BG NL CY ES PT GR Share of Firms More Difficult Equally Difficult Less Difficult Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses. Chart 8: Difficulty to adjust wages 2013vs2010 FR BE MT SK EE AT DE SI LT UK LU RO CZ HU LV PL IT PT HR BG NL IE ES CY GR Share of Firms More Difficult Equally Difficult Less Difficult Source: WDN3. Note: Figures weighted to reflect overall employment and rescaled to exclude non-responses. 12

13 4. Determinants of firms perceptions about easiness to adjust This section presents the results of the regression analysis on the relationship between firms perception about the easiness to perform certain actions and the various firm characteristics as well as the environment in which the firm operates. In particular, we perform probit regressions with dependent variable the change in the easiness to perform certain adjustments. It takes the value of 1 if firms consider it less difficult /much less difficult to perform these actions. All the regressions include country and sector fixed effects to control for unobserved country and sectoral effects. Country effects are likely to also capture the differences in the institutional environment across countries. Therefore, we are able in these regressions to capture how firm characteristics and the economic environment influence firms perceptions controlling for the different institutions. The main control variables are capturing the composition of firms labour force (share of skilled and permanent workers), the economic environment, i.e. whether the firms have been negatively affected by demand shock and financial constraints and some institutional variables, i.e. whether the firms are covered by agreements signed at the firm level or outside the firm. 4.1 Firm characteristics and the environment in which the firm operates Table 2 presents the results of the baseline regression the one with the set of main control variables. Firms facing a demand shock and financial constraints are more likely to perceive it easier to adjust wages and labour input using all the individual margins of labour cost adjustment. Firms influenced by demand and credit constraint shocks may have actually used some of the above margins. Therefore, this result is likely to indicate that firms that used these margins of adjustment are more likely to perceive it easier to adjust. Interestingly, bigger firms are more likely to find it easier to adjust labour input compared to smaller firms (5-19 ). This is likely to indicate that bigger firms are more able to have the infrastructure, i.e., specialized legal departments that will allow them to exploit all available adjustment options. Firms employing a higher share of permanent workers are less likely to offer new hires a lower wage. This result could be interpreted in the context of insider-outsider theories (see Lindbeck and Snower, 1988). Incumbent workers may not cooperate with newly hired especially if they are hired to replace workers with higher wages that were made redundant. Another interesting result is that firms employing a higher share of skilled workers are less likely to find it easier to lay off, adjust the wage of 13

14 incumbents or adjust working hours. Again, the first two could be interpreted in the context of efficiency wage theories (Bewley, 1995 and Campbell and Kamlani 1997). Firms employing a higher share of high-skilled are less likely to be willing to lay-off, even if legislation allows it, since the cost of hiring and training high-skilled may be high. Further, they may not want to lay-off or cut the wages of skilled workers as they may not want to obtain the reputation of a bad employer that will in the future make hiring qualified difficult. Regarding the easiness to adjust working hours this may be related to the fact that shift work, part-time work etc. is not widespread among skilled workers therefore hours adjustment is a margin that cannot be easily used for this type of workers. Finally, firms applying firm level collective agreements are more likely to find it easier to layoff, hire and adjust the wage of incumbents. For outside agreements no significant results emerge. Most of the reforms adopted aimed at increasing firms ability to adjust labour input and wages by allowing firm level agreements to conclude wages and working conditions that are less favourable than those provided by the sectoral agreements. The increased flexibility provided to firms by the labour market measures adopted is confirmed by this finding. 14

15 Table 2: Firm' perceptions about the easiness to perform certain actions-probit regressions Move Move Adjust Adjust Lay-off Hire working wages of to other to other hours incumbents locations positions Offer new hire a lower wage Demand shock Finance shock Permanent workers (%) Skilled workers (%) Firm agreement Outside agreement *** ** *** *** *** *** *** (9.345) (2.044) (4.685) (3.526) (4.213) (5.158) (8.936) *** *** *** *** ** *** (4.610) (0.761) (2.719) (3.352) (3.876) (2.170) (4.145) ** (-0.840) ( ) (0.488) (-0.768) (1.012) (0.462) (-2.185) *** * ** (-3.477) (-0.505) (-1.862) (-0.949) (-1.118) (-2.004) (-0.226) ** * ** * (2.107) (1.937) (1.572) (0.686) (0.632) (2.187) (1.806) (0.0276) (-0.199) ( ) (1.140) (0.120) (0.936) (-0.706) *** *** *** *** (2.650) (2.976) (0.708) (2.735) (4.613) (0.808) (1.539) *** ** ** *** *** (3.720) (2.349) (2.549) (5.773) (8.523) (0.650) (1.388) *** *** *** (3.927) (1.339) (0.0186) (5.842) (7.076) (-1.508) (1.643) Observations Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1 Note: Lay-off the variable takes the value of 1 if the firm finds it much less difficult/less difficult to perform at least one of the following actions: to lay off collectively, individually, temporarily and for disciplinary reasons. 15

16 4.2 Firm perceptions and actions It is would be also interesting to know whether firms that have actually adjusted labour input and wages perceive it easier to adjust in 2013 compared to This would be an interesting exercise as the perceptions of firms that have actually adjusted are based on their actual experience and not on a vague judgement. Table 3 shows that firms that have reduced permanent and temporary employment find it easier to lay-off now. Similarly, firms that have reduced hours are more likely to find it easier to adjust hours (Table 4) and firms that have cut wages or offered new hires lower wages are more likely to perceive it easier to adjust their wage bill (Table 5). 9 Therefore, firms that have actually adjusted seem to find it easier to adjust in 2013 compared to the pre-reforms period. Consequently, in countries that have significantly reformed their labour markets firms that did not adjust labour input and wages may not be able to provide a clear answer on whether it is easier to adjust, i.e. they have no experience on how the new institutional framework operates. Table 3: Actions and firms perceptions about easiness to lay off -probit results Lay-off Has reduced permanent employment *** (11.18) Lay-off Has reduced temporary employment *** (5.130) Observations Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1 Table 4: Actions and firms perceptions about easiness to adjust hours-probit results Has reduced hours *** (8.731) Observations Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1 9 The regressions presented in Tables 3 to 5 include all the control variables of the baseline regression in Table 2. 16

17 Table 5: Actions and firms perceptions about easiness to adjust wages-probit results Adjust wages of incumbents Has cut wages *** (13.08) Offer new hire a lower wage Has offered lower wage to new hires in *** (11.78) Observations Robust z-statistics in parentheses*** p<0.01, ** p<0.05, * p<0.1 17

18 5. Conclusions In this paper we shed some light on how the labour market reforms that were implemented in various EU countries during the recent crisis have affected firms ability to adjust. We used a cross-country firm-level survey conducted in in 25 EU countries that contains information on firms perceptions regarding the easiness to adjust labour input and wages now compared to the pre-reforms period. On the basis of these perceptions we analysed the effectiveness of labour market reforms and related the easiness to adjust labour input and wages to firm and worker characteristics. We found that firms in countries that have reformed their labour markets significantly find it easier to adjust labour input and wages now and attribute this easiness mainly to the reforms of labour laws. We also find that firm characteristics matter for perceptions on whether the easiness to adjust had changed. Firms employing a higher share of skilled are less likely to find it easier to adjust wages and lay off, which is consistent with the efficiency wage theory, i.e. firms try to avoid earning a bad reputation that will make it difficult for them to hire high skilled workers who also require costly training. Further, firms applying agreements concluded at the firm level find it easier to adjust wages. Finally, firms having adjusted labour input and wages find it easier to adjust now compared to the pre-reforms period. 18

19 References Annett, A. (2007), Lessons from Successful Labor Market Reformers in Europe, IMF Policy Discussion Paper No. 07/1, International Monetary Fund. Bewley, T.F. (1995), A depressed labor market as explained by participants, American Economic Review, 85(2), Campbell, C.M. and K.S. Kamlani (1997), The reasons for wage rigidity: Evidence from a survey of firms, Quarterly Journal of Economics, 112(3), Izquierdo, M., J.F. Jimeno, T. Kosma, A. Lamo, S. Millard, T. Rõõm and E. Viviano (2017), Labour Market Adjustment during the Crisis: Microeconomic Evidence from the Wage Dynamics Network Survey, ECB Occasional Paper No.192. Lindbeck, Assar, and Dennis J. Snower (1988) The Insider-Outsider Theory of Employment and Unemployment, Cambridge, MA: MIT Press. 19

20 Appendix Table A1: WDN3 survey - sample distribution by country Austria 784 Belgium 991 Bulgaria 528 Croatia 301 Cyprus 182 Czech Republic 1011 Estonia 500 France 1156 Germany 2454 Greece 402 Hungary 2032 Ireland 1568 Italy 1102 Latvia 557 Lithuania 515 Luxembourg 674 Malta 178 Netherlands 727 Poland 1530 Portugal 1383 Romania 2043 Slovakia 621 Slovenia 1269 Spain 1975 United Kingdom 654 Table A2: Sample used in the paper - distribution by sector Manufacturing 7884 Electricity, gas, water 239 Construction 2306 Trade 5162 Business services 6947 Financial intermediation 688 Table A3: Sample used in the paper - distribution by size and