NCPA - National Center for Policy Analysis

Labor-Market Flexibility Increases Employment

February 10, 1999

Many politicians extol the benefits of flexible labor markets. But not until recently has there been hard proof that fewer rules reduce unemployment.

A new study by Rafael Di Tella of Harvard University and Robert MacCulloch of the University of Bonn tracks the job-creating benefits of flexible labor policies -- everything from severance pay requirements to advance notice of dismissal -- in 21 countries over seven years up to 1990.

Among their findings:

  • If the French labor market -- which is notorious for its tight controls -- had been as flexible as America's during those years, the rate of employment there would have been between 1.6 and 4.4 percentage points higher.
  • That is equivalent to between 14 percent and 38 percent of the difference between the two countries' actual employment rates.
  • Thus France's unemployment rate would have dropped 1.7 percentage points.
  • The researchers speculate that flexibility may affect unemployment with a lag -- and they found some evidence of this.

They also found evidence that flexibility is associated with lower rates of unfilled vacancies and with lower persistence of unemployment over time.

Source: "Working Man's Burden," Economist, February 6, 1999.


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