Thursday, January 31, 2013

Is anything else holding back the recovery?

In a recent post, I compared nations and found no evidence that ones with more inequality are recovering more slowly from the recession.  That led me to think about other ideas of what might hold back the recovery.  One thing that's sometimes said is that measures which make wages less "flexible" make it harder to rebound from a recession.  This argument relies on the basic economic principle that if the price of something becomes lower, people will buy more of it.  So if wages decline during a recession, employers will buy (hire) more.  If they don't, that's good for people who still have jobs, but employers won't hire, and unemployment will remain high.  A paper by Juan Botero et al.  compiled measures of the strength of employment protection laws, collective bargaining laws, and social security measures in different countries. 

 Employment protection includes things like regulation of work hours and laws limiting employers' ability to lay off workers.  Collective bargaining laws protect workers' right to unionize and encourage or require employers to negotiate with unions.  "Social security" includes unemployment insurance and benefits for retirement, disability, and sickness.  The measures are available for 30 of the 33 OECD countries (all except Estonia, Iceland, and Luxembourg).  The data are from about 2000, but things like that usually don't change rapidly, so they're probably still pretty accurate for the recession. 

If you regress economic growth from 2009-11 on these factors plus log GDP and stimulus spending, you get:

            estimate  t-ratio
Constant      .702   2.82
Wealth       -.058  -2.23
Stimulus      .54    2.25
Employment   -.046  -1.97
Bargaining   -.001   -.01
Security     -.021   -.71

That is, there's no evidence that social security or protection for collective bargaining makes a difference, but some evidence that employment protection does.   If we drop social security and protection for collective bargaining, we get:

            estimate   t-ratio
Constant    .759        3.26
Wealth     -.067       -3.09
Stimulus    .556        2.32
Employment -.049       -2.67

The US ranks low in employment protection, but so do some countries with generous welfare states, like Sweden and Denmark.  The countries that rank high in employment protection are mostly in southern Europe (Portugal, Spain, Greece) or eastern Europe (Poland, Slovak Republic, Slovenia).

In terms of the combination of policies that's associated with faster recovery (high stimulus spending, low employment regulation), South Korea ranks at the top, followed by Austria, Canada, and the United States.  At the other extreme is Portugal, followed by Hungary, and Greece. 

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