The political economy of employment performance: Testing the deregulation thesis

This dissertation tests the relationship between labor market institutions and employment outcomes. The deregulation thesis posits that labor market rigidities are responsible for poor employment performance in the OECD countries. Specifically, the advocates of this thesis suggest that high taxes, generous welfare states, stringent job protection, and high wages are the cause of high unemployment in Europe and slow job growth elsewhere in the OECD. This study uses a combination methodology—quantitative and case study—to test this thesis. The quantitative analysis uses time-varying measures of labor market institutions—tax structure, unemployment benefit generosity, union density, wage bargaining centralization, employment protection, active labor market policy—in cross-section time-series regression analysis. The principal results from the quantitative analysis find little support for the deregulation thesis. Social security taxes and generous unemployment benefits of long duration have a consistent, negative effect on employment rates across the OECD. Active labor market policy spending, total taxes, generous first-year unemployment benefits, and wage bargaining centralization have a positive effect on employment. The findings suggest that the deregulation thesis does not adequately explain employment performance in the OECD, despite the prominence of this thesis in policy discussions. In addition to quantitative testing, a case of study of the United Kingdom was used to test further the efficacy of labor market deregulation. Given the voluminous changes in labor market policy in the United Kingdom under the Conservative governments of 1979–97, the United Kingdom served as a “test case” for the deregulation thesis. Combining extensive data analysis and employer interviews in the United Kingdom, this study found limited employment benefits, but large economic costs, to the deregulated approach to labor market reform in the United Kingdom. In conclusion, the study finds limited support for the deregulation thesis and stronger support for multiple paths to successful outcomes.