Labour Market Institutions and Economic Performance

Labour markets Richard Freeman Do particular types of labour market institution hold the key to economic success? Should other countries try to emulate the flexibility of the American labour market or the centralization of Swedish-style corporatism? Since 1970 within the OECD there has been a sharp divergence both of economic performance and of indicators of labour market structure. The paper uses union density and the degree of wage dispersion across industries to proxy a country's underlying labour market institutions. In assessing economic performance, it is argued that cross-country differences in output growth were much smaller than differences in employment growth. For given output growth, there is a clear negative relationship between employment growth and real wage growth across countries. Why do different countries find themselves at different points on this trade-off? The final part of the paper examines the correlation between indicators of labour market structure and the position on the wage-employment trade-off. It concludes that the degree of wage dispersion across industries is the most important indicator of market structure and that countries with very high or very low dispersion, typically the countries with highly centralized or highly decentralized bargaining in the labour market, have better employment performance than countries with intermediate degrees of centralization and wage dispersion.