Changes in Labour Market Institutions and Unemployment in European Countries: An Empirical Analysis on the Short- and Long-Run Effects of Flexibility Measures

The fight against unemployment has become one of the most important challenges that advanced European countries have faced in the last forty years. Economic literature suggests that the changes in labour market institutions—through the implementation of a set of flexibility measures—represent a useful tool to reduce unemployment. In this chapter, we estimate the short- and long-run effects of a change in the labour market institution on unemployment—using data about 28 selected European countries in the period between 2000 and 2017—with the aim of verifying the validity of the hypothesis that higher labour market de-regulation contributes to improving labour market performance. The empirical results—using the bias-corrected least square dummy variables (LSDVC) econometric techniques—do not show robust evidence that higher labour market de-regulation is correlated with a reduction of unemployment rate. The policy implication of this chapter is that, face the likely increase in unemployment rate in upcoming years, due to the outbreak of the global COVID-19 pandemic, will require policymakers to implement different policies (investment in ALMPs and the adoption of ad hoc economic policies in order to increase the aggregate demand), rather than further reforms aiming to de-regulate the labour market.