Capitalism and Society Volume 2 Issue 1 2007 Article 5 Comments on Are Protective Labor Market Institutions at the Root of Unemployment A Critical Review of the Evidence by David Howell Dean Baker Andrew Glyn and John Schmitt James J Heckman University of Chicago American Bar Foundation Copyright c 2007 The Berkeley Electronic Press All rights reserved Heckman Comments on Are Protective Labor Market Institutions In many areas of research conventions are established and then blindly followed A working paradigm emerges which attracts adherents Numerous papers are written that are refereed by followers First movers guard their property rights and claims of priority Usually they become leaders unless a clearer vision is articulated by a later entrant The groups so formed are mutually supportive and successful as long as they share a common paradigm and respect pecking orders Outsiders who challenge the convention face an uphill task Success in many fields is often gauged by the size of the band formed through group activity and the frequency of citations received and not through the empirical or predictive success of the activity of the group Because of the weakness of its data base macroeconomics is particularly vulnerable to this phenomenon though it is by no means unique among fields of economics Howell Baker Glyn and Schmitt HBGS challenge the consensus view the orthodox view as they call it on the causes of European unemployment trends Numerous papers in this literature examine essentially the same data base The authors construct alternative measures of incentives or disincentives created by institutions usually some index or indices of regulatory activity HBGS and the unpublished papers they cite perform a valuable professional service by carefully studying the robustness of the evidence on the role of protective labor market institutions PLMI in creating European unemployment HBGS are convincing in showing the fragility of the evidence on the role of labor market institutions in explaining the pattern of European unemployment using standard econometric methodology Their use of rigorous econometric methods contrasts with the casual empiricism used in the real business cycle RBC literature that picks parameters out of a hat and does not subject models to a rigorous test 1 The major sources of weakness in the European unemployment literature are a the short often nonstationary time series on unemployment and its determinants b the poor quality of the basic data intertemporally incomparable measures are often used reflecting improvements in the basic data collection over time c use of ad hoc measures of incentives a variety of crude proxy measures for a diverse array of policies are used and d inadequate attention to the problems of reverse causality The revisions in institutions that are used to explain outcomes are often caused in part by macroeconomic crises that affect the dependent variables used by European unemployment analysts To their list of problems I would add the problems associated with the lack of explicit econometric measurement models where the effects of the institutional variables on outcomes are carefully delineated and dynamics and asymmetries 1 As Watson 1993 shows when standard predictive criteria are applied to RBC models they fail badly to account for many features of the macro data Published by The Berkeley Electronic Press 2007 1 Capitalism and Society Vol 2 2007 Iss 1 Art 5 produced by different regulations are carefully articulated The empirical models used in this literature are statistical models only weakly motivated by economics They do not recognize policy feedback and they do not model general equilibrium effects For example payroll taxes may have little effect on employment if firms can pass on the tax costs to consumers in the form of higher prices In the absence of better data and better measurement frameworks prior beliefs will continue to dominate how one interprets the evidence This is not as much about dogmatism or conspiracy as it is about good science In the absence of empirical evidence logically consistent stories that accord with intuition have great appeal At both an intuitive level and at the level of formal economic theory incentives matter If a person is paid not to work the person will likely not work If the costs of hiring a worker rise fewer workers are likely to be hired The microevidence supports these basic predictions of theory Like the controversy over the effects of minimum wages disagreements are not over qualitative predictions of the theory but are about quantitative empirical responses HBGS are splendid critics However they do not offer a constructive empirical alternative to existing practices in the literature They have not proved that institutions do not cause the pattern of European unemployment They have instead shown that the current data base and models are too weak to decide the issue Progress in this field requires a lot more empirical effort than has been exerted to date It requires deriving comparable measures of outcomes and incentives across countries and over time for the same country It also requires developing better measures of the incentives generated by institutions and capturing the full array of institutions at work instead of just a few selected institutions with easily measured characteristics The indices currently used do not directly measure the cost of labor which is the key issue in the debate The only valid index of the effect of institutions on the labor market is the cost of labor or better the dynamic schedule of labor costs All institutions operate on this cost Instead of creating a panoply of newer more refined indices to represent the magnitude of various institutional forces as characterizes the current empirical literature it would be more constructive to quantify the effects of the entire edifice of labor institutions on demand and supply of labor through their effects on a single measure the labor cost schedule All institutions affect costs and alternative institutions within an economic environment raise or lower costs Once the incentives of protective institutions are properly measured they can be used to estimate economic responses Since some labor market institutions affect the dynamics of hiring and firing it is important to measure state contingent labor costs and to estimate dynamic relationships As much recent research shows see e g Haltiwanger Brown and Lane 2006 at a
View Full Document
Unlocking...