Labour market institutions in Europe: differences, developments, consequences and reform.

Abstract

Governments devise various labour market institutions to enhance the functioning of the labour market or to correct and overcome negative consequences that the labour market may have. One of the reasons is that, as is the case with all markets, the market for labour may not function as efficiently as predicted in neoclassical economics. As a result, many countries and economic sectors observe longer or shorter periods of high unemployment. In addition, all kinds of other mismatches can occur, for example if people work more or less hours than they would like, if they are unable to find jobs for which they are qualified, or if displacement takes place. The occurrence of these outcomes and the desire to prevent their consequences can result in government intervention in the labour market. Besides these considerations of market failure, normative and ideological forces may play a role, meaning that the public can be in favour of the government always taking a strong role in the labour market. Researchers investigating labour market institutions can focus on different aspects of the labour market. To begin with, they can look at the outcomes or at the policies contributing to these outcomes, or both. With regard to the outcomes, full employment may be regarded as the ultimate goal of the labour market and if this is achieved, one may conclude that the labour market is functioning efficiently. Others who focus on government policies are more interested in learning how governments can contribute to achieving full employment. This chapter examines how governments intervene in the labour market and the consequences of this intervention.