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Shaping earnings instability: labour market policy and institutional factors

  • SOLOGON Denisa
  • O’DONOGHUE Cathal

The concerns regarding the economic insecurity stemming from earnings instability and volatility have been gaining momentum in the contemporary political discourse. If earnings instability/volatility is a proxy for risk, for risk-averse individuals, increasing earnings instability/volatility bears substantial welfare costs. Using the European Community Household Panel and the OECD labour market indicators, we explore the cross-national dierences in earnings instability and earnings volatility across 14 European countries in the 1990s and the relationship between earnings instability/volatility, labour market institutions and macroeconomic shocks by means of non-linear least squares. Earnings instability is measured by the variance of transitory earnings, and earnings volatility by the standard deviation of the two-year changes in log earnings. Evaluated for the average country, we nd that the employment protection legislation, the degree of corporatism and the deregulation in the product market are associated with a lower earnings instability and a lower earnings volatility. The institutions are found to shape the distributional eects of macroeconomic shocks on earnings instability and earnings volatility. The institutions which counteract the adverse eects of macroeconomic shocks on both earnings instability and earnings volatility, are a high corporatism, deregulated product markets and generous unemployment benets. The institutions which counteract the adverse effects of macroeconomic shocks only on earnings volatility are the employment protection legislation and low tax-wedges on labour.

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Paper provided by CEPS/INSTEAD in its series CEPS/INSTEAD Working Paper Series with number 2012-06.

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Length: 52 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:irs:cepswp:2012-06
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