IDEAS home Printed from
   My bibliography  Save this paper

Labor market institutions convergence in the European Union


  • Alka Obadić

    (Faculty of Economics and Business, University of Zagreb)

  • Vladimir Arčabić

    (Faculty of Economics and Business, University of Zagreb)

  • Lucija Rogić Dumančić

    (Faculty of Economics and Business, University of Zagreb)


This paper analyzes labor market institutions convergence in the European Union (EU) to test for economic integration of the EU countries. The convergence is analyzed for five indicators of labor market institutions: employment protection legislation index (EPL), tax wedge, unemployment benefits, active labor market policies, and minimum wages. Convergence is measured using standard beta and sigma convergence complemented with a more sophisticated and more flexible approach of the log-t regression. Annual data for the EU countries from 1993 to 2018 is considered, depending on availability. The results suggest there is no convergence in labor market institutions between EU member states. The differences between institutions are still substantial, and the labor market institutions are changing too slowly to converge. The empirical analysis also considers a possibility of club convergence, differentiating between endogenous clubs based on clustering algorithm and exogenous clubs based on geographical proximity and labor market similarities. Convergence is present only in endogenous clubs. Such results imply different long-run steady states where the differences between countries may be substantial. Since labor market institutions are fundamental determinants of employment and unemployment, differences found in labor market institutions suggest that levels of employment and unemployment in the EU will hardly converge, implying weak labor market integration

Suggested Citation

  • Alka Obadić & Vladimir Arčabić & Lucija Rogić Dumančić, 2021. "Labor market institutions convergence in the European Union," EFZG Working Papers Series 2102, Faculty of Economics and Business, University of Zagreb.
  • Handle: RePEc:zag:wpaper:2102

    Download full text from publisher

    File URL:
    File Function: First version, 2021
    Download Restriction: no

    References listed on IDEAS

    1. Ángel Estrada & Jordi Galí & David López-Salido, 2013. "Patterns of Convergence and Divergence in the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 601-630, December.
    2. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    3. Christian Bayer & Falko Jüßen, 2007. "Convergence in West German Regional Unemployment Rates," German Economic Review, Verein für Socialpolitik, vol. 8(4), pages 510-535, November.
    4. Bernard, Andrew B. & Durlauf, Steven N., 1996. "Interpreting tests of the convergence hypothesis," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 161-173.
    5. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    6. Paul Johnson & Chris Papageorgiou, 2020. "What Remains of Cross-Country Convergence?," Journal of Economic Literature, American Economic Association, vol. 58(1), pages 129-175, March.
    7. Krištić, Irena Raguž & Dumančić, Lucija Rogić & Arčabić, Vladimir, 2019. "Persistence and stochastic convergence of euro area unemployment rates," Economic Modelling, Elsevier, vol. 76(C), pages 192-198.
    8. Bernard, Andrew B & Durlauf, Steven N, 1995. "Convergence in International Output," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 97-108, April-Jun.
    9. Peter C. B. Phillips & Donggyu Sul, 2009. "Economic transition and growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(7), pages 1153-1185.
    10. Michèle Belot & Jan C. van Ours, 2004. "Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms?," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 621-642, October.
    11. Stephen Bond & Anke Hoeffler, 2001. "GMM Estimation of Empirical Growth Models," Economics Series Working Papers 2001-W21, University of Oxford, Department of Economics.
    12. Ruud Muffels & Ruud Luijkx, 2008. "Labour market mobility and employment security of male employees in Europe: `trade-off' or `flexicurity'?," Work, Employment & Society, British Sociological Association, vol. 22(2), pages 221-242, June.
    13. Ulrich Fritsche & Vladimir Kuzin, 2011. "Analysing convergence in Europe using the non-linear single factor model," Empirical Economics, Springer, vol. 41(2), pages 343-369, October.
    14. Richard Freeman, 2005. "Labour market institutions without blinders: The debate over flexibility and labour market performance," International Economic Journal, Taylor & Francis Journals, vol. 19(2), pages 129-145.
    15. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-389, September.
    16. Peter C. B. Phillips & Donggyu Sul, 2007. "Transition Modeling and Econometric Convergence Tests," Econometrica, Econometric Society, vol. 75(6), pages 1771-1855, November.
    17. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    18. repec:ilo:ilowps:374124 is not listed on IDEAS
    19. Stephen Bond & Anke Hoeffler & Jonathan Temple, 2001. "GMM Estimation of Empirical Growth Models," Economics Papers 2001-W21, Economics Group, Nuffield College, University of Oxford.
    20. Eichhorst, Werner & Escudero, Veronica & Marx, Paul & Tobin, Steven, 2010. "The Impact of the Crisis on Employment and the Role of Labour Market Institutions," IZA Discussion Papers 5320, Institute of Labor Economics (IZA).
    21. Bartkowska, Monika & Riedl, Aleksandra, 2012. "Regional convergence clubs in Europe: Identification and conditioning factors," Economic Modelling, Elsevier, vol. 29(1), pages 22-31.
    22. Mercedes Monfort & Javier Ordóñez & Hector Sala, 2018. "Inequality and Unemployment Patterns in Europe: Does Integration Lead to (Real) Convergence?," Open Economies Review, Springer, vol. 29(4), pages 703-724, September.
    23. Baker, Dean, & Glyn, Andrew, & Howell, David R., & Schmitt, John., 2004. "Unemployment and labour market institutions : the failure of the empirical case for deregulation," ILO Working Papers 993741243402676, International Labour Organization.
    24. Mihaela Simionescu, 2015. "About regional convergence clubs in the European Union," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 33(1), pages 67-80.
    25. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    26. Vasco M. Carvalho & Andrew C. Harvey, 2005. "Convergence in the trends and cycles of Euro‐zone income," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 275-289.
    27. Kerui Du, 2017. "Econometric convergence test and club clustering using Stata," Stata Journal, StataCorp LP, vol. 17(4), pages 882-900, December.
    28. Vladimir Arcabic, 2018. "Fiscal convergence and sustainability in the European Union," Public Sector Economics, Institute of Public Finance, vol. 42(4), pages 353-380.
    29. Sjef Ederveen & Laura Thissen, 2007. "Can labour market institutions explain high unemployment rates in the new EU member states?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(4), pages 299-317, September.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. José-Ignacio Antón & Rafael Grande & Rafael Muñoz de Bustillo & Fernando Pinto, 2023. "Gender Gaps in Working Conditions," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 166(1), pages 53-83, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Obadić, Alka & Arčabić, Vladimir & Rogić Dumančić, Lucija, 2023. "Club convergence of labor market institutions in the European Union," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 876-896.
    2. Vladimir Arcabic, 2018. "Fiscal convergence and sustainability in the European Union," Public Sector Economics, Institute of Public Finance, vol. 42(4), pages 353-380.
    3. Cavallaro, Eleonora & Villani, Ilaria, 2022. "Beyond financial deepening: Rethinking the finance-growth relationship in an uneven world," Economic Modelling, Elsevier, vol. 116(C).
    4. Arčabić, Vladimir & Kim, Kyoung Tae & You, Yu & Lee, Junsoo, 2021. "Century-long dynamics and convergence of income inequality among the US states," Economic Modelling, Elsevier, vol. 101(C).
    5. Cavallaro, Eleonora & Villani, Ilaria, 2021. "Real income convergence and the patterns of financial integration in the EU," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    6. Charles Shaaba Saba & Oladipo Olalekan David, 2023. "Identifying Convergence in Telecommunication Infrastructures and the Dynamics of Their Influencing Factors Across Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 1413-1466, June.
    7. Juan Ángel Lafuente & Amparo Marco & Mercedes Monfort & Javier Ordóñez, 2020. "Social Exclusion and Convergence in the EU: An Assessment of the Europe 2020 Strategy," Sustainability, MDPI, vol. 12(5), pages 1-22, February.
    8. Magrini, Stefano, 2004. "Regional (di)convergence," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 62, pages 2741-2796, Elsevier.
    9. E. Tsanana & X. Chapsa & C. Katrakilidis, 2016. "Is growth corrupted or bureaucratic? Panel evidence from the enlarged EU," Applied Economics, Taylor & Francis Journals, vol. 48(33), pages 3131-3147, July.
    10. Kacou Yves Thierry Kacou, 2022. "Interregional inequality in Africa, convergence, and multiple equilibria: Evidence from nighttime light data," Review of Development Economics, Wiley Blackwell, vol. 26(2), pages 918-940, May.
    11. Cutrini, Eleonora, 2019. "Economic integration, structural change, and uneven development in the European Union," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 102-113.
    12. Linda Glawe & Helmut Wagner, 2021. "Divergence Tendencies in the European Integration Process: A Danger for the Sustainability of the E(M)U?," JRFM, MDPI, vol. 14(3), pages 1-22, March.
    13. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.
    14. Fabio Mazzola & Pietro Pizzuto, 2020. "Great Recession and club convergence in Europe: A cross‐country, cross‐region panel analysis (2000–2015)," Growth and Change, Wiley Blackwell, vol. 51(2), pages 676-711, June.
    15. Silvia Fedeli & Vitantonio Mariella & Marco Onofri, 2018. "Determinants of Joblessness During the Economic Crisis: Impact of Criminality in the Italian Labour Market," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 139(2), pages 559-588, September.
    16. Aweng Peter Majok Garang & Hatice Erkekoglu, 2021. "Convergence Triggers in Africa: Evidence from Convergence Clubs and Panel Models," South African Journal of Economics, Economic Society of South Africa, vol. 89(2), pages 218-245, June.
    17. Sturn, Simon & Epstein, Gerald, 2021. "How much should we trust five-year averaging to purge business cycle effects? A reassessment of the finance-growth and capital accumulation-unemployment nexus," Economic Modelling, Elsevier, vol. 96(C), pages 242-256.
    18. Maynou, Laia & Monfort, Mercedes & Morley, Bruce & Ordóñez, Javier, 2021. "Club convergence in European housing prices: The role of macroeconomic and housing market fundamentals," Economic Modelling, Elsevier, vol. 103(C).
    19. Belloc, Ignacio & Molina, José Alberto, 2023. "Are greenhouse gas emissions converging in Latin America? Implications for environmental policies," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 337-356.
    20. Charles Shaaba Saba & Nicholas Ngepah & Christian Nsiah, 2020. "Convergence in military expenditure and economic growth in Africa and its regional economic communities: evidence from a club clustering algorithm," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1832344-183, January.

    More about this item


    labor market; institutions; convergence; club convergence; clustering algorithm;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zag:wpaper:2102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: WPS (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.