The Impact of Institutions on the Employment Performance in European Labour Markets

Abstract

This paper investigates the role of the institutional framework for the labour market performance in EU countries. The point of departure is the labour demand equation that is derived from cost minimization behaviour of firms. Labour demand is expressed by its structural parameters, i.e. the output and real wage elasticity. Cointegration relationships between employment, output and wages are revealed by efficient estimation techniques. The long run parameters are explained by indicators for product and labour market institutions using panel fixed effects models. The results suggest that higher flexibility in the product and labour markets could be a strategy to improve the employment record. The response of employment to macroeconomic conditions is stronger in a more deregulated environment, and the absorption of shocks can be relieved.