Employment, Social Affairs & Inclusion

News 23/09/2015

Labour market institutions: One index to rule them all

How well are EU governments doing in terms of labour market rules and policies? Does the quality of their action match labour market outcomes, such as getting a job or moving from a temporary to a permanent contract? Do successful countries have something in common? We created a "super-index" to find out.

Labour market institutions: One index to rule them all

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Before explaining how this index works, a bit of terminology: with the term "labour market institutions", we mean instruments such as:

  • active labour market policies (ALMP), for example employment subsidies and job-counselling,
  • unemployment benefits,
  • lifelong learning policies, for example on-the-job training and
  • employment protection legislation, such as rules regarding dismissing permanent employees, and
  • activation conditionalities, for instance when an unemployed person needs to participate in some forms of ALMP in order to continue receiving unemployment benefits.

These instruments are crucial in ensuring a well-functioning labour market, one in which unemployed people find a job quickly and workers on temporary contracts move on to permanent jobs (these transitions are examples of what we call "labour market outcomes").

Our Labour Market Institutions Index (LMII) assesses each EU country on five different labour market institutions, compares setups across countries and tries to match them with labour market outcomes. The goal is to examine policy instruments to see (a) if they are effective and (b) in which cases they work best.

This spider chart presents all instruments together and matches them with labour market outcomes (click to enlarge).

 Labour market institutions index, average for the top and bottom labour market performers*, 2012 Source: ALMP and UB spending data from Eurostat LMP database, Lifelong learning data from Eurostat (trng_lfs_02), data on opinions of managers (part of LLL component) is from IMD WCY executive survey and IMD World Competitiveness Yearbook 2012, eligibility requirements and job-search conditionalities for unemployment benefits are from the Venn (2012).

The analysis suggests that many instruments are not only interrelated but more effective when combined with other policy instruments (e.g. think of combining unemployment benefits and active labour market policies). For instance, employment protection legislation, if looked at in isolation, does not appear to be clearly correlated with labour market outcomes.

Indeed countries with the combined highest investment in activation, training and effective unemployment benefits were those that fared better in the crisis. In Austria, Denmark, Germany, Sweden and the UK the unemployed have been more likely to go back to work, and the people on temporary contracts have had greater success in moving to a more stable job within one year.

In other words, it is the combination of the institutions that determines how good labour market outcomes can be. Hence, a less fragmented and more comprehensive approach is needed when developing labour market institutions.

Nevertheless, each of these instruments plays a crucial role and their funding, design or coverage deserves attention because it defines their ability to deliver better results.

This analysis was part of Chapter 1 on the Legacy of the Crisis: Resilience and Challenges of the 2014 Employment and Social Developments in Europe review.

Author: F. Tanay is a policy analyst at the Employment Analysis unit of DG EMPL.

The views expressed in this article are those of the author and do not necessarily reflect the official opinion of the European Union.

Editor's note: this article is part of a regular series called "Evidence in focus", which will put the spotlight on key findings from past and on-going research at DG EMPL.

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