A More Intelligent Approach to
Curing the Unemployment Malaise

Increased efficacy if applied with synergy

What do modern migraine medication and labour market reforms have in common? That both work better when they take advantage of synergy effects. Synergism is—of course you knew it immediately— the phenomenon whereby elements acting together create an effect greater than the sum of the effects each is able to create independently. So is it with migraine pills: a bit of aspirin plus a bit of paracetamol is much more effective than higher doses of either of these components on its own. And so, according to a new CESifo Working Paper by Helge Berger and Stephan Danninger, is it with labour market reforms. Combine them with suitable reforms in the product market, and you have a much more powerful medicine against the unemployment malaise.

Their study, based on an OECD country panel from 1990-2004, shows why the seemingly endless series of small and large reform measures applied to the German labour market in the past few years have produced lots of public frustration and precious little to show for it. If one peeks beyond the national borders, the authors point out, particularly strong employment growth rates can be observed in those countries where labour market reforms go hand in hand with a liberalisation of the product and service markets. When it comes down to employment, individual measures focused solely on the labour market are less than half as good.

The reason is that the labour market is part of a much bigger whole. The dearth of jobs cannot be isolated from the rest of the economy. Companies hire because they want to produce and sell goods and services. With that in mind, why do companies then refrain from hiring? The answer lies with the prevailing market conditions: companies subject to fierce competition in their respective marketplace react much more readily to changes in the labour market when, for instance, non-wage labour costs decrease or the conditions for hiring or firing workers change.

This opens up room for identifying significant reform synergies. Generally speaking, highly regulated countries that reform their labour and product markets simultaneously achieve about 1.5-percent higher employment rates per year. That’s not exactly peanuts: for Germany that would mean some 400,000–500,000 additional jobs in a year. Those countries limiting themselves to single measures evidence a markedly smaller improvement. Labour market reform alone produces a 0.7% improvement in employment, while liberalisation of competition in the product and service markets achieves a meagre 0.3 percent hike. Not until reforms are co-ordinated across markets do their effects exceed those attained by the sum of the individual reform efforts, pushing the employment effect above the 1% mark.

True, there are no magic potions to cure all problems. But a bit of attention to resulting synergies when devising reforms, for instance, can go a long way towards making those sickly employment markets perk up a bit.

Helge Berger and Stephan Danninger: The Employment Effects of Labor and Product Market Deregulation and their Implications for Structural Reform, CESifo Working Paper No.1709

• Other CESifo Working Papers dealing with the labour market
• Other CESifo Working Papers dealing with reforms
• Other CESifo Working Papers by Helge Berger
• CESifo Working Papers published in the past three months