Determinants of Labor Market Liberalization in Europe

What accounts for patterns of labor market liberalization in Europe in the last three decades? Why reforms of employment protection legislation vary so much across European countries? This paper argues that the propensity of governments to reform depends on the economic problem load they face. However, they also have to face the opposition of trade unions, which we model as unambiguously against liberalization. In a context characterized by high unemployment and rising international competitiveness, the degree of labor market liberalization will thus depend on the strength of trade unions. If they are weak, governments will carry out full liberalization. By contrast, if unions are sufficiently strong to oppose the government, the latter may decide to settle for partial liberalization, which thereby results in labor market dualization. When unions are very strong, however, labor will be opposed even to partial liberalization. Therefore, if the problem-load is high enough, governments will implement full liberalization even when facing very strong unions. This model explains why a number of Nordic countries have liberalized their labor markets more than continental countries, and it is backed by regression analysis carried out on available datasets on European labor markets and labor markets reforms.