Why Some Nations’ Labour Markets Did Better During the Pandemic

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Lambert here: Headline should be “Have Been Doing Better,” not “Did Better.” And some would say all capital is human capital. Perhaps then the phrase “human capital accumulation” would not be so jarring….

By Simeon Djankov, Policy Director, Financial Markets Group, London School of Economics, and Eva (Yiwen) Zhang, Researcher, Peterson Institute for International Economics. Originally published at VoxEU.

Leaving human capital out of policy discussions might lead to incorrect inferences about which measures were most successful during the pandemic. Based on a sample of 45 mostly OECD economies, the authors of this column show that both high levels of human capital and, to a lesser extent, flexible labour regulation have allowed labour force participation to recover faster during the Covid crisis. Countries that prepare to fight the effects of globalisation and robotics have also managed to alleviate the effects of the shock on the labour market.

Baldwin and Forslid (2020) posit that labour markets are more robust in nations better endowed with human capital, as high-skill workers are more likely to have flexible work arrangements. High-skill jobs can also be accommodated more easily in a period of social distancing and lockdown measures. If this hypothesis is correct, the recovery in labour force participation in the wake of COVID-19 will be faster in countries with higher human capital. We find that this is indeed the case in a sample of 45 mostly OECD economies during the first year of the pandemic (Figure 1).

Figure 1 Nations with higher human capital recovered faster

Note: The change in the Labour Force Participation Rate is measured between second quarter of 2020 and second quarter of 2021. We use a measure of human capital accumulation as proxy for the share of footloose high-skill jobs in danger of moving to either other countries or being lost to robots. The sample comprises 45 economies with available quarterly data on labour force participation: Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Rep., Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Netherlands, Norway, Paraguay, Poland, Portugal, Romania, Serbia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, United States, and Vietnam.
Source: Authors’ calculations using the Angrist et al. (2021) dataset and the labour force participation rate measured by OECD, last accessed on October 30, 2021.

Other, more traditional forces may be at play in the job recovery process too. Since the 1980s, labour regulation has become more flexible in much of the world (Blanchard et al. 2013). The effects of this dynamic have been the subject of much empirical research, particularly in the European context. Bjuggren (2018) finds, for example, that a 2001 reform that increased labour market flexibility in Sweden also improved participation. Bentolila et al. (2012) demonstrate that the wide insider-outsider labour marker divide in southern European economies is reduced with flexible labour rules. Cournede et al. (2016) use OECD data to show that easing employment regulation benefits employment transitions, which in turn increases labour force participation. Botero et al. (2004) use a global dataset to show that flexible labour regulation brings workers to formal jobs, increasing labour force participation.

We find some support for the hypothesis that flexibility in labour market regulation aids the job recovery. In particular, there is a positive correlation between the percentage change in the labour force participation rate in the first year of the pandemic and a regulatory index on the ease of hiring (Figure 2).

Figure 2 Nations with flexible regulation on hiring recovered faster

Note: The change in the Labour Force Participation Rate is measured between second quarter of 2020 and second quarter of 2021. The analysis is performed on the 2019 pre-pandemic data on the ease of hiring, and in particular the availability and maximum length of a fixed-term contracts for permanent tasks. The sample comprises 45 economies with available quarterly data on labour force participation: Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Rep., Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Netherlands, Norway, Paraguay, Poland, Portugal, Romania, Serbia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, United States, and Vietnam.
Source: Authors’ calculations using the updated Botero et al. (2004) dataset and the labour force participation rate measured by OECD, last accessed on October 30, 2021.

We further test the human capital and regulatory flexibility hypotheses using regression analysis. Human capital is positively and statistically significantly correlated with a faster recovery in labour force participation. This is true when controlling for income per capita and ease of hiring regulation. These qualitative results are maintained if we control for other proxies for flexible labour regulation.

The coefficients on labour regulation are positive, though not statistically significant. The interaction terms between regulation and human capital are negative, but also insignificant. Overall, the results show that both high levels of human capital and flexible labour regulation allow labour force participation to recover faster during crisis. The effect of the former is, however, dominant. Irrespective of the level of regulation, countries that prepare to fight the effects of globalization and robotics have also managed to alleviate the effects of the pandemic’s shock on the labour market.

Policy advisors should take note of this result, as it may distort the inference of which labour market policies have yielded positive results during the pandemic. Initial conditions play a significant role in designing such policies, both in terms of regulation as well as – as this column argues – human capital accumulation.

References available at the original.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

6 comments

  1. Zamfir

    This is rather dubious statistics, in my not too humble opinion. The “trends” are already weak if you assume that these data points are truly 45 independent observations of an underlying phenomenon. But If you look closer, the trend is driven by the cluster of latin-american countries, and South Africa.

    That’s it. The graphs just say “labour participation went down more in Latin America than in Europe and East Asia, and yet more in South Africa”

    Given that, you will get a (statistically significant!) trend for any variable that differs somewhat between Latin America on the one hand, and Europe+East Asia on the other hand.

    Reply
  2. anon y'mouse

    definitions?
    unless one reads all of the background literature, this thing is useless.
    and then we must agree as to what exactly constitutes “high skill” labor, human capital accumulation (what & how?), and what are exactly “flexible” labor policies. oh, and we won’t count any other huge and myriad variables like development level, major resource or production modes, demographics, or the million other policies which may affect “labor force participation”.
    a writeup so intangible, it floats on air. my professors would have failed it for not explaining these things and the authors’ understandings of how the concepts apply, then simply citing jargon. but that was them and it wasn’t economics, the anti-social “social” science.

    Reply
  3. MarkT

    Um. This looks very much like the stuff put out by stock broking firms in the 1990s. The giveaway is “to a lesser extent, flexible labour regulation have allowed labour force participation to recover faster during the Covid crisis.”

    The statistical science here is non-existent. This analysis was produced in an Excel spreadsheet. I’d have been ranting even if the R-squared was close to 1.0. But here sadly it is not.

    Reply
  4. Oh

    These guys don’t know how to fit data. R2 = 9.64 is not a correlation. You can draw a line any which way with thses points.

    Reply
    1. The Historian

      Yes! When I read that article, my first thought was “What am I missing?” because an R2 of .28 or .09 seems to imply that y is barely dependent on x so it doesn’t seem to justify their conclusions that: “Overall, the results show that both high levels of human capital and flexible labour regulation allow labour force participation to recover faster during crisis.”

      Wouldn’t you want an R2 of .5 or higher to validate their hypotheses?

      I’m not a statistician but those graphs seem to be no more than simple algebra: y=mx+b with linear curve fitting to find b.

      Reply

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