Labor Market Institutions and Their Effect on Labor Market Performance in the New EU Member Countries

This paper focuses on the role of labor market institutions in explaining different labor market developments in European countries, paying special attention to the new EU member countries. This may allow us to analyze the effects of various institutional setups and their changes to major labor market indicators. We complement several studies from the late 1990s by using more recent data that allow us to compare institutional setups from the mid-1990s and early 2000s in both old and new EU member states. We estimate the effects of labor market institutions on various performance indicators (unemployment, long-term unemployment, employment, activity rate). Our results confirm that high taxes increase unemployment, whereas active labor market policies tend to reduce it. We also show that stricter employment protection, higher taxes, and a larger economic burden represented by the minimum wage decrease employment and activity rates. Statistical tests indicate a difference in the institutional effects between old and new EU members.