Shaping earnings insecurity: Labor market policy and institutional factors

We examine the relationship between earnings insecurity, labor market policies/institutions, product market regulation, and macroeconomic shocks across Europe in the 1990s by means of the non-linear least squares method. Earnings insecurity is proxied by transitory variability in earnings, which captures transitory earnings shocks, and by earnings volatility, which captures both permanent and transitory earnings shocks. Our results suggest that corporative bargaining systems, generous unemployment benefits, and deregulated product markets reduce the impact of macroeconomic shocks on transitory variability in earnings and earnings volatility, while a stronger labor protection legislation reduces the impact of macroeconomic shocks on earnings volatility. Several institutional mixes have the potential to reduce transitory variability, for example coupling a high corporatism with a high unionization, coupling protection mechanisms with activation policies, incorporating a trade-off between the generosity of unemployment benefits and the strictness of labor market regulation, and coupling product market deregulation with deregulated labor markets or with a high unionization. Two valuable lessons are that contextual interaction effects are important for understanding the influence of particular policies and institutions on earnings insecurity and that there is no one-size-fits all policy package for reducing the impact of the business cycle on transitory variability and volatility.