FS I 91 - 10
Leaving Employment: Patterns in Major EC Countries
Christoph Buechtemann N igel Meager
Januar 1992
ISSN Nr. 1011-9523
discussion papers
Forschungsschw erpunkt A rbeitsm arkt und
B eschäftigung (FS I) R esearch A rea
L abour M arket and
Em ploym ent
Forschungsschw erpunkt
A rbeitsm arkt und B eschäftigung (FS I) R esearch A rea
L abour M arket and Em ploym ent R eichpietschufer 50
D-10785 B erlin
Leaving Employment: Patterns in Major EC Countries Abstract
This paper reconsiders the question, prominent in the "labour market flexibility" debate of the 1980s, of the extent to which inter-country varia
tions in employment adjustment in responce to demand and output varia
tions can be attributed to institutional differences, and in particular to the relative "rigidity" of regulations governing dism issals/redundances and layoffs.
It develops the argument that the supporting institutional arrangements associated with these constraints on dismissals, together with the level of voluntary labour turnover (which may itself reflect institutional factors such as the extent of transferable skill training, and the rate of unemploy- m ent/social benefits), may have an im portant mitigating effect on the actual costs to firms of workforce adjustment.
To examine this argument empirically, the paper makes use of data from the EC Labour Force Sample Surveys (EC-LFSS) for four EC countries (Germany, France, Italy and the UK), which provide information on p at
terns of job loss in these countries during the 1980s. In particular, the data show the m a n n er o f se p a ra tio n fr o m the la st jo b , for people who have recently left employment. Initial analysis of these data appears to support the argument that apparent inter-country differences in em
ployment adjustment cannot simply be attributed to the relative presence or absence of such institutional restrictions. The paper examines, for ex
ample, the proportion of job separations in the four countries which are due to "involuntary" job terminations (this proportion is lowest, for ex
ample, in Germany). The extent to which employers have to resort to such measures is one index of the relative ease and cost of employment ad
justment, and the data suggest that it depends inversely on the extent of a) voluntary labour turnover (relatively high in Germany, for example), and b) supporting and accompanying public measures (such as early retirem ent schemes) - relatively widespread in Germany during the period examined - which "soften" certain forms of job separation.
The existence in a particular country of certain factors apparently inimical
to rapid workforce adjustment (such as strict employment security
regimes) should not therefore be taken to imply that there do not exist
countervailing factors in that country facilitating adjustment.
Verhaltemsmuster in größeren EG-Ländern bei der Beendigung von Beschäftigungs-Verhältnissen
Zusammenfassung
Das Papier greift eine Frage auf, die in der D ebatte über Arbeitsm arkt- Flexibilität in den achtziger Jahren besonders intensiv diskutiert wurde.
Es geht dabei darum, wie die Unterschiede zwischen einzelnen Volkswirt
schaften im Prozeß der Anpassung der Beschäftigung an den Strukturwan
del unter dem Einfluß von Veränderungen bei Nachfrage und Produktion auf institutioneile Unterschiede zurückgeführt werden können und dabei besonders auf den Grad der "Rigidität" von Regelungen, die einen Einfluß auf den Prozeß der Entlassungen haben.
In dem Papier wird argum entiert, daß die unterstützenden institutionellen Regelungen in Verbindung mit Regelungen, die Entlassungen einschrän
ken, einen wichtigen m ildernden Effekt auf die Kosten der Unternehm en bei der Anpassung des A rbeitskräfte-Potentials haben können. In diese Überlegung muß das Ausmaß freiwilliger Arbeitsplatzwechsel (die ihrer
seits institutionelle Faktoren wie den Umfang, in dem überbetriebliche Qualifikationen verm ittelt werden oder auch die Höhe des A rbeitslosen
geldes bzw. der Sozialhilfe widerspiegeln können) einbezogen werden.
Um dieses Argument empirisch zu überprüfen, wurden Daten aus den EG- Arbeitskräfte-Stichproben (EC Labour Force Sample Survey) von vier Ländern (Deutschland, Frankreich, Italien und Großbritannien), die In
form ationen über Muster von Arbeitsplatzverlusten in diesen Ländern während der achtziger Jahre beinhalten, herangezogen. Diese Daten zei
gen besonders die Art und Weise der Auflösung des letzten A rbeitsvertra
ges an für diejenigen, die erst vor kurzem aus der Beschäftigung ausge
schieden sind. Eine erste Analyse dieser Daten scheint das Argument zu belegen, daß offenkundige internationale Unterschiede in der Beschäfti
gungsanpassung nicht einfach dem Grad des Vorhandensein bzw. Fehlens solcher institutioneller Restriktionen zugeschrieben werden können.
Das Papier untersucht beispielsweise den Anteil von V ertragsauflösun
gen in den vier Ländern, die auf "unfreiwilligen" Beendigungen von V er
tragsverhältnissen beruhen. (Dieser Anteil ist für Deutschland am nied
rigsten.) Das Ausmaß, in dem A rbeitgeber zu solchen Maßnahmen greifen, ist ein Index für den Grad an "Umständen" und Kosten der Arbeitskräfteanpassung. Die D aten legen nahe, daß es einen inversen Zusammenhang gibt zwischen dem Ausmaß an a) freiwilligen Arbeitsplatzwechseln (relativ hoch in Deutschland) und b) unterstützenden und begleitenden öffentlichen Maßnahmen (wie vorzeitige Pensionierung, ziemlich weit verbreitet in Deutschland während des Untersuchungszeitraumes), die bestimmte Formen von Arbeitsvertragsauflösungen abmildern.
Das Vorhandensein bestim m ter Faktoren in einem Land, die gegenüber einer schnellen A rbeitskräfteanpassung offensichtlich verhindernd wirken (wie strikte Beschäftigungssicherungs-Regelungen) sollte deshalb nicht dahingehend interpretiert werden, daß in diesem Land nicht auch entge
gengesetzte Faktoren existieren können, welche eine A rbeitskräfteanpas
sung an den Strukturwandel erleichtern können.
Leaving Employment: Patterns in Major EC Countries1
b y Christoph F. Buechtemann12 and Nigel Meager3
1. Introduction
Recent studies have shown pronounced differences in employment elasticities and workforce adjustment behaviour in response to demand and output variations across major industralised countries (see Buechtemann 1991). In the "labour market flexibility" debate of the 1980s these differences in employment adjustment were frequently attributed to institutional differences between countries, particularly the relative "rigidity" or severity of legal or collectively bargained regulations governing dismissals/redundancies and lay
offs. In Europe, employment security regulations have typically been seen as least restrictive in the United Kingdom and most restrictive in Italy, with Germany and France ranking somewhere between these extremes (see e.g. Emerson 1988; Bertola 1990; Lazear 1990). However, such country rankings appear to be contradicted by various studies that have found (West) Germany4 to exhibit the most rapid rate of workforce adjustment (in terms of both employment and hours) to output variations, whilst the United Kingdom has the slowest rate
1 The data used in th is paper were c o lle c te d as p a rt o f a la rg e r p ro je c t, conducted on b e h a lf o f the Commission o f the European Communities, which evaluates the impact o f employment p ro te c tio n regimes in EC c o u n trie s (see Mosley 1991). The authors are g ra te fu l to Günther Schmid, David Soskice and Hugh Mosley fo r comments on an e a r lie r d r a f t.
2 Senior fe llo w a t the Social Science Centre B e rlin (WZB), research u n it "Labour Market and Employment".
3 Senior guest fe llo w a t the Social Science Centre B e rlin (WZB), research u n it "Labour Market and Employment", and Research Fellow a t the I n s t it u t e o f Manpower S tudies, U n iv e rs ity o f Sussex.
4 Throughout the te x t "Germany" re fe rs to ( p r e -u n ific a tio n ) West Germany
(see Maurau and Qudinet 1988), Indeed, the speed of workforce adjustment in the German manufacturing sector is close to that of the United States, a country where legal lay-off and dismissal restraints were virtually absent until very recently (see also Kraft 1988 and 1991; Franz 1991). This apparently surprising finding (surprising given Germany's highly elaborate system of legal and collectively bargained dismissal and lay-off restraints) casts doubt on popular notions about the alleged labour market impact of employment security regulations, and draws attention to the role of the wider micro and macro-economic as well as the institutional framework in which employment security regulations operate.
In most European countries, legal and collectively bargained dismissal restraints are embedded in a more or less comprehensive system of supporting and accompanying measures, such as public work sharing subsidies (short-time
working compensation) or early retirement schemes, measures which may have a strong mitigating impact on the socio-economic costs of workforce adjustments and external labour turnover (see Mosley 1991). Apart from these supporting measures, the frequency of voluntary quits may play a vital role in determining the actual costs imposed on firms by legal and collectively bargained dismissal restraints (see Gavin 1986): the higher the quit rate, the more firms can reduce their workforce through mere attrition (or "voluntary wastage") without having to resort to often costly (and conflictual) worker dismissals and enforced redundancies5.
We should note, however, th a t v o lu n ta ry q u its and dism issals (o r redundancies) are not n e c e s s a rily fu n c tio n a l e q u ivale n ts from the fir m 's pe rsp e ctive . On the one hand, workers w ith the highest q u it rates may not be those workers the fir m would lik e to lose f i r s t in the event o f a sudden drop in demand; re ly in g on v o lu n ta ry wastage may g re a tly l im i t the fir m 's in flu e nce over who w i l l lose th e ir jo b s. This
"disadvantage" compared to enforced redundancies may, indeed, have become r e la t iv e ly more im portant in recent years in so f a r as s k i l l requirements and the le ve l o f fir m - s p e c ific human c a p ita l investments have increased. On the o th e r hand, firm s which a n tic ip a te s ig n ific a n t le v e ls o f h ir in g in the fu tu re may not be in d iffe r e n t to the s ig n a l given to the market by a high p ro p o rtio n o f enforced jo b losses in a downturn.
Indeed, it is likely that the secular decline in voluntary quit rates c
observable in most European countries since the 1960s has contributed to shifting the pressure of adjusting employment (to variable demand conditions) towards involuntary job terminations; this in turn may partly explain European employers' apparently growing concern about dismissal costs and their intensified call for a "deregulation" of legal dismissal restraints. There is ample evidence that firms in all major European countries tend to have a clear preference for "soft" workforce reductions through attrition and early retirement schemes over more costly, enforced redundancies67 (for an overview see Buechtemann 1991). Inter-country differentials in workforce adjustment behaviour and in the "management" of structural change might, therefore, be partly explained by differences in the scope for such "soft" workforce reduction measures. As a first step towards investigating this proposition, this paper presents some new empirical evidence of differential patterns of leaving employment in four major European countries, Germany, France, Italy, and the United Kingdom.
2 The Model
Before discussing the empirical findings, however, and in order to provide a framework for this discussion, we set out a simple model of the key factors influencing the composition of employment separations. The paper attempts, in particular, to throw light (with the use of some recent data) on inter-country variations in the proportion of terminations which are involuntary (call this
6 See, fo r example, OECD 1986 (page 58), fo r evidence on th is d e c lin e .
7 There is evidence fo r the UK, fo r example, th a t even a t the h e ig h t o f the 1979-81 recession, redundancies did not account fo r a m a jo rity o f gross job loss, w ith employers e x h ib itin g a c le a r preference fo r "v o lu n ta ry " methods o f w orkforce re d u ctio n - see Meager 1984.
proportion Z). and which is determined as a residual from the following equations:
I* = L - Q - R ... (1) I = i.I* ... (2)
where:
L = overall level of employment terminations desired by employers in the period;
Q = voluntary quits during the period;
R = retirements (including early retirements) etc. during the period;
I* = involuntary terminations "desired" by employers (assuming no extra costs associated with redundancies, dismissals etc);
I = involuntary terminations actually achieved by employers in the period (taking account of these extra costs);
i = employers' degree of "success" in achieving their overall desired level of involuntary terminations.
That is,
Z = 1/(1 + Q + R)
i.(L - Q - R)/[i.(L - Q - R) + Q + R] ... (3),
Taking the various factors which influence the different types of separation into account, we might expect that
1(a u, s, a) + + + where:
au = the change in unemployment over the period (taken as a proxy for the degree of change in demand in the economy);
s = some index of the rate of "structural change" in the economy (with a higher value indicating faster structural change);
a = a measure of the age structure of the workforce (a higher value indicating an older workforce).
In other words, the desired (gross) job loss by employers over the period will be larger, the stronger the decline in demand over the period and/or the faster the rate of structural change being experienced (i.e. the less employers' actual workforce composition reflects its desired composition8), and the higher the average age of the workforce (assuming greater skill obsolescence among older workers).
The quits equation might be something like,
Q = q(Au, b, a) ... (5),
where:
8 In p ra c tic e the c a u s a lity may be more complex. Thus a fa s t ra te o f s tr u c tu ra l change may not always be associated w ith a high degree o f "mismatch" in employment, a t le a s t in so fa r as employers (and economies) have some "choice" over the degree o f s tr u c tu ra l change to which they are su b je ct (e .g . by op tin g fo r market segments s u b je c t to fa s te r or slower ra te s o f te c h n ic a l in n o v a tio n ). Thus w h ils t high "mismatch"
may re s u lt p a r t ly from ra p id s tr u c tu ra l change, the opposite need not be tru e , and a low degree o f mismatch might r e f le c t e ith e r a slow ra te o f s tru c tu ra l change, o r ra p id s tr u c tu ra l change coupled w ith a r e la t iv e ly h ig h ly tra in e d , f le x ib le w orkforce. This complicates our simple model, and may be p a r t ic u la r ly im portant in in te rn a tio n a l comparison, since one fe a tu re arguably d is tin g u is h in g economies in "high s k i l l e q u ilib riu m ", from those in "low s k i l l e q u ilib riu m " (Finegold and Soskice 1988) is th a t the former have adapted to s tr u c tu ra l change w ith o u t generating mismatch by deploying a w e ll-tr a in e d , f le x ib le w orkforce, to a g re a te r e x te n t than the l a t t e r , who have avoided mismatch by o p tin g f o r , o r remaining in , market segments less s u b je ct to s tr u c tu ra l change. Not a l l s tr u c tu ra l change is endogenous in th is sense, however, and w ith in one economy, i t is s t i l l lik e ly to be the case th a t a fa s te r ra te o f such change w i l l , c e te ris pa rib u s, be associated w ith a higher degree o f mismatch, although the parameters o f the ! ( . . ) fu n c tio n in our model may w e ll d i f f e r somewhat between co u n trie s.
b = is some measure of the degree of "risk aversion" or immobility present in the workforce, as an indicator of individual workers' willingness to quit employment at a given level of economic activity.
That willingness might be expected to be higher, for example, the higher the level of unemployment compensation9, the higher the proportion of dual income families, the higher and more transferable the general level of skill in the workforce, etc.
Thus, (voluntary) quits will be greater, the less the increase in unemployment over the period, the lower the degree of risk aversion of individual workers (itself reflecting a number of institutional and structural factors in the labour market), and the lower the average age of the workforce (it is well- documented that voluntary quits tend to decline with age).
Retirements might be given by the equation:
R = r(a, e ) ... ... (6) + +
where
e = a measure of the prevalence of early retirement schemes.
And finally,
i = i(c, a ) ... ... (7),
where:
s In much o f the lit e r a tu r e on labour market f l e x i b i l i t y , a high level o f unemployment b e n e fits is g e n e ra lly seen as a c o n trib u tio n to g re a te r labour market " s c le ro s is " , by reducing the in ce n tives fo r the unemployed to search fo r work, and reducing th e ir w illin g n e s s to accept low paid work. In our fo rm u la tio n , i t could be argued th a t high unemployment b e n e fit le v e ls a c tu a lly c o n trib u te to labour market f l e x i b i l i t y by increasing in d iv id u a l w orkers' w illin g n e s s to take the r is k o f q u ittin g employment (although th is e ffe c t may be q u a lifie d in so fa r as v o lu n ta ry q u ittin g d is q u a lifie s o r delays an in d iv id u a l's e l i g i b i l i t y fo r unemployment b e n e fit) .
c - the cost to the employer of compulsory dismissals/redundancies.
That is, the proportion of the "desired" level of involuntary terminations which is actually achieved by employers will be a decreasing function of the cost (statutorily determined or otherwise) of dismissals/redundancies, and of the age of the workforce (for reasons discussed above)10.
Substituting equations (4) to (7) in (3), it is clear that:
Z = z(a u, s, a, b, c, e) ... (8) + + ? + - -
In other words: we assume the proportion of involuntary terminations will tend to be higher: the greater is the fall in demand/rise in unemployment (this is a dual effect through an increase in the overall desired job loss and a reduction in voluntary quits); the greater the degree of structural change in the economy (by increasing the mismatch between current and desired workforce composition); the lower the financial and institutional costs of dismissals/redundancies; and the less widespread the existence of early retirement schemes and similar supporting measures. The effect of the demographic structure of the workforce is not determined in this simple model, since the age structure affects the overall desired job loss, the rate of voluntary quits, the rate of retirement and the costs of involuntary
10 In th is simple fo rm u la tio n we are e ff e c tiv e ly assuming th a t the only mode o f in v o lu n ta ry te rm in a tio n is dism issal/redundancy. In p ra c tic e , (see a lso the discussion in se ctio n 4.1 below) th e re also e x is ts the p o s s ib ilit y o f the use o f temporary c o n tra c ts , and where the cost o f dism issal/redundancies is r e la t iv e ly high (as in France), we might expect some s u b s titu tio n towards the use o f such c o n tra c ts . In a more complete model, th e re fo re , we might include a v a ria b le r e f le c t in g the ease/cost o f using temporary co n tra cts in th is equation.
terminations11.
We have,, therefore, a number of possible explanations for inter-country (and inter-temporal) variations in Z, and we now turn to examine the data on the composition of job-separation from four EC countries, to see if and how these explanations can help account for observed patterns in the data.
3. The Data
The following results are based on cross-sectional comparisons using data from the 1989 European Community Labour Force Sample Survey (EC-LFSS), together with a narrower range of comparable data from the 1983 Survey. As well as detailed data about (mainly supply-side) labour force characteristics, the annual EC-LFSS also contains information about the manner of separation from the last job for unemployed or inactive persons who have had some employment
spell during the three years preceding the survey. In order to get a clearer picture of the flows from employment to unemployment or economic inactivity, the analysis included only those persons who had left their last job within the six months preceding the survey1112.
A serious deficiency of these data for present purposes is that they do not contain any information on those job separations which lead directly into new
11 Our sim ple model assumes th a t the age d is tr ib u tio n o f employment is single-peaked ( i . e . a country w ith a r e la t iv e ly high p ro p o rtio n o f o ld e r workers w i l l also have a r e la t iv e ly low p ro p o rtio n o f younger w orkers). In p ra c tic e , as shown in the ta b le in the Appendix, th is need not be so, and I t a ly , f o r example has both the sm a lle st p ro p o rtio n o f workers under 25 and the sm a lle st p ro p o rtio n over 50 o f the fo u r c o u n trie s . In a more complete model, th e re fo re , the age v a ria b le (s ) m ight e n te r in a more complex way than th a t portrayed here.
12 I t is we11-documented in most c o u n trie s , th a t those who become long-term unemployed comprise a r e la t iv e ly small p ro p o rtio n o f the flo w out o f employment, but a much la rg e r p ro p o rtio n o f the eventual stock o f unemployed. As our concern here is m ainly w ith the flo w out o f employment, i t is im portant to choose a measure which excludes th is large " t a i l " o f long-term unemployed o r in a c tiv e persons.
jobs, i.e. without intermittent non-employment . A further disadvantage 1 inherent in the data set is that for those people who retired from the labour force for "other than economic or health reasons" (i.e. "regular" retirements of people reaching normal retirement age) and for people leaving employment for other "unspecified" reasons, the EC-LFSS does not enable us to distinguish those leaving a job in dependent employment, from those leaving from other types of economic activity, such as self-employment or unpaid family work. It is clearly inappropriate to include the latter groups in an analysis of the relative importance of involuntary versus involuntary employment separations and the impact of employment security regimes, and we have therefore excluded this category of separations (mainly "regular retirements") from our analysis.
It could be argued that given the paper's focus on alternative policy options for employment reductions, it makes sense to exclude those separations which are the result of country-specific demographic structures. On the other hand, and as our model above explicitly recognises, the rate of "automatic"
separations through regular retirement is one factor affecting the resulting need for involuntary adjustment methods, and it is therefore unfortunate that the EC-LFSS data do not permit us to capture this aspect. These various deficiencies suggest caution in interpreting the observed separation patterns in the EC-LFSS, and we duly exercise such caution in presenting these results below. In particular when we refer to "separations leading to unemployment or economic inactivity", it should be recalled that "regular retirees" are excluded from this group. *
13 C le a rly the v o lu n ta ry /in v o lu n ta ry r a t io among such separations is l ik e l y to d i f f e r from th a t amongst separations leading d ir e c t ly to unemployment o r economic in a c t iv it y . Thus, fo r example, from lo n g itu d in a l data fo r Germany we know th a t o n ly a small fr a c tio n (19.2%) o f a l l v o lu n ta ry q u its leads in to unemployment (9.6%) or in a c t iv it y (9.6% ); in the case o f dism issals th is share is s u b s ta n tia lly la rg e r (46.9%): see Gerlach and Schasse 1990, p.131.
4. Results14
4.1 Patterns of separation from employment
Table 1 shows that the flows from employment to unemployment or inactivity were not insignificant over the observation period. They vary, moreover, in size from country to country: In Germany close to half a million (461,000) unemployed or inactive persons had left their previous job within the preceding six months; this is equivalent to two per cent of all workers in dependent employment at the time of the survey; i.e. within a six-month time span (and excluding "regular" retirements), roughly one in fifty employees moves to unemployment or economic inactivity; in the other countries this share was larger - France (3.8%), Italy (3.1%), and the United Kingdom (2.5%) - a finding which (in the case of France and Italy at least) appears to be at odds with the frequent allegation of a relatively high degree of labour immobility in these countries. It is, of course, likely that these differences
partly reflect a greater need for downward employment adjustment in France and Italy than in Germany or the UK over the period considered (reflected in variations in the value of a u in our model above). Internationally comparative figures (OECD 1990) show, for example, that unemployment rates in 1988-89 were not only considerably higher in France and Italy than in the UK and Germany, but also that the tightening of the labour market between 1988 and 1989 was far less marked in the former two countries than in the latter two1415.
14 A d e ta ile d summary o f the main re s u lts is presented in the ta b le in the Appendix.
15 1988 unemployment ra te s were: Germany, 5.6%; UK, 8.5%; France, 10.0%; I t a ly 11.0%; and the percentage changes in these ra te s over 1988-89 were: Germany, -10%; UK, -19%; France -6%; I t a ly -1% (OECD 1990). Unemployment ra te s and changes in them may a ls o , o f course, r e f le c t the impact o f the choice o f adjustment measures themselves - e .g . a r e la t iv e ly high use o f e a rly re tire m e n t would tend to lead to lower unemployment ra te s than otherw ise. Using employment change as an in d ic a to r leads to the same ranking o f co u n trie s however - thus OECD data show th a t the annual growth ra te s o f to t a l employment in 1989 were Germany 1.3%, UK 3.1%, France 1.2% and I t a ly 0.1%.
Table I: Outflows from employment in major EC countries - overall patterns (1989)
1 2 3 4 5
Dependent employment (excl. apprentices)
Total left job in last * 8m, and not working
6 month separation rate (2 as % of 1)
Total left job in last 6m, and unemployed*
Unemployed as % of total separations (4 as
% o f2 )
fOOOs) fOOOs) (%) fOOOs) (%)
Germany male
female to t a l
13,963.5 244.0 1.8 145.8 59.8
8,970.3 217.0 2.4 131.8 60.7
22,933.8 461.0 2.0 277.5 60.2
France male
female to t a l
10,213.5 351.0 3.4 284.7 81.1
7,955.9 332.8 4.2 252.3 75.8
18,169.4 683.9 3.8 536.9 78.5
I t a l y male female to t a l
9,445.5 223.8 2.4 109.7 49.0
5,304.6 232.9 4.4 120.8 51.9
14,750.2 456.7 3.1 230.5 50.5
UK male
female to t a l
12,153.6 313.8 2.6 230.5 73.5
10,536.0 259.3 2.5 132.8 51.2
22,689.6 573.1 2.5 363.3 63.4
* ie unemployed o r econom ically in a c tiv e (excluding "re g u la r” r e tir e e s ) + ie looking f o r work
Source: EC Labour Force Sample Surveys 1989 (fig u re s do not always to t a l 100% due to rounding e rro rs )
Differences between the four countries also emerge with regard to the proportion of recent job leavers classified as unemployed, i.e. looking for work: of all non-employed persons (excluding "regular retirees") who had left their previous job some time during the past six months 60.2 per cent were looking for work in Germany, 78.5 per cent in France, 50.5 per cent in Italy, and 63.4 per cent in the UK. This suggests a particularly large scale of external labour turnover adjustment through unemployment in France, in contrast to a rather large movement towards economic inactivity in Italy, with Germany and the United Kingdom lying somewhere between these two extremes. The overall rate of job separation leading to subsequent unemployment (i.e. recent job seekers as percentage of all persons in dependent employment) amounted to 1.9 per cent in France, followed by 1.6 per cent in both the United Kingdom
and Italy, and only 1.2 per cent in Germany.
Clearly the proportion of lob-losers who enter unemployment will be a function of the relative tightness of the labour market in the country concerned, but we might also expect institutional and structural factors to play a role here.
Thus, for example, the proportion of job-losers in the previous six months who show up as unemployed rather than economically inactive is likely to reflect the relative "generosity" or otherwise of the redundancy payment arrangements in that country, as well as the eligibility requirements for signing-on as unemployed in that country. Other things being equal we would expect a more generous redundancy payments regime to increase the proportion of job-losers taking a period of inactivity prior to job search16, and equally the existence of a "waiting period" after redundancy or dismissal before unemployment benefits can be claimed might increase this proportion17.
Further differences show up when we differentiate according to the mode of separation from the last job (see Table 2). In all four countries dismissals
(including redundancies) accounted for a minority of job separations (excluding "regular" retirements) leading into unemployment or inactivity (Germany: 35.5%; France: 31.3%; Italy: 22.0%; UK: 35.5%). If we calculate dismissal rates (i.e. separations due to dismissal/redundancy as a percentage
of all persons in dependent employment), we find (surprisingly) the highest dismissal rate in France (1.2%), followed by the United Kingdom (0.9%) and
16 I t is d i f f i c u l t to p rovide a s tra ig h tfo rw a rd summary ranking o f the d if f e r e n t s ta tu to r y requirements fo r severance payments in the d if f e r e n t c o u n trie s , since the various re g u la tio n s have d if f e r e n t e l i g i b i l i t y thresholds in terms o f age and length o f se rvice c r i t e r ia (see Mosley 1991, ta b le 2 .5 , f o r a summary o f these c o n d itio n s ). The e x te n t to which employers in the d iffe r e n t c o u n trie s t y p ic a lly pay above the s ta tu to ry minima (a fa c to r which may i t s e l f be s u b je ct to the in flu e n c e o f c o lle c t iv e b a rg a in in g ), w i l l also be im p o rta n t. I t is o f in te re s t to note, however, th a t Germany is the o n ly one o f the fo u r c o u n trie s where there is no general s ta tu to ry requirement fo r severance payments.
17 In p ra c tic e , however, we m ight expect th is la t t e r e ffe c t to be r e l a t i v e ly small since the EC-LFSS measure o f unemployment is based on a "seeking and a v a ila b le f o r work" d e f in it io n , ra th e r than an a d m in is tra tiv e d e fin itio n .
then Italy (0.7%) and Germany (0.7%), again revealing a ranking counter to commonly held beliefs about relative labour market "rigidity" in the countries under consideration.
Table 2: Outflows from employment, by reason for separation from last job (1989)
1 2 3 4 5 6
Dismissals End of temporary job
Voluntary quits Early retirement for economic reasons
Other (e.g.
retirement for health grounds)
All voluntary separations (3 + 4 + 5)
Germany to t a l ('0 0 0 s)
% o f stock*
% o f flo w +
163.8 67.3 89.3 68.0 72.8 230.1
0.7 0.3 0.4 0.3 0.3 1.0
35.5 14.6 19.4 14.8 15.8 49.9
France to t a l ( ’ 000s)
% o f stock*
% o f flo w +
213.8 335.2 53.6 30.1 51.1 135.0
1.2 1.8 0.3 0.2 0.3 0.7
31.3 49.0 7.8 4.4 7.5 19.7
I t a l y to t a l ('0 0 0 s)
% o f stock*
% o f flo w +
100.3 197.6 21.7 6.6 130.5 158.8
0.7 1.3 0.1 0.0 0.9 1.1
22.0 43.3 4.8 1.4 28.6 34.8
UK to t a l ('0 0 0 s )
% o f stock*
% o f flo w +
203.6 161.8 112.6 10.3 84.9 207.7
0.9 0.7 0.5 0.0 0.4 0.9
35.5 28.2 19.6 1.8 14.8 36.2
* 's to c k ' defined as to t a l dependent employment ( c o l . l o f Table 1)
+ 'flo w ' defined as a l l persons not c u rre n tly employed who l e f t th e ir jobs during the la s t 6 months, but excluding "re g u la r re tir e e s " (c o l. 2 in Table 1)
Source: EC Labour Force Sample Surveys 1989 (fig u re s do not always to ta l 100% due to rounding e rro rs )
More substantial differences emerge with regard to those separations which are due to the end of temporary jobs: here again France is the leader with half (49.0%) of transitions into unemployment or inactivity (excluding regular retirements) being due to the end of a temporary employment engagement, closely followed, however, by Italy (43.3%) and - at some distance - the United Kingdom (28.2%). In Germany, by contrast, separations due to the end of a fixed-term contract play only a very minor role (14.6%) in these
separations from employment, despite the legal facilitation of temporary engagements through recent "deregulation" measures (see also Buechtemann 1991a). Again, the total impact of fixed-term employment on labour market (and unemployment) dynamics becomes visible when we consider separation rates as a percentage of all persons in dependent employment: within the six month period under investigation roughly one in fifty (1.8%) dependently employed persons in France became unemployed or inactive following the end of a temporary work contract, a proportion that in Germany amounted to no more than one in 350 persons (the figures for Italy and the UK were 1.3% and 0.7%
respectively). It would seem, moreover, that for young people (i.e. under 25 - see Appendix), the end of a temporary employment engagement is now the prime reason for job loss in France, and to a lesser extent also in Italy. In these countries it accounts for the majority (France: 67.3%; Italy: 53.4%) of all young persons' separations from employment (the comparable figures for the UK and Germany are 36.3% and 22% respectively).
Taken together, dismissals/redundancies and separations due to the end of a fixed-term engagement accounted for less than half of separations (excluding regular retirements) in Germany, close to two thirds in the United Kingdom (63.7%) and in Italy (65.3%), and over 80 per cent in France. If we count both dismissals/redundancies and the expiration of temporary jobs as "involuntary"
terminations , France has by far the highest incidence of enforced separations from employment (affecting 3.1% of dependent employees over a six month period), whereas Germany (1.0%) ranks at the opposite end of the scale
18 In the case o f temporary employment engagements th is may be a strong assumption, since several studies have shown th a t the fix e d -te rm nature o f such engagements fre q u e n tly conforms w ith w orkers' preferences: see Buechtemann and Quack 1989. More g e n e ra lly , the e x te n t to which a temporary c o n tra c t coming to an end can be seen as a "hard" o r a " s o ft" means o f employment te rm in a tio n , p a r tly depends on the tig h tn e s s o f the o v e ra ll labour market. Fixed-term c o n tra ct workers (u n lik e o th e r jo b -lo s e rs ) know from the outset th a t th e ir c o n tra c t is o f fix e d d u ra tio n , and in a t i g h t labour market many o f those who wish to continue in employment w i l l be able to arrange a subsequent jo b p r io r to the end o f th e ir c o n tra c t (and they w il l n o t, th e re fo re , show up in the data here as jo b -lo s e rs ). In a sla c k e r labour market, fewer w i l l be able to do t h is , and the end o f a temporary c o n tra c t w i l l be more akin to o th e r forms o f in v o lu n ta ry job loss.
(Italy: 2%; UK: 1.6%).
A quite different ranking is shown with respect to quits, supporting our initial hypothesis that the amount of voluntary turnover strongly influences the extent to which firms have to resort to enforced employment terminations19: in Germany (19.4%) and the United Kingdom (19.6%) the share of quits in separations with subsequent unemployment or withdrawal from the labour force (excluding regular retirement) is substantially higher than in France (7.8%) and Italy (4.8%); if "sclerosis" denotes immobility in the sense of a lack of voluntary mobility20, then the latter two countries must be considered as highly sclerotic; even among young people (under 25 years - see Appendix) voluntary quits play hardly any role in France and in Italy.
Yet a different picture emerges with regard to transitions into early retirement for economic reasons: here Germany by far exceeds the other
countries, with one in seven (14.8%) of these separations from employment occurring in the framework of early retirement schemes; in France (4.4%), Italy (1.4%) and the UK (1.8%), by contrast, this share is small or negligible. In the short period from January to June 1989 almost 70,000 employees in Germany made the transition into early retirement for economic reasons (France: 30,000; Italy: 6,600; UK: 10,300), revealing the impressive overall scale of Germany's various (and repeatedly extended through the 1970s
19 I f we assume a homogeneous w orkforce, and a given le ve l o f "autom atic" te rm in a tio n s (re tire m e n ts e tc ) , then th is re la tio n s h ip is tru e by d e f in itio n - i. e . fo r any given le ve l o f desired job loss, the need fo r dism issals/redundancies w i l l be an inverse fu n c tio n o f the ra te o f v o lu n ta ry tu rn o v e r. I f the workforce is not homogeneous, and th e re is s tr u c tu ra l change occurring in s k i l l requirem ents, however, the re la tio n s h ip may not be so sim ple, since those who do not q u it v o lu n ta r ily may not have the c h a ra c te ris tic s re quired by employers fo r th e ir remaining w orkforce. See also the discussion in s e ctio n 2 above.
20 I t has o fte n been unclear in the debate on "E u ro -s c le ro s is ", and US-European comparisons o f labour market " f l e x i b i l i t y " , whether s c le ro s is re fe rs to lack o f v o lu n ta ry m o b ility in th is sense, o r to le g a l/ in s titu t io n a l r e s t r ic tio n s on employers' a b i l i t y to re s o rt to in v o lu n ta ry jo b te rm in a tio n s . The key p o in t is th a t r e s tr ic tio n s in the la t t e r sense do not ne ce ssa rily reduce the o v e ra ll adjustment o f employment in one country compared w ith another, i f combined w ith a r e la t iv e ly high degree o f m o b ility in the former sense (see also Buechtemann 1991).
and 1980s) early retirement schemes. Looking merely at persons aged 50 or older (see Appendix), we can see that early retirement in Germany has indeed become the prime channel for withdrawal from employment among people of normal working age (accounting for 43 per cent of all employment separations in this age category), whilst "involuntary" job terminations (dismissals/redundancies and end of temporary appointments) play a minor role among older workers. This picture contrasts in particular with the one emerging for the United Kingdom, where publicly-financed early retirement schemes for economically motivated workforce reductions hardly exist21 22 and a high proportion of employment terminations of older workers (i.e. other than "regular" retirement) occurs in the form of dismissals or redundancies. In Italy, by comparison, most older workers (65.4%) leaving employment, do so for 'non-economic' (e.g. health) reasons, whereas (as in Germany) dismissals/redundancies tend to be the exception among this age group.
4.2. The scope for adjusting employment levels through "soft" workforce reductions
With regard to our initial question about the relative scope for "soft"
workforce reduction measures given in the four countries under consideration,
the findings can be summarised as follows: defining "soft" workforce reductions as all those separations not involving dismissals or terminations of temporary employment contracts (i.e. put positively: quits plus early
retirement plus "other separations' ), Germany exhibits the largest scope
21 The main exception here was the ( r e la t iv e ly sm all) Job Release Scheme which operated between 1977- 88, p ro v id in g a subsidy to people accepting e a rly re tire m e n t on c o n d itio n th a t the vacated jobs were f i l l e d w ith people from the unemployment r e g is te r . There was, however, some evidence o f a growth in employer- s p e c ific e a rly re tire m e n t schemes in the UK during the recession o f the e a rly 1980s (see Atkinson 1984), but th e re is no in fo rm a tio n on th e ir o v e ra ll q u a n tita tiv e s ig n ific a n c e .
22 This category also covers employment te rm in a tio ns "on mutual agreement" (e .g . "worker buy-outs") as w e ll as - among young persons - separations due to m ilit a r y s e rv ic e , which in the EC-LFSS does not count as ( c i v il ia n ) employment.
for "soft" workforce adjustments, with half (49.9%) of all separations with subsequent transitions to unemployment or inactivity (excluding regular retirement) being accounted for by quits, early retirement or "other separations". Germany is followed at some distance by the United Kingdom (36.2%) and Italy (34.8%), whilst the scope for "soft" workforce reductions is least in France, where four out of five of these separations involve dismissals/redundancies or the expiration of temporary engagements.
Some care must be taken in interpreting these figures, however, since an observed variation between countries in the proportion of "soft" separations may also reflect, in a purely arithmetical sense, inter-country variations in the extent of the required job loss over the observation period. Thus, compare two otherwise identical countries, both with voluntary quit rates of, say, 5 per cent per annum, but in one of which employers require to reduce employment by 10 per cent over the year, whilst in the other the requirement is 15 per cent. Assuming, as the evidence suggests, that employers generally attempt
"soft" workforce reductions before resorting to "hard" ones, then the first country would apparently exhibit a much larger scope for "soft" reductions than the second (50 per cent compared with 33 per cent), but the only real difference between the two countries would lie in the extent of the demand shock suffered, and not in the behaviour of employers or workers. In a real example of course, we would also expect the second country to exhibit, ceteris paribus, a lower voluntary quit rate, thereby increasing the observed
differences in the voluntary/involuntary separation ratio even further. In our model in section 2 above, this is the dual influence of a u on Z (the proportion of involuntary terminations) - one influence operating through the overall desired level of job loss, and the other through the voluntary quit rate.
Bearing this caveat in mind, however, the implications of these patterns for firms' employment adjustment behaviour can be illustrated by the following (admittedly very crude) example. Assuming that in the event of an unexpected major decline in demand, none of the quits, early retirement or "other separation" cases are replaced by new hires, the average German firm ceteris paribus could in fact reduce its employment level by (at least23) one per
cent within six months without being forced to resort to involuntary job terminations; projected on the economy as a whole, this would amount to a drop in total (civilian) employment by 200,000 to 250,000, i.e. a number only to be expected in the case of a major recession. Whilst Italy and the United Kingdom show a similar scope for "soft" workforce reductions as Germany, the scope is substantially smaller (0.7%) in France, reflecting the overall low quit rate of French workers, the more limited (compared to Germany) range of early retirement schemes, and - last but not least - the lower share of older workers qualifying for (early) retirement among the French workforce24; this, coupled with the relatively tight net of regulations governing collective dismissals for economic reasons in France may help to explain why fixed-term employment contracts have become the prime recruitment channel in France, accounting for more than two thirds of all new hires in the private sector
(the corresponding figure for Germany is 34 per cent: see Auer and Buechtemann 1990).
4.3. Separations of older workers and structural adjustment
23 As noted above, our data do not include q u its th a t immediately lead in to a lte rn a tiv e employment w ith o u t in te rm itte n t non-employment; moreover, the d e fin itio n o f our sub-sample o f employment separation cases (non-employed persons w ith separation from la s t job during the previous 6 months) im plies th a t job changes in v o lv in g very s h o rt s p e lls o f in te rm itte n t non-employment are under-represented in our data;
combined, these two e ffe c ts may compensate fo r the (opposite) e ffe c t o f the d e c lin e in v o lu n ta ry q u its when economic c o n d ition s d e te rio ra te .
24 As shown in the ta b le in the Appendix, the share o f workers aged 50 o r o ld e r (and th e re fo re p o te n tia lly e lig ib le fo r e a rly re tire m e n t) in the to ta l dependent w orkforce in 1989 amounted to 21% in Germany, 20% in B r ita in , 18% in I t a ly , and o n ly 15.4% in France.
The differential patterns observed also bear implications with regard to the management of structural change-, most employment security regimes tend to be tied to the criterion of seniority, thereby effectively prohibiting employment terminations of older workers (at least where they have long service ) through "lay-off by inverse seniority" or " last in, first out", or by rendering them more costly than terminations of younger workers. At the same time, however, older workers tend to exhibit lower (voluntary) quit rates and possess more obsolete occupational skills than younger workers; equally, the retraining of senior workers is likely to involve higher net costs for either party, due to shorter remaining pay-off periods. Given an excess supply of better trained young workers (manifest in high youth unemployment rates, which are particularly pronounced in the French and Italian labour markets), early retirement schemes, therefore, may offer a socially acceptable way around the relatively strict employment protection regulations applying to the majority of older workers, allowing firms to replace them by better trained young workers from the external labour market, thereby facilitating structural adjustment, promoting technological innovation, and increasing international competitiveness.
Looking at separations of workers aged 50 or older, we again encounter substantial differences between the four countries investigated: Italy, i.e.
a country that since the beginning of the 1980s has been undergoing massive industrial restructuring, shows the highest rate of employment separation (excluding "regular" retirement) among older workers, amounting to almost 6 per cent (or 155,000) of all dependently employed workers aged 50 years or older within the six month observation period; the large majority (71%) of
25 We would, o f course, expect th is general re la tio n s h ip between age and " s e n io r ity " o r length o f s e rv ic e , to be weaker in economies w ith a r e la t iv e ly high le ve l o f o v e ra ll labour m o b ility .
these separations occurred "voluntarily" (and mainly for non-economic reasons)26. Italy is followed by Germany, where between January and June 1989 3.2 per cent (or 155,000) of all workers aged 50 or older separated from employment, the overwhelming majority among them likewise "voluntarily", i.e.
in the case of Germany largely through early retirement for economic reasons (43%) or (to a lesser extent) through retirement for non-economic (e.g.
health) reasons (25.8%). The experience of Italy and Germany is in strong contrast to that of France and the United Kingdom; both of the latter countries not only exhibit (apart from regular retirement) a lower separation rate among older workers (France: 2%; UK: 2.8%), but when separations of older workers occur, they are in most cases involuntary (France: 52.9%; UK: 56.6%),
i.e. involving dismissals or (particularly in France) the termination of temporary work contracts. We should note, finally, that these findings can not apparently be explained by differences in the overall age structure of the workforce between the countries (although the picture would clearly be modified slightly if we allow for such differences): thus, for example, the relatively very low separation rate among older workers in the UK stands in contrast to a relatively high share of workers aged 50+ among the UK workforce.
5. Variations over Time
The above empirical illustration used cross-sectional comparisons for the year 1989. Clearly, however, an important question concerns the extent to which the
28 The fa c t th a t e a rly re tire m e n t fo r economic reasons has played o n ly a subordinate r o le in I t a ly is la rg e ly e x p lic a b le by in s t it u t io n a l fa c to rs , in p a rtic u la r the o p e ra tio n o f the Cassa In te g ra zio n e Guadagni (Wage Compensation Fund), which in cases o f in d u s tria l re s tru c tu rin g allow s fo r a re d u ctio n o f working time to zero fo r an in d e fin ite p e rio d , w h ile m aintaining the formal employment re la tio n s h ip : see Garonna 1989;
T ro n ti 1991.
observed cross-national differences in patterns of leaving employment are ones which persist over time. Thus, within the framework of the model set out here it is possible, given the hypothesised sequencing of adjustment responses (ie
"soft" measures before "hard"), that inter-country differences in the relative importance of different adjustment mechanisms reflect differences in the stage of the adjustment process reached by the countries concerned. A relatively high proportion of "hard" workforce reductions might, at least partly, reflect a country's being further along in the adjustment process and having exhausted the scope for "soft" reductions.
Research is currently ongoing to compare the dynamics of adjustment in these countries. For illustration, however, Table 3 contains some comparative data from the 1983 EC-LFSS. Unfortunately, at the time of writing, these data were available in a usable form for only three of the countries - ie excluding Germany - nevertheless they confirm the existence of significant inter
temporal variations in adjustment patterns.
First, looking at the overall extent of adjustment, the Table shows considerable differences between the three countries with regard to the "6 month separation rate from employment" (excluding, as in the earlier analysis, mainly "regular" retirements). Over the period 1983-89, this rate halved in the UK, whilst it more than doubled in Italy, and remained constant in France.
To some extent this pattern is in line with prior expectations given changes in the need for adjustment over the period in the different countries. In particular, the change in the UK's position from being the country with the highest to the country with the lowest separation rate from employment of the three, is consistent with its development during the eighties from being the country with the sharpest recession of the three, to its experiencing the
earliest and strongest recovery of the three, such that by 1989 the UK unemployment rate was somewhat below that of the other three countries.
Table 3: Patterns of separation from employment 1983-89
1 2 3 4 5 6 7
6 month separation rate
All volun-tary separations (% of flow)
Dismissals/
redund-ancies (% of flow)
End of temporary job (% of flow)
Voluntary quits (% of flow)
Early ret
irement (% of flow)
Other - e.g retirement for health grounds (% of flow)
Germany 1983
1989
n.a. n .a . n .a . n .a . n .a . n .a . n .a .
2.0 49.9 35.5 14.6 19.4 14.8 15.8
France 1983
1989
3.8 40.6 28.5 30.9 8.6 22.5 9.5
3.8 19.7 31.3 49.0 7.8 4.4 7.5
I t a l y 1983 1989
1.3 25.3 38.7 36.0 15.0 4 .8 5.5
3.1 34.8 22.0 43.3 4.8 1.4 28.6
UK 1983
1989
5.4 51.0 34.6 14.4 12.1 2.1 36.8
2.5 36.2 35.5 28.2 19.6 1.8 14.8
A ll d e fin itio n s as in Tables 1 and 2
Source: EC Labour Force Sample Surveys 1983 and 1989 (fig u re s do not always to t a l 100% due to rounding e rro rs )
Second, looking at the proportion of these separations from employment (excluding regular retirement) which are "involuntary", the Table shows that whilst in the case of Italy this proportion fell over the period, from about three quarters to just under two thirds, in the other two countries the proportion increased significantly - in France from under 60 per cent to over 80 per cent, and in the UK from just over a half to nearly two thirds. How to explain these changes? Clearly the dynamics of adjustment are extremely complex and these highly aggregated data can do no more than scratch the surface of the process. Looking, however, at the more detailed breakdown of the types of separation in Table 3, the data again suggest that apparently similar outcomes (eg in both France and the UK, a significant increase in the involuntary proportion of separations), are associated with rather different
22
underlying behavioural and institutional configurations.
Thus in France and the UK the data suggest that by the end of the 1980s, the scope for voluntary separation methods had begun to be exhausted, resulting in both countries in a relatively greater need to resort to involuntary methods, despite the (relative) easing in the pressure for adjustment over the period. It should be noted however, that in the UK's case notwithstanding the increase in the proportion of involuntary separations, that proportion remained in both periods lower than the proportion in the other two countries.
That is, compared with France and Italy, throughout the period, the UK coped with the need for employment adjustment with less resort to involuntary methods, and this was possible mainly because of the UK's relatively high voluntary quit rate from employment.
In the French case by contrast, the voluntary quit rate appears to have remained low, and rather insensitive to economic conditions throughout the period. In this sense, it can be argued that the French labour market remained relatively "sclerotic" throughout the 1980s. In the earlier period (1983) this low quit rate was accommodated without recourse to a high level of dismissals/redundancies, through the use of various supporting measures (particularly a wide array of early retirement programmes), which operated in adjustment terms as functional equivalents to a high quit rate. During the course of the 1980s however, these measures were largely dismantled (except for certain "crisis" sectors - see Auer 1991), and their role replaced by a significant increase in the (already relatively widespread) use of temporary contracts. It is in particular this shift from the use of early retirement measures to the use of temporary contracts to facilitate adjustment, which appears to account for the increase in the proportion of involuntary
separations in France over the period.
In the UK, voluntary quits fell somewhat as a proportion of the stock of employment during the 1980s, although since the overall separation rate fell even faster, quits accounted for a higher proportion of separations (excluding regular retirement) in 1989 than in 1983 (see Table 3). This relative increase in the importance of voluntary quits, however, was more than offset by a strong fall in the significance of the "other" category. This reasons for this latter development are not entirely clear, but it is possible that it resulted in part from the extremely high rate of separations among older workers in the early 1980s (mainly through redundancy - see Appendix), in particular contrast to Italy (see also discussion below), since assuming that many of these workers were not subsequently rehired during the period27, the net effect will have been a fall in the size of the older cohort (the group most likely to be affected by separations in the "other" category - retirement on health grounds etc) towards the end of the decade (and beyond). Hence in the UK, as in France, we can observe a relative greater reliance on the use of temporary contracts as a means of employment separation in 1989 than in 1983 (the difference between the two countries is that in the UK the overall prevalence of temporary contracts hardly increased over the period, but given the fall in the separation rate, their relative importance as a means of adjustment did increase).
Turning to Italy, it would appear that it accommodated a major increase in the rate of separations (excluding regular retirement) during the period (the "6 month separation rate" increased from 1.3 to 3.1 per cent), without a resort
27 N ational data confirm the strong f a l l in the economic a c t i v i t y ra te s o f o ld e r (5 0 -p lu s) age groups in the UK during the 1980s - Employment Gazette, A p ril 1990, pp 186-198
