Labour Market Institutions in the European Union and Their Impact on Total Factor Productivity Growth

Abstract

The paper provides an insight into the institutional set-up of labour markets in member states of the European Union. Besides the current trends, the impact of labour market institutions on the overall economic performance is assessed. The main goal of this paper is to determine the effect of selected labour market institutions on the total factor productivity growth in the European Union, with an emphasis on their interactions. More precisely, five labour market institutions are considered: active labour market policies, employment protection legislation, the minimum wage, trade unions and unemployment benefits. The impact of institutions on productivity growth is estimated through the application of a policy-augmented productivity equation via panel data regression models. The empirical analysis is conducted on an unbalanced dataset covering observations on 28 member states of the European Union over the period 1995–2017. The main results confirm our assumption that, besides the direct effect of selected labour market institutions, their interactions are also decisive in determining total factor produc- tivity growth.