Shaping earnings instability: labour market policy and institutional factors

The concerns regarding the economic insecurity stemming from earnings instability have been gaining momentum in the contemporary political discourse. If earnings instability is as a proxy for risk, for risk-averse individuals, increasing earnings instability bears substantial welfare costs. Using the variance of transitory earnings estimated using the European Community Household Panel (ECHP) and the OECD labour market indicators, we explore by means of non-linear least squares the relationship between earnings instability and labour market policies/institutions across Europe in the 1990s. We find of a complex system of interactions within the institutional framework affecting earnings instability. For an average country with a low corporatism, we find a U-shape relationship between earnings instability and the strictness of labour market regulation. Corporatist systems have a lower earnings instability than decentralized economies, they are effective in reducing the adverse effects of macroeconomic shocks on earnings instability, and can counteract the increase in earnings instability associated with the development of ALMPs, with unionization, with product market regulation and with the tax wedge. The earnings instability associated with developed ALMPs is reduced by regulated labour markets, a high corporatism, low non-wage labour costs and high unemployment benet replacement rates (UBRR). The decrease in earnings instability associated with an increase in the UBRR is the largest for developed ALMPs.