Laziness Or Liberation?

Labor Market Policies and Workers Attitudes Towards Flexibility

Abstract

This paper examines the relationship between labor market policies (dismissal protection

and unemployment benefits) and workers willingness to be flexible (e.g., accept lower

pay or learn new skills) in order to remain gainfully employed. Drawing on the policy

feedback literature, we argue that these policies not only influence actual labor market

dynamics but also affect employees attitudes and that attitudinal flexibility is a key

precondition for the efficient functioning of labor markets. In contrast to economists who

have examined the direct effects of policies on employment outcomes with mixed results,

we thus focus on the indirect effects of labor market policies on attitudes related to labor

market behavior. Using multilevel modeling techniques, we analyze individual level data

collected by the International Social Survey Program (ISSP) in 2005 in combination with

country level information from the Organization for Cooperation and Economic

Development (OECD). The main findings of this paper are: First, employment regulation

and unemployment benefits indeed make a difference in employees willingness to be

flexible; and second that the relationships between the strength of dismissal protection

and the generosity of unemployment benefits on one hand and employees attitudes

towards employment flexibility on the other are non-linear. Substantively, this strongly

suggests that there can be either too little or too much social protection. We ascribe our

findings to different sources of work motivation. Extrinsic motivations, such as financial

incentives, seem to be equally important for attitudes towards flexibility as intrinsic

motivations that can only be developed if a minimum level of job security exists.

Paper prepared for presentation at the Annual Meeting of the

American Political Science Association, Washington, DC, September 2-5, 2010.

DRAFT

COMMENTS WELCOME

Christopher J. Anderson

Department of Government

Cornell University

christopher.anderson@cornell.edu

Lena Hipp

School of Industrial and Labor Relations

Cornell University

lh247@cornell.edu

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Since the mid-1980s, policy makers in the industrialized world have increasingly sought

to combat mass unemployment through deregulation. Specifically, to reduce the

inflexibility and sclerosis of European labor markets, reforms have aimed at

facilitating the hiring and dismissal of workers and increasing employees incentives to

quickly transition to a new job after a lay-off through cutbacks in unemployment

insurance and the simultaneous increase in funding for work-force programs. While a

sizable literature in economics has investigated the effects of these policies and changes

in them on actual labor market behavior i.e., unemployment duration and labor market

transitions (e.g., Kahn 2007; Esping-Andersen and Regini 2000; Siebert 1997; Lazear

1990) the causal chain by which they affect these outcomes has remained somewhat

murky and mostly exists in the realm of economic theory.

In this paper, we develop a model of labor market behavior rooted in the notion

that policies affect behaviors via attitudes, and that attitudinal flexibility is thus a key

precondition for the efficient functioning of labor markets as conceived by policymakers.

We therefore ask how labor market policies specifically, dismissal protection and

unemployment benefits affect what people think about work. Do stringent levels of

dismissal protection and generous unemployment benefits make workers idle and lazy?

Or, do they make them more willing to sacrifice parts of their income or accept longer

working hours in order to get or keep a job?

By addressing these questions empirically, we take a first step toward

understanding the widely neglected impact of public policies on attitudes towards

flexibility. Drawing on recent literature on policy feedback (e.g., Mettler and Soss 2004

for review ; Soss 1999; Campbell 2003; Kumlin and Rothstein 2005; Kumlin 2004) and

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the ambiguous findings of economists on the effects of dismissal protection and

unemployment benefits on employment performance (e.g., Blanchard and Landier 2002;

Bertola et al. 2007; Bertola 1999; Cahuc and Postel-Vinay 2002; Kugler and Pica 2008),

we argue and show that a) labor market policies not only have an impact on the

unemployed but also affect the attitudes of those who are currently employed and, b)

policy effects on attitudes towards employment flexibility are non-linear that is, there is

neither a purely positive nor a purely negative relationship between the level of

protection and employees attitudes towards flexibility. Put simply, there can either be

too little or too much of a good thing.

The paper is organized as follows. After defining employment flexibility and

introducing the notion of policy feedback, we review the existing literature on effects of

labor market policies and employment performance, providing a rationale for why it is

important to focus on attitudes rather than actual behaviors and the effects of labor

market policies should also impact the employed and not only the unemployed. The

hypotheses developed in this second part will then be tested using a dataset that combines

individual-level data on attitudes from the 2005 wave of the International Social Survey

Program (ISSP) with national-level information on welfare states from the Organization

of Economic Cooperation and Development (OECD). The results of these multi-level

analyses are discussed in the third part of the paper. The concluding section presents the

limitations of the paper and directions for further research.

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Public Policies and Employment Flexibility: A Case for Policy Feedback?

To describe employees attitudes towards labor market flexibility, we use the term

employment flexibility and define it as the willingness and ability of individuals to

adapt to new or changing labor market requirements. That is, for example, being willing

to learn new skills or travel a long distance to go to work and accept temporary

employment or income losses in order to become or remain employed. We use the term

employment flexibility to delineate this psychological, individual level concept from the

more commonly employed and related term labor market flexibility, which denotes the

efficiency of labor markets in coordinating the supply of and demand for workers. While

firms and the economy at large benefit from a flexible workforce, accepting a job with

lower pay, learning new skills, or commuting a longer distance to work can be unpleasant

and costly for the individual worker.

For several reasons, we focus on individuals who are currently employed. These

are related to the fact that, in the industrialized countries, the share of the employed

population is disproportionately greater than the share of the unemployed population.

Simply put, there are many more employed than unemployed people. How labor market

policies affect these populations matters to employers: dismissal protection and

unemployment benefits are likely to affect how and how much individuals work, and how

they behave when at risk of becoming or actually becoming unemployed. This matters to

policymakers, too, as these behaviors affect economic output, labor market dynamics,

and the demands that voters in democracies make with regard to social protection.1

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1 The practical reason for focusing on employed rather than unemployed individuals is that sample surveys

contain many more employed than unemployed respondents, thus facilitating the systematic analysis of

policy effects on attitudes.

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To understand more systematically how labor market policies matter, we position

our research project in a growing stream of scholarship in political science that has

investigated why and how government programs and public policies affect individual

behaviors, like civic and political engagement (Soss 1999; e.g., Campbell 2003; Kumlin

and Rothstein 2005; Mettler and Soss 2004; Mettler 2002) or social behavior (Anderson

2009). This research program on so-called policy feedback effects offers a useful

roadmap for our investigation. The general notion underlying studies on policy feedback

is that citizens (and in our case, workers) are nested within particular policy regimes, and

that the designs of policies shape peoples attitudes and patterns of participation

(Campbell 2008). For example, there is evidence that peoples sense of job security as

well as their private behaviors (social ties) are significantly shaped by labor market

policies (Anderson 2009; Anderson and Pontusson 2007).

The notion of policy feedback effects leads us to look for the effects of policies on

populations in ways that are consistent with the logic of their design that is, that

policies affect peoples incentives to do or not do certain things. For the purposes of

analysis, we focus on employment protection and unemployment benefits as the most

immediate and proximate macro-political factors likely to differ across capitalist welfare

states and affect labor market outcomes. In particular, given that all employees in theory

are at risk of being laid off at some point during their careers although the likelihood

and the duration differs considerably across individuals and countries we have even

more reason to believe that these policies affect what individuals think about work and

the necessity to be flexible in order to keep or quickly find new work.

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Conceptually, dismissal protection can best be thought of as a form of employer-

borne tax associated with the costs of lay-offs (OECD 2004). By increasing the costs of

firing workers, stringent dismissal protection makes firing more difficult and therefore

less likely. Unemployment benefits are the compensation employees receive upon losing

their jobs. Laid off workers may not only receive income support after a job loss but also

additional assistance in finding a new job (i.e., counseling, training, or wage subsidies).

Figures 1 and 2 display the variation in strength of dismissal protection and the

generosity of unemployment benefits in the sample of countries we investigate.

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Insert Table 1 & 2 about here

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These tables show considerable variation across countries. In the U.S., for example, it is

easy to lay off workers. Moreover, once laid off, workers do not have much to expect

financially from their government. In stark contrast, Germany is almost completely the

reverse. Denmark, the iconic example of the EUs idea of flexicurity2, however, is a mix,

as it combines low levels of dismissal protection with generous levels of unemployment

benefits, particularly in the area of active labor market policies. These simple descriptive

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2 With its idea of flexicurity, the European Commission sought combine flexible labor markets with

income and employment security for workers (Wilthagen, 1998; Wilthagen and Tros, 2004; European

Commission, 2006, 2007; Philips and Eamets, 2007). Flexicurity therefore is magic word, which

supposedly satisfies organizations, with their needs for flexibility, and employees, with their needs for

security. Dismissal protection and unemployment benefits are the main knobs to twiddle to ensure this

flexibility-security nexus (Wilthagen and Tros, 2004).

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figures illustrate that both the perceived need and potential reforms also differs

considerably across countries.

How these policies impact individuals attitudes, and in particular, peoples

employment flexibility as defined above, is unknown. Despite the importance of

employment flexibility for individual, organizational, and macro-economic outcomes, it

is unclear whether welfare state and labor market policies impact what people think they

need to do to ensure continued employment. When employment protection is low or the

duration of unemployment payments short, are employees more willing to accept jobs

with lower pay or jobs that require longer travel to work. Or do protection against

dismissal and generous unemployment benefits increase the odds of good and lasting

matching processes on the labor market? Based on the review of the existing literature on

the direct effects of these policies on employment outcomes, we will develop hypotheses

on the indirect effects of these policies on employment outcomes that is, workers

attitudes towards flexibility in the next section.

Dismissal Protection, Unemployment Benefits, and Labor Market Performance

Theoretically speaking, the expected impact of dismissal protection on

employment outcomes is ambiguous. While creating new jobs should be easier when

levels of protections are low, overall unemployment may not decrease since the lowered

cost of offering jobs may be compensated by higher exit rates from employment (e.g.,

Blanchard and Landier 2002; Cahuc and Postel-Vinay 2002; Bertola et al. 2007).

Likewise, the effect of unemployment benefits on employment outcomes is ambiguous as

well. By providing those who have lost their job involuntarily with temporary income

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support, unemployment benefits can either be considered a disincentive to find new

employment or an economic stabilizer helping individuals to find jobs that match their

qualifications and needs (e.g., Young 2010; Gangl 2003).

Empirically, the relationship between these policies and labor market outcomes is

not much clearer. Although many of the studies of the effects of dismissal protection on

unemployment dynamics suggest that changing the ease with which workers can be laid

off from their jobs indeed affects employment rates (Kugler and Pica 2008; Blanchard

and Landier 2002; Marinescu 2007) and that generous unemployment benefits

especially when paid over an extended period of time prolong unemployment duration

(e.g., Young 2010; Card and Levine 2000), the overall picture is hardly unequivocal.

Based on the literature evaluating the effects of these policies and its ambiguous findings,

negative as well as positive relationships between labor market policies and employment

flexibility could be hypothesized.

While the stringency of dismissal protection is not correlated with overall

unemployment rates at an aggregated level (Nickell 1997; Nickell and Layard 1999),

there is a positive association between dismissal protection and the incidence of

temporary employment (Booth et al. 2002). This finding also has been confirmed at the

micro-level. Kahn (Kahn 2007), for example, finds that higher levels of dismissal

protection are associated with higher employment rates, in particular however, with the

side effect of more temporary employment among women, youth and immigrants.

While in Spain, for example, employment increased after dismissal protection for

permanent employees younger than 30 and older than 45 was relaxed (Kugler et al.

2005), data from Italy suggest that job creation based on reforms making it easier to

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employ workers in temporary jobs is only transitional (Boeri and Garibaldi 2007).

Overall, it remains unclear whether the employment effects of dismissal protections are

actually due to changes in dismissal protection or due to changes in the overall economic

environment (Kahn 2010). One explanation for the ambiguous findings in the effects of

dismissal protection is that it affects the composition of unemployment. While high levels

of dismissal protection entail long-term unemployment3, low levels are associated with a

high incidence of short-term unemployment, both of which can contribute to high

unemployment rates.

One consistent finding in the literature examining the effects of unemployment

insurance is that the average duration of unemployment increases when benefits are paid

over a prolonged period of time (e.g., Card and Levine 2000). Moreover, the likelihood

of finding a new job increases considerably just before the benefits run out (Chetty 2008;

Young 2010 for an overview), suggesting that this point is reached later the longer

unemployment benefits are paid. Some scholars interpret this finding as a labor-leisure

tradeoff, such that individuals prefer not to work if they do not have to. The unemployed

may schedule the start of new jobs just for the time when the benefits expire or may be

willing to take any job in the face of exhausting benefits. That is, generous

unemployment benefits are seen as an incentive to not work for pay as long as possible

(Decker 1997; Fredriksson and Holmlund 2006; Gangl 2003). 4

Others view this result as evidence for improved matching that is, that

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!3 Two mechanisms may underlie this phenomenon: First, there are fewer job openings when turnover is low

(or more, when it is high). Second, employers may put more effort into the screening of potential

employees if it is difficult to get rid off them, in case they turn out to be lemons. 4 For the case of the U.S., there is actually a third one: The increase in re-employment at the time when

benefits are about to exhaust, employers may recall of laid off employees. That is, they use unemployment

to manage temporary lay-offs.

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individuals do not take the first job available but hold out for a better fit or for better

wages. This interpretation is also highly plausible, given the evidence that unemployment

typically involuntary and a very stressful event for most people. Research has shown that

individual wellbeing decreases sharply in the event of unemployment, even among those

who receive benefits (Jahoda 1982; Clark and Postel-Vinay 2009). Unemployment is thus

not a prolonged holiday but a state that individuals seek to quickly exit. More generous

benefits may only provide them with the opportunity to find a job that matches their skills

and is of comparable income and quality as their previous one, rather than having to take

any job that comes along (Gangl 2006; Chetty 2008; Acemoglu and Shimer 2000).

Assuming that individuals who are employed take existing policies and

regulations into account when thinking about their employment prospects and research

on policy feedback suggests this to be a reasonable assumption two opposing sets of

hypotheses regarding employees employment flexibility are plausible. On one hand, we

would expect that a high likelihood of continued employment because of employment

protection and high reservation wages because of generous unemployment benefits afford

workers the freedom to not work at all or not work very hard that is, reduce their

willingness to be flexible. Therefore, stringent dismissal protection and generous

unemployment benefits should be associated with less employment flexibility. On the

other hand and in contrast to this very instrumental view, there are also good reasons to

believe that the relationship between social protections and individuals attitudes towards

employment flexibility is positive. Unemployment benefits provide workers with the

opportunity to look for jobs that fit their needs, while stringent levels of dismissal

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protection requires employers to select their employees more carefully, lest they get stuck

with an unproductive workforce they cannot let go.

We believe that both forces may be at work, up to a point. Thus, we plead for a

third alternative possibility that combines elements of both of the above interpretations.

Specifically, we posit that a moderate level of protection and benefits are positive, since

they ensure some basic level of security that individuals need to concentrate on and enjoy

their work. At the same time, protection and benefits beyond a certain threshold make

people idle. In other words, we expect that up to some level, dismissal protection will be

associated with increasing employment flexibility but that this positive association will

level out or even decline after a certain threshold is reached. Likewise, the prospect of

some basic level of material security will make workers more flexible when it comes to

finding a new job but, again, if these benefits are paid beyond a certain limit, the effect

will level out. Put simply, instead of insisting on resolving the tradeoff between laziness

or liberation, we contend that labor market policies may induce both laziness and

promote liberation.

METHODOLOGY AND DATA

We test these hypotheses by applying multi-level modeling techniques to a dataset that

combines individual-level data from the International Social Survey Program (ISSP) with

country-level information from the Organization of Economic Cooperation and

Development (OECD). The ISSP is an ongoing, collaborative survey of a wide array of

countries with annually changing survey topics. For our analyses, we use the 2005 survey

on work orientations. The OECD collects country level information on important

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economic indicators, such as unemployment rates, social expenditures, and employment

regulation, on a regular basis and standardizes the data to allow for international

comparisons.

To assess workers employment flexibility we created a measure consisting of four

questions that asked respondents what they would be willing to do to avoid

unemployment. This included accepting a position with lower pay, temporary

employment, longer commutes to work, and learning new skills. Answers ranged from

strongly agree to strongly disagree. Higher values indicate greater employment

flexibility. A Cronbachs alpha of 0.73 suggests high internal consistency of our measure.

The main independent variables in this study are dismissal protection and

unemployment benefits. These indicators have been widely used in studies of political

economy and measure key components of states labor market policy regimes. The

strength of dismissal protection is captured by an indicator that consists of 14 items on

the protection of individual workers against dismissal and special requirements for

collective dismissals, as well as the regulation of temporary forms of employment.

(OECD 2004, p. 65). The generosity of unemployment benefits is measured in national

expenditures on a) passive labor market policies that is, the material assistance workers

receive in case of lay-off, and b) active labor market policies that is, those government-

provided services seeking to increase the quality of the labor supply through training and

consulting, creating new jobs, and assisting workers with finding new jobs. This measure

is provided in percentage GDP and adjusted by the number of unemployed and GDP.

To account for alternative reasons that may make workers flexible or inhibit their

flexibility, we include the following control variables: On the individual level we include

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gender (1=female), age (in years) as well as its square term, education (in years and

standardized within countries), flexibility of spouse or steady partner (1 having a partner

working fulltime to 4 having no partner), children (1 having children living in ones

household), union membership (1 being a union member), position at work (1 being a

supervisor), occupation (1 being a manual workers), and perceived alternative job

opportunities (1 finding a new job very easily, to 5 having great difficulties finding a new

job). On the country level we use standardized unemployment rates averaged over the last

5 years, a dummy variable capturing labor market trends (1 indicating that unemployment

between 2004 and 2005 goes down). A detailed description of all the variables used in

this study along with their underlying items is provided in the appendix. The means,

standard deviations, and correlations among our study variables are displayed in Table 1.

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Insert Table 1 about here

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ANALYSES

Because we examine differences across countries and combine individual-level with

national-level data in our analyses, we estimate a multilevel model on workers

employment flexibility. Ignoring the nested structure of the data would lead to

underestimated standard errors and erroneous conclusions about the statistical

significance of relationships between the study variables (Rabe-Hesketh and Skrondal

2005). Our random intercept model takes on the following form.

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!

Yij = "0 + "k0k=1

# Xij + "0kZ jk= ind

# + uk0k= count

# Xij + u0 j + eij , where

Yij is the variable the employment flexibility of the individual i

in country j

Xij are the individual level characteristics for the individual i in country j

Zj are the country level characteristics for country j

0 is the overall intercept

ind are the fixed individual level parameters

count are the fixed country level parameters

u0j is the country specific deviation from the overall intercept

!ij is the residual for the ith

individual in country j.

This model assumes that the error components on the individual as well as on the country

level are normally distributed and have equal variance and a mean of zero, that is, uj ~

N(0, !) and !ij ~ N(0, "). Tests of normality and heteroscedasticity (examining the VIFs

of an OLS regression on country level averages with macro-level variables as the only

predictors) do not indicate violations of these assumptions. By restricting the analysis to

employees working at least part-time and to those countries for which macro-level

indicators were available, the final sample yields a total of 12,618 observations in 20

countries1. Missing data for all the variables used in the analyses were less than five

percent.

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RESULTS

The results of our analyses are provided in Table 2. First, we run an empty model

(Model 1), which does not include any of our independent variables and therefore only

estimates the intercept. Based on this empty model, we can calculate the intra class

correlation ! (ICC). ! indicates how much of the variance in the dependent variable is

due to differences between individuals versus differences between countries. The intra

class correlation coefficient of Model 1 is of 0.07, which means that around seven percent

of the variance in employment flexibility can be explained by differences between

countries. This suggests that it indeed matters for employment flexibility where in the

world a person lives and works and that it is likely that labor market policies have an

effect on the attitudes towards flexibility of the working population.

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Insert Table 2 about here

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When adding the individual level variables (Model 2), the ICC stays approximately the

same, suggesting that only a very small part of individuals willingness to be flexible

across countries is due to systematic differences between individuals across countries. In

other words, compositional effects do not explain the differences we can observe across

countries. Overall, the coefficients of the individual level variables are straightforward

and confirm what one would generally expect.

The negative and statistically significant coefficient of gender and the negative (but

statistically insignificant) coefficient of children need to be interpreted together. Women

are less willing or, probably, less able to be flexible than men, due to their greater

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engagement in household and reproduction work. Having to take care of a child or even

several children at home makes women less flexible than men. We test this by including

an interaction term between gender and children in the model, which turns out to be

statistically significant and suggests that womens and mens attitudes towards flexibility

differ not per se but only in the presence of children (results available upon request).

The effect of age is non-linear (statistically significant coefficients for both, age and

its square term), meaning that employment flexibility increases with age in the early

phases of ones career. This effect flattens outs over time, however. The older and more

experienced one gets, the less willing one is to travel long distances for work, learn new

skills, accept pay cuts, etc. Union membership, public sector employment, and

spousals/partners actual flexibility, do not seem to affect individuals employment

flexibility at least not in a similar way across all countries5.

Education, occupation, working hours, responsibilities at work, and perceived

employment alternatives, however, all affect employment flexibility. We believe that two

different mechanisms drive these results: Needs and opportunities. Although highly

educated workers usually have better employment opportunities than low skilled workers,

they also have fewer actually matching their skills and qualifications. The same applies to

jobs involving supervisory responsibilities. Therefore, it is not surprising that the

coefficients for education and supervisory position are both positive and statistically

significant. These individuals are used to acquiring new skills and traveling longer to

work. Probably they are also more intrinsically motivated to work than those with jobs

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!5 It may be that the non-significance of these coefficients is due to the fact that union membership and

public employment mean very different things in different countries, and that we therefore do not see

statistically significant results. One way to examine whether this was the case is to estimate random slopes

model, (tending to be computationally much more extensive), which we do not do here.

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that require only low levels of education and that are subordinate positions. Likewise,

those working fulltime and/or in service sector jobs (occupation is coded such that 1

equals manual worker) as well as those believing that they will have difficulties finding a

new also need to be more flexible. Either they have poor labor market prospects (a lack

of alternatives), are highly dependent on their income (full-time employees), or, given the

nature of their jobs (service workers) have always been used to being flexible.

When adding the country-level variables labor market conditions, unemployment

benefits, and dismissal protection none of the individual level variables changes its sign

(Model 3 & 4). The coefficients for both variables on labor market conditions that is,

unemployment rates (averaged over the last five years) and recent changes in

unemployment fail to reach statistical significance at conventional levels. This is

surprising, but we have two explanations for this finding. First, unemployment (both,

averaged rates and recent changes) varies considerably within countries and across

industries. It thus may simply be that our measures are too coarse to have a statistically

discernable effect on individuals attitudes. Second, although unemployment rates change

seasonally and over the course of different years changes in structural unemployment

turn out to be minor in absence of major labor market reforms(Blanchard and Katz 1997;

Blanchard and Wolfers 2000). Therefore, individuals may just be used to certain

either good or bad labor market conditions (at least in the short to medium-term) and

therefore unaffected in their attitudes towards labor market flexibility.

Finally, the coefficients of dismissal protection, unemployment benefits, and their

respective square terms, provide evidence for our expectation that labor market policies

matter for employment flexibility, and that the relationship between labor market policies

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and employees attitudes toward labor market flexibility are non-linear. In Model 3, the

coefficient for dismissal protection is negative (but not statistically significant),

suggesting that higher levels of dismissal protection are associated with less employment

flexibility. The coefficient for unemployment benefits, in contrast, is statistically

significant and positive, suggesting that more generous unemployment benefits increase

workers willingness to be flexible.

By adding the square terms of both variables (Model 4), we increase the model fit of

the data (indicated by the statistically significant Chi-square test of deviances of 8.84

with p < 0.05) and get a fuller picture of the patterns in the data. The signs of the

coefficients for unemployment benefits (positive) and dismissal protection (negative) stay

the same as in Model 3, but become statistically significant when the square terms are

added. The signs of the square terms, in turn, have the opposite direction than the simple

terms. This means that workers employment flexibility increases with the generosity of

unemployment benefits. Beyond a certain point however, this effect levels out and the

association becomes negative). This is exactly the relationship we expected to observe.

The association between dismissal protection and employment flexibility, in contrast, is

exactly the opposite from what we hypothesized. With increasing levels of dismissal

protection, workers employment flexibility decreases and only beyond a certain

threshold does dismissal protection have a positive effect. How can we explain these

findings?

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DISCUSSION

We first turn to the relationship between unemployment benefits and employment

flexibility, which confirms our hypothesis. Essentially, economists have discussed and

observed two opposing effects of generous unemployment benefits on labor market

efficiencies. For those with a more pessimistic and more neo-classical outlook, the

distorting effects of generous unemployment benefits stand. According to this

perspective, individuals receiving generous unemployment benefits are inclined to stay at

home when balancing the reasons for and against resuming work.

This reasoning may not only apply to those who are unemployed but also to those

who are asked about what they would do in order to keep their jobs. This may be exactly

what happens if unemployment benefits are paid for a really long time. Not only do

employees know that they can afford to survive without income for quite some time, but

they may also feel entitled to use available benefits, given that their contributions and

taxes to the unemployment insurance are high.

So, why is it that we observe a positive relationship between the generosity of

benefits and employment benefits up to a certain threshold? The reasoning underlying the

argument used by those with a more positive outlook on unemployment benefits, which is

essentially a matching argument, only applies to actual behaviors of the unemployed. We

therefore suggest that another mechanism is at work here, namely, a gift exchange

(Akerlof 1982; Young 2010). Receiving benefits can induce a sense of gratitude and this

gratitude is counteracted with a dedicated search for work, involving training, new

qualifications, longer commutes, and even pay-cuts. Moreover, it may be that employees

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anticipate the requirements of active labor market programs, including training as well as

workforce programs.

Although we draw on similar arguments to explain the u-shaped relationship

between dismissal protection and employment flexibility, i.e., the real effects of labor

market policies and work motivations, we argue that there are slightly different

mechanisms at work. In countries where it is difficult to lay-off workers, both employees

and employers have a vested interest in investing in firm- or industry-specific skills

(Estevez-Abe et al. 2001). As a consequence, both the likelihood that one is laid-off but

also the transferability of skills decreases with increasing levels of dismissal protection.

Protections against dismissal, moreover, do not take on the form of a gift, inducing

feelings of reciprocity, but rather induce feelings of entitlement. The negative coefficient

of the main-effect of dismissal protection may therefore be due to the fact that workers

either feel that they do not have to be or cannot be flexible.

There are two explanations for why this negative effect levels out and even becomes

positive. First, only if protections against dismissal exceed a certain threshold do

employees feel truly secure about their job. Only then can the intrinsic motivation to

work increase. Put differently, work enjoyment increases when one does not need to

worry about job loss. A more pessimistic interpretation of the positive coefficient of the

square term is that it is not stringent levels of dismissal protection per se that drives these

results but the high share of temporary workers in those countries with high levels of

dismissal protection. Those employees essentially have no job security and therefore need

to be flexible, with respect to pay, type of work, and commuting time. Because of a lack

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of information in the ISSP data on what types of contract employees have, we are

unfortunately unable to assess which of the two explanations is more plausible.

In sum, our analyses show that labor market policies, created to ensure efficient

labor markets and social equity, also affect what people think about their work. The

associations between the different types of policies, dismissal protection and

unemployment benefits, and workers employment flexibility, are non-linear. There are,

however, important differences between the two types of policies. While the positive

effects of generous unemployment benefits level out, confirming our hypothesis of a

happy medium, the opposite is the case for dismissal protections. Increasing strength of

dismissal protection is associated with lower levels of employment flexibility and only

beyond a certain threshold is it associated with an increase in employees attitudes

towards flexibility.

CONCLUSIONS

In this paper, we examine the relationship between labor market policies and workers

attitudes towards flexibility (employment flexibility) that is, the indirect effects that

unemployment benefits and dismissal protection may have on labor market efficiencies.

Our starting point is the demand for labor deregulation, which has led to the promotion

and enactment of policies fostering labor market flexibility in many countries since the

mid 1980s. First, by facilitating the hiring and dismissal of workers and increasing

employees incentives to quickly transition to a new job after a lay-off, policymakers

have sought to make it easier for employers to lay off workers in times of economic

downturn and hire more in times of economic advance. And by lowering social benefits,

! ! ! ! ! ! ! ! ! ! ! !21

policymakers have sought to lower stubbornly high unemployment rates by decreasing

reservation wages and increasing incentives to work.

While the effects of labor market policies and their reforms on labor market

dynamics and social inequality have received considerable attention in economics and

sociology, the question of how these policies affect the attitudes of the employed is

under-researched. With this paper we seek to close this gap. Linking macro-level welfare

state policies with individual-level attitudes and perceptions, we expand on existing

research on labor market flexibility and its consequences in economics and sociology

(Giesecke 2009; Giesecke and Gross 2003).

In contrast to the research done by economists and sociologists, our focus is on

the attitudes towards flexibility of those who are currently gainfully employed. We show

that the generosity of unemployment benefits and strength of dismissal protection are

associated with workers willingness to be flexible and describe how these policies

matter. Unemployment benefits are good for workers employment flexibility, however,

only up to a certain level. Dismissal protections, in contrast, only have a positive

association with employment flexibility beyond a certain threshold.

While we attribute these findings to differences in feelings of reciprocity vs.

entitlement and differences in intrinsic vs. extrinsic work motivations, our data cannot

help us identify these causal pathways directly. The data we use in our analyses are only

cross-sectional. As a result, meaning that we do not know for sure whether individual

attitudes and predispositions are the consequence of certain policies or their drivers. In

addition to this very common limitation, the lack of a variable indicating whether the

respondent is a permanent or a temporary employee is another shortcoming of our study.

! ! ! ! ! ! ! ! ! ! ! !22

Further research on the relationship between labor market policies and workers

employment flexibility should therefore be based on longitudinal data that also contain

information about individual employment agreements. Moreover, we need to find out

what the actual consequences of individuals stated willingness to be flexible are with

respect to their employment as well as demand for policies (Fazio 1986). Moreover, it

would be interesting to see whether and, if so, how, previous experiences with

unemployment affect individuals later employment flexibility. We believe that the

results of this study along with further research on the relationships between labor market

policies and individuals willingness to be flexible can be important for policymakers as

well as for organizations.

! ! ! ! ! ! ! ! ! ! ! !23

Figure 1. Strength of Dismissal Protection (2005)

Note: The dismissal protection indicator has been developed by the OECD and refers to the protection of regular as

well as temporary employment. The data can be found at stats.oecd.org/index.aspx .

! ! ! ! ! ! ! ! ! ! ! !24

Figure 2. Absolute and Relative Spending on Unemployment Benefits (2005)

Note: While the upper figure displays the absolute generosity of unemployment benefits on the individual level, the

lower figure displays the relative generosity on the country level. The data can be found at stats.oecd.org/index.aspx .

!Table 1. Means, Standard Variations, and Correlations of Study Variables

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1 Emp. Flex. 1

2 Gender -0.017 1

3 Partner Flex. 0.0287 -0.0893 1

4 Children 0.027 0.0211 -0.2458 1

5 Age -0.1443 -0.0491 -0.1823 -0.1774 1

6 AgeSq -0.1512 -0.0518 -0.1477 -0.2275 0.9895 1

7 Education 0.0752 0.0167 0.0474 -0.0297 -0.152 -0.1381 1

8 Occupation -0.073 -0.2809 0.0387 -0.013 0.0399 0.0457 -0.1371 1

9 Union -0.0181 0.0259 -0.0868 -0.0049 0.1126 0.102 -0.0496 -0.0319 1

10 Public Sector -0.0057 0.1774 -0.0544 0.0036 0.0623 0.0537 0.0428 -0.2156 0.3171 1

11 Alternative -0.0112 0.0187 -0.0422 -0.0349 0.189 0.1865 -0.0556 0.0002 0.0372 0.0628 1

12 Fulltime 0.0372 -0.2758 0.022 -0.0553 -0.024 -0.0313 -0.0652 0.0893 0.0706 -0.0407 0.0149 1

13 Supervisor 0.1092 -0.1566 -0.0429 0.0272 0.0748 0.064 0.045 -0.1488 -0.0201 -0.0271 -0.0244 0.1127 1

14 Trend 0.008 -0.0099 -0.0487 -0.0185 0.0334 0.0373 -0.0288 0.0137 0.0508 -0.0122 -0.1171 0.0444 0.0045 1

15 Unempl. -0.0709 0.0145 -0.0595 0.0189 -0.0538 -0.0579 -0.0652 0.0318 -0.0415 0.0205 0.0224 0.0716 -0.0417 0.1534 1

16 DP -0.083 0.0248 -0.0104 0.0503 -0.0541 -0.0586 -0.0378 0.0303 0.0065 0.0239 0.1083 0.0726 -0.0882 -0.5091 0.3775 1

17 UB 0.0524 0.0046 0.0345 0.0103 0.0518 0.0481 -0.0936 -0.0973 0.3455 0.1259 -0.0552 -0.0346 0.0296 -0.0102 -0.2352 0.0641 1

Table 2. Random Intercept Models of Employment Flexibility

Model 1 Model 2 Model 3 Model 4

b se b se b se b se

Gender -0.03* (0.02) -0.03* (0.02) -0.03* (0.02)

Flex/Partner -0.00 (0.01) -0.00 (0.01) -0.00 (0.01)

Children -0.02 (0.02) -0.02 (0.02) -0.02 (0.02)

Age 0.02*** (0.00) 0.02*** (0.00) 0.02*** (0.00)

Age Squared -0.00*** (0.00) -0.00*** (0.00) -0.00*** (0.00)

Education 0.00*** (0.00) 0.00*** (0.00) 0.00*** (0.00)

Occupation -0.10*** (0.02) -0.10*** (0.02) -0.10*** (0.02)

Union -0.04 (0.02) -0.04* (0.02) -0.04* (0.02)

Public -0.01 (0.02) -0.01 (0.02) -0.01

Supervisor 0.12*** (0.02) 0.12*** (0.02) 0.12***

Full time 0.10*** (0.02) 0.10*** (0.02) 0.10*** (0.02)

Alternative 0.03*** (0.01) 0.03*** (0.01) 0.03*** (0.01)

Trend -0.06 (0.10) -0.02 (0.08)

Unemployment 0.00 (0.03) -0.01 (0.02)

Unemployment

benefits 0.09* (0.04) 0.36** (0.11)

Dismissal

protection -0.11 (0.07) -0.46** (0.18)

DP_sq 0.09* (0.04)

UB_sq -0.06* (0.02)

Intercept 3.44*** (0.05) 3.36*** (0.12) 3.43*** (0.20) 3.54*** (0.21)

sigma_u 0.22*** (0.04) 0.22*** (0.04) 0.18*** (0.03) 0.15*** (0.02)

sigma_e 0.82*** (0.00) 0.80*** (0.01) 0.80*** (0.01) 0.80*** (0.01)

Log Likelihood -1.7e+04 -1.5e+04 -1.5e+04 -1.5e+04

LR Chi Square 0.00 507.86 514.81 523.07

Rho 0.07 0.07 0.05 0.03

* p

! 27

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