Can Labour Market Institutions Explain Unemployment Rates in New EU Member States?

This study poses the question about whether labour market institutions can explain unemployment rates in the ten new European Union member states. In five out of the ten new member states, unemployment rates lie above the average in the 15 member states of the European Union (EU-15) that comprised the EU prior to May 2004. The study finds that labour market institutions in the acceding countries are less rigid than in the EU-15. Moreover, labour market institutions explain only a minor part of unemployment in the new EU member states. This does not mean that these countries have no labour market problems. Just as in the EU-15, a great deal of heterogeneity exists among the acceding countries. In some of them, labour market reforms could prove a key issue in improving employment performance. The main worry is the poor labour market performance in Poland and the Slovak Republic, where unemployment has risen to almost 20 per cent. The main reasons for this growth are postponed restructuring in combination with tight monetary policy, poor governance and an increasing labour force. The study concludes that labour market institutions in the new member states do not on average differ that much anymore from the institutions in the EU-15. If anything, they should be considered more flexible. Replacement rates are lower and the duration of benefits is shorter u0096 after one year of unemployment no unemployment benefit is issued anymore in three of the four largest acceding states. In the wage-setting process, coordination is lower in the new member states. In general, employment protection legislation is less strict u0096 only collective dismissal legislation is stricter in the new member states than in most EU-15 countries. Minimum wages as a percentage of average wages are lower in the new member states. Only expenditure on active labour market policies is considerably lower than in the EU-15. This implies that unemployment rates should not be higher in the new acceding states than in EU-15 countries with similar lab