LABOR MARKET INSTITUTIONS CONVERGENCE IN THE EUROPEAN UNION

This paper analyzes labor market institutions convergence in the European Union (EU) to test for economic integration in the EU. The convergence is analyzed for five indicators of labor market institutions: employment protection legislation index (EPL), tax wedge, unemployment benefits, active labor market policies, and minimum wages. Convergence is measured with a novel approach of the log-t regression allowing for different convergence patterns using annual data for the EU countries. The results suggest there is no convergence in labor market institutions between EU member states. The differences between institutions are still substantial, and the labor market institutions are changing too slowly to converge. The analysis also considers a possibility of club convergence, differentiating between endogenous clubs based on clustering algorithm and exogenous clubs based on geographical proximity and labor market similarities. Convergence is present only in endogenous clubs. Such results imply different long-run steady states where the differences between countries may be substantial. Since labor market institutions are fundamental determinants of employment and unemployment, differences found in labor market institutions suggest that levels of employment and unemployment in the EU will hardly converge, implying weak labor market integration.