The global financial crisis has left its mark, but not all countries were equally hard hit. Whereas in theNetherlands, the output loss caused by the crisis amounted to around five percent, this loss inNew Zealandworks out at just over two percent. But in some countries, the crisis resulted in a much higher output loss than it did in theNetherlands. The researchers measured the output loss as the difference between the top pre-crisis output and the lowest level during the crisis.
TheDNBworking paper, shortly due for publication in the academic journal Kyklos, analyses the extent to which these differences in the effect of the crisis are affected by labour market flexibility. It considers the degree of labour market regulation, the costs of dismissing employees and the hiring costs. These factors are then related to the output loss during the crisis.
The figure below shows the connection between output loss (vertical axis) and flexibility (horizontal axis).The flexibility moves from low (left of axis) to high (right of axis).The figure presents a negative relation between flexibility (measured by hiring costs) and output loss during the crisis. In other words: more flexibility is coupled with a lower output loss.