Why Do Similar Countries Have Different Labour Market Regulations?

Over the past 15 years or so a general tendency towards deregulation of the labour market has swept most OECD countries, notably the highly-regulated European ones. Nonetheless, radical differences in labour market regulations among countries that in other institutional respects are quite similar are still surprisingly frequent. And deregulation has taken place with differing speed, deepness and resistance and has involved other instruments of social protection, such as unemployment benefits and the pension systems. Traditional theoretical analysis of labour market institutions has proven to meet relevant difficulties explaining these different dynamics. We believe that these difficulties depend on the circumstance that the traditional approach mainly focus on the pecuniary cost of unemployment, leaving aside psychic costs. To study the role that these psychic costs of unemployment play in determining why workers ask for protection and how they prefer it to be delivered, the paper looks at psychological evidence and some clues from behavioural economics. Indeed, behavioural economics emphasises non-pecuniary costs of labour market flexibility which the standard approach to decision-making generally ignores. We focus on the role of some interlinked phenomena analysed by economic psychology: loss-aversion (Tversky and Kahneman 1991, Kahneman, Knetsch and Thaler 1991), the endowment effect (Knetsch and Sinden 1984, Knetsch 1989, Kahneman, Knetsch and Thaler 1990, Kahneman, Knetsch and Thaler 1991), the status quo bias (Samuelson and Zeckhauser 1988, Kahneman, Knetsch and Thaler 1991), and hedonic adaptation (Clark and Oswald 1994, Frey and Stutzer 2002).