Institutions and the structure of labour market matching in the United States and West Germany

This paper examines the impact of institutional factors on the structure of matching processes in external labour markets. Drawing on 1984-1995 employment history data from the Survey of Income and Program Participation and the German Socio-Economic Panel, the paper describes re-employment dynamics for unemployed workers in the United States and West Germany. Consistent with earlier research that has emphasized the strong skill stratification of the German labour market, the data show lower rates of occupational mobility among unemployed workers in Germany. Using a two-sided probit model, the paper tests for two key generative mechanisms: more comprehensive labour market regulation potentially implying risk-averse hiring by employers, and more comprehensive social security that may induce more selective job search by workers. The empirical data support both predictions, so that both low levels of labour market regulation and low levels of welfare state support are conducive to higher levels of occupational mobility, higher churning of specific skills and loose linkages between individual and job skills in the US labour market.