Observations on an index of labour market flexibility

The construction of an index of labour market flexibility offers the promise of encapsulating a range of complex factors into a single measure. The aim of this paper is to critically evaluate the construction of one such index and subject it to a preliminary empirical test by examining the rank order of just two countries, Singapore and Australia. Our empirical analysis of the evolution of the returns to skill in the two countries over a decade suggests that these rankings cannot be supported. We argue that it is only by subjecting the index to rigorous evaluation can the validity and utility of the index be assessed. The empirical results suggest that the methodology employed in the construction of this index is flawed and biased.