Conflict resolution processes, uncertainty and labour demand

Abstract

In this article, the impact of diminishing levels of uncertainty on labour demand, as a consequence of conflict resolution processes, is tested by means of a case study of a European region largely affected by political violence. For this purpose, the response of Basque manufacturing employment during conflict resolution attempts is used as a natural experiment with which to evaluate the effect of reduced uncertainty on labour demand. Accordingly, using the difference-in-differences technique, which overcomes some of the shortcomings of previous studies, the relative performance of Basque labour demand during the last two attempts to bring peace to the region is quantified. The longest ceasefire episode ever declared in the region is shown to have triggered a reactivation in labour demand and, therefore, that Basque manufacturing firms responded positively to the reduction in uncertainty by significantly raising their average number of employees. More precisely, it is found that the average number of workers employed by Basque manufacturing firms increased considerably when credible peace talks directed towards the end of the conflict were undertaken. Thus, when compared with their counterparts in similar Spanish provinces, the truce declared in 1998 boosted employment demand in Basque companies by more than 4%, which reflects the economic dividend of peace to be reaped in the event of an eventual conflict resolution and the establishment of a peaceful environment in the region.