Transcript Labour markets and Social Policy

Split: March 2006
Lecture 2:
Modernising or
Americanising the
European Social Model
Nick Adnett
LECTURE OUTLINE

Is the European Social Model
obsolete?
– Origins
– What do we know about its effects?




Do we need more flexible labour
markets in the EU?
Differences between EU and US
employment regulation
Differences in labour market
behaviour and performance
between EU and US
Is the European Model being
Americanised?
Issue 1: Is the European
Social Model Obsolete?
In second-half of C20th:

Fordist technology + solidaristic
wage bargaining
+

Increased economic integration
–  wage interdependence and wage
convergence

Compressed wage bargaining
and allowed trade-offs between
social rights and real wage
– allowed levelling-up of social
protection
A HISTORY OF SOCIAL
EUROPE?
‘Fordism’/Social Cohesion
↓

European Social Model
↓
‘Euro-sclerosis’/Neo-liberalism
↓

Deregulation/Flexible Labour
Markets
‘New’ Economy/Third Way(s)
↓

Regulation for Competitiveness
(addressing the trade-offs between
economic and social objectives)
Which are the harmful
regulations?



Econometric studies find that
employment protection &
representational rights can be
positively related to social and
economic performance
Strong trade unions when linked
to co-ordinated bargaining not
harmful
High unemployment benefits of
long-duration are harmful
Issue 2: Do We Need
More Flexible
Employment?
Types of Flexibility;
 Numerical flexibility
– growth of part-time, temporary
and self-employment

Functional flexibility
– flexible specialisation and
economies of scope

Temporal flexibility
– esp. in service sector

Flexibility in the location of
work
INCREASING INTERNAL
AND EXTERNAL FLEXIBILITY

 Numerical & internal flexibility:
– extra hours & part-timers, flexible
working time

 Numerical & external flexibility:
– temporary contracts, sub-contracting,
agency workers

 Functional & internal flexibility:
– multi-tasking, internal mobility

 Functional & external flexibility:
– consultants, out-sourcing specific tasks
Flexibility in OECD
Labour Markets
Increased need for flexibility:
» Globalisation
» Technology / New Economy
» ↑ economic integration
BUT in EU:
 Inter-regional and international
migration levels low
 Job and worker turnover
increasing but relatively low
 High firm and industry specific
skills limit inter-sectoral mobility
of labour and increase costs of
job loss
EU and US Labour
Markets: Differences in
Employment Regulation
US – Supremacy of laissez-faire
– rational forward-looking decisionmakers in competitive markets generate
socially optimal outcomes
» ‘employment at will’ policies
• waivable employment rights conferred on
employer
• bi-lateral bargaining about the terms of
employment contracts
» requires legally enforceable
contracts + freedom of contract
• self-enforceable through reputation
effects?
The European Social
Model: mandatory
employment rights
Markets produce sub-optimal
outcomes

Market failure
– Asymmetric information
» Signalling failures – sickness + job security
» Ignorance: rights and costs of regulation
– Incomplete employment contracts
» Agency problems and opportunistic
behaviour – hold-up problems

Equity
– Markets create too much inequality
» Minimum wages, state retirement pensions
– Markets create too much risk and uncertainty
» Sickness and unemployment benefits and
insurance
EU and the US: Differences
in Labour Market
Behaviour

US
– High job growth
» High business start-ups
– High participation rates
» High female and older worker
participation rates
– Fast service sector growth
– High annual working hours
– Market-driven wage fixing
– High wage inequality
– Low unemployment but high incidence
of social exclusion
» High relative deprivation
– Employment at will
» Few mandatory benefits
• but anti-age discrimination law
EU and the US: Differences
in Labour Market
Behaviour (contd.)

EU
– Slow employment growth
» Low start-ups
– Low participation rates
» Especially mothers and older
workers
– Slow service sector growth
» Lack of marketisation of home
production
– Compressed wage structure
» Centralised wage-fixing + high
minimum wage
– Persistent levels of high unemployment
– High levels of social protection
» health, unemployment and
retirement benefits
EU and US: Differences
in Labour Market
Performance
Benefits of US-style labour markets
– faster rate of job creation
– employment to population rate 10 points
higher than EU ave.
– Low unemployment
– higher annual hours of working
But:
–  growth of labour productivity
» High labour turnover
– growth of wage and wealth inequality
» inequality not influence US happiness,
(perceived greater social mobility)
– no LTU problem but imprisons 3% of male
employment (equivalent to 11% in prison or
under supervision)
EU and the US –
convergence?
Similarities:
 ‘Making Work Pay’ policies (esp. lower
benefits of shorter duration) to reduce
unemployment
 More fragmented (decentralised)
bargaining
–
but may add to insider-power
Emphasis upon policies which encourage
higher basic literacy, numeracy and
vocational competency amongst the
young reduce labour market inequality
BUT:
 ‘Hire and Fire’ flexibility reduces firmspecific training and lowers productivity
growth and innovation.
 Different combinations of wage & nonwage costs and productivity can yield the
same unit labour costs.

–
Importance of diverse aspirations, custom &
practice and institutions.
The Case For A Targeted
Strengthening of Social Policy

Need to strengthen incentives for firmspecific training
–
employment protection
e.g. Acquired Rights Directive

Modern production technologies create
more asymmetric information
–

favour co-operative managerial approach
e.g. Works Council Directive
Protect workers from undesirable
consequences of greater flexibility:
–
–
 work intensity and unpaid overtime hours
unequal distribution of costs of family rearing and
caring
e.g. Working Time Directive
Parental Leave Directive
Aiginger, K. and Guger, A. (2005) The
European Socio-Economic Model:
Differences with the USA and changes
over time. WIFO Working Paper.
Prepared questions:
1.
Identify the three characteristics of
the European Socio-economic model.
What does Aiginger consider to be
the three ‘pillars’ on which the
success of Denmark, Finland and
Sweden have been based?
2.
What are the main differences
between the ‘Old’ and ‘Reformed’
European Model?
3.
To what extent is the ‘Reformed’
European Model distinct from the US
model?