Transcript Anglo-Saxon versus ‘Rhineland’ labour relations

Does Europe need more flexible
labour markets?
Contribution to the European Trade Union Confederation
workshop on "Quality of Jobs", Brussels, 28-29 February 2008
by
Alfred Kleinknecht,
Full Professor, Economics of Innovation, TU Delft
(with thanks to Ronald Dekker, Ro Naastepad, Servaas Storm and
Robert Vergeer)
These sheets are downloadable from:
www.eci.tbm.tudelft.nl
'Liberal Market Economies' (LME) versus
'Coordinated Market Economies' (CME)
LME countries:
CME ('Rhineland'):
•
•
•
•
•
•
• Most continental
European countries
• Japan
USA
Canada
Australia
Ireland
Great Britain
New Zealand
'Liberal Market Economies' (LME) versus
'Coordinated Market Economies' (CME)
LME (Anglo-Saxon):
CME (Rhineland):
• Easy hiring and firing
• Shorter stay in same
firm
• Modest unemployment
benefits
• Weak trade unions
• Labor relations are
more 'conflictuous'
• Wage bargaining more
de-centralized: income
distribution more
unequal
• Protection against firing
• Longer stay in same
firm
• Generous
unemployment benefits
• Strong trade unions
• Labor relations are
more 'co-operative'
• Wage bargaining more
centralized: more
income equality
Differences in labour market institutions between LME
en CME translate into 'automatic' wage restraint
Figure I-1: Development of real wages:
Anglo-Saxon versus Continental-European countries (1960-2004)
400
Real wage (1960=100)
300
200
100
1960
1965
1970
1975
1980
Cont.-European
1985
1990
1995
2000 2004
Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
Netherlands, Portugal, Spain, Sweden;
Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
Remarkable: Despite differences in real wage growth,
real GDP growth hardly differs
Figure I-3: Development of real GDP:
Anglo-Saxon versus Continental-European countries (1960-2004)
400
Real GDP (1960=100)
300
200
100
1960
1965
1970
1975
1980
Cont.-European
1985
1990
1995
2000 2004
Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
Netherlands, Portugal, Spain, Sweden;
Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
Anglo-Saxon countries need more labour hours for
their GDP growth
Figure I-2: Development of total hours worked:
Anglo-Saxon versus Continental-European countries (1960-2004)
200
Total hours worked (1960=100)
180
160
140
120
100
1960
1965
1970
1975
1980
Cont.-European
1985
1990
1995
2000 2004
Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
Netherlands, Portugal, Spain, Sweden;
Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
… due to a lower growth of their labour productivity
(i.e. GDP growth per labour hour)
Figure I-4: Development of labour productivity:
Anglo-Saxon versus Continental-European countries (1960-2004)
400
Labour productivity (1960=100)
300
200
100
1960
1965
1970
1975
1980
Cont.-European
1985
1990
1995
2000 2004
Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
Netherlands, Portugal, Spain, Sweden;
Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
… which is due to a lower growth of capital intensity
(capital/output ratio)
'Flexible' Anglo-Saxon versus 'rigid' European countries:
High labour productivity growth versus high employment intensity of
GDP growth
Average annual GDP
growth
Average annual GDP
growth per hour
worked
Growth of labour
hours per 1% GDP
growth
Cont.
European
AngloSaxon
Cont.
European
AngloSaxon
Cont.
European
AngloSaxon
1950-60
5.5
3.3
4.2
3.6
0.23
- 0.09
1960-73
5.1
4.1
5.2
2.7
- 0.03
0.34
1973-80
2.7
2.4
3.0
1.1
- 0.14
0.55
1981-90
2.6
3.2
2.4
1.4
0.07
0.55
1990-00
2.4
3.1
1.9
1.9
0.21
0.40
2000-04
1.3
2.5
1.1
1.6
0.15
0.35
Anglo-Saxon countries: Australia, Canada, New Zealand, US and UK. Cont.-European countries: Austria,
Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Portugal, Spain, Sweden
Source: Groningen Growth and Development Centre (http://www.ggdc.net/); non-weighted averages across
countries.
Is there a causal link from wage growth
to labour productivity growth?
Traditional argument:
• Labour productivity growth → wage growth (end of
story)
My argument (to be proven):
• There must also be a link: wage growth → labour
productivity growth
See also the debate (in Dutch):
• Kleinknecht, A. & C.W.M. Naastepad: 'Loonmatiging schaadt
productiviteitsontwikkeling wel', in Economisch Statistische
Berichten, Vol. 89 (September 2004), p. 413-417.
• W.J. Jansen: 'Kleinknechthypothese mist empirisch bewijs!',
Economisch Statistische Berichten, Vol. 89 (September 2004), p. 418.
The feedback from wages to labour
productivity growth
Our econometric estimates (still unpublished) show:
• 1% less wage increase leads to 0,37% loss of labour
productivity growth (within 7 years).
• Controls: Verdoorn effect; past productivity growth;
gap towards the leading country; capacity utilization;
service shares; country and year dummies.
• Coverage: 19 OECD countries, 1960-2004.
Further evidence from firm-level studies (Netherlands
and Italy): Use of flexible labour reduces labour
productivity growth
More 'flexible' firms (with many temporary contracts, manpower
agency workers or a high labour turnover):
 pay, on average, lower wages,
 but they do not differ from 'rigid' firms in their sales growth;
 'Flexible' firms create more jobs due to:
 a lower growth of sales per worker (our proxy for labour
productivity growth)
Source:
• Kleinknecht, A., R.M. Oostendorp, M.P. Pradhan & C.W.M. Naastepad:
'Flexible labour, firm performance and the Dutch job creation miracle',
in: International Review of Applied Economics, Vol. 20 (2006), pp. 171187 (downloadable from: www.eci.tbm.tudelft.nl).
Why do the Anglo-Saxon countries realize
lower labour productivity growth? (1)
1. Neo-classical factor substitution
2. Vintage effects: wage increase leads to quicker replacement of
older, more labour intensive capital goods
3. Theory of induced technological change: A higher wage rate
increases the labour-saving bias of newly developed
technology
4. Schumpeterian creative destruction: innovating firms can
better cope with aggressive wage claims by trade unions.
Innovators have market power due to monopoly rents from
unique product and process knowledge that acts as an entry
barrier to their markets. Higher real-wage growth enhances the
Schumpeterian process of creative destruction in which
innovators push out technological laggards
5. Schmookler's 'demand-pull' theory & the 'Verdoorn Law':
higher effective demand enhances innovative activity and
labour productivity growth
Why do the Anglo-Saxon countries realize
lower labour productivity growth? (2)
• Flexibilization of the labour market (shorter job duration):
– Less loyalty and commitment → firm secrets and technological
knowledge can more easily leak to competitors: stronger market
failure due to positive externalities
– Historical memory of the 'learning organization' suffers from
frequent changes in personnel
– Manpower training is less attractive (short pay-back period)
– Strong growth of management functions for control and
monitoring due to loss of trust and loyalty (frustrating for creative
people!)
– De-centralized wage formation: workers may appropriate part of
the monopoly profits from innovation
– Continuous accumulation of incremental knowledge in a
Schumpeter II innovation model is suffering from frequent changes
of personnel
Why do the Anglo-Saxon countries realize
lower labour productivity growth? (3)
Schumpeter I model:
 'Entrepreneurial model': new firm foundation (e.g. in
ICT, biotechnology); inventor-entrepreneur ('Garage
business').
Schumpeter II model:
 'Routinized innovation model': Incremental, stepwise
innovations based on continuous accumulation of
(tacit) knowledge; professionalized R&D labs in
larger firms.
Share of managers in working population
(19 OECD countries, 1984-1997)
Norway
Spain
Greece
Sweden
Italy
Switzerland
Belgium
Ireland
Germany
Portugal
Japan
Denmark
Finland
Austria
Netherlands
U.K.
Australia
USA
Canada
0
5
10
15
Managers as a percentage of the non-agrarian working population
Rounding up:
Are more flexible labour markets 'good'?
• Yes, for unemployment: Nickell, Nunziata & Ochel:
'Unemployment in the OECD: What do we know?', in: Economic
Journal, Vol. 115: 1-27.
• Doubts: According to our (still unpublished) estimates, their
results are not robust! → It is doubtful whether the 'flexible'
countries indeed have lower unemployment rates (in spite of
their labour-intensive growth!)
• Empirical research at macro and micro level: Flexible labour
relations and wage restraint lead to lower growth of labour
productivity and a more labour-intensive growth (which does
not necessarily translate into lower unemployment rates!)
• A low-productive and highly labour-intensive growth path is
very problematic with an ageing population in Europe!
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