Jobs

A Way Out Of Europe's Labor Crisis (Part I)

Note: This is the first of two related posts.

In his latest New York Times Magazine column, Adam Davidson writes:

"In 1994, Denmark modernized a system, which came to be known as 'flexicurity,' that offered American-style flexibility (layoffs, transitions into new lines of business) coupled with traditional European security. Laid-off workers were offered generous benefits, like 90 percent of their last salary for two years and opportunities to be retrained...It has been successfully implemented, in locally appropriate ways, in Norway, Sweden and Finland. But in other countries — like Germany, France and Spain — similar reforms faced stiff resistance from workers who preferred the old way."

To continue the discussion, we asked two economists on different sides of the debate - Ton Wilthagen of Tilburg University and Nobel laureate Christopher Pissarides of the London School of Economics- to answer the following question:

Does "Flexicurity" offer Europe a clear roadmap to labor reform?

Ton Wilthagen's response is below. To read Christopher Pissarides's response, click here.

Europe has a concrete promise, enshrined in the Lisbon Treaty, to work towards a highly competitive economy, aiming at full employment and social progress. A best of both worlds scenario. Fat chance, argues Adam Davidson in his column. In his view Europe is doomed to go broke. First because of the existential 'Euro crisis' and the subsequent austerity measures, second due to the lack of labor market flexibility, the preservation of archaic social protection, and the related overall flaws in competitiveness.

Much can be said here. Is the US fundamentally in a better shape than the EU? In terms of average GDP per capita, yes, but correcting for the number of hours worked, the differences largely disappear for countries such as France, the Netherlands and even Germany. And if one looks at the U.S. debt situation, poverty rates, income inequality, access to healthcare, imprisonment, the deplorable state of infrastructure of many of the U.S.'s once thriving cities, doubts are justified.

And the labour market? With around 9 percent unemployment, U.S. performance is no more than average in the EU context, equal to Italy. Some 13 EU countries are faring better. As a recent International Labor Office paper contends, unemployment growth in the U.S. has surpassed pre-crisis estimates of the sensitivity of the unemployment rate to recessions. In more 'protected' countries such as Germany and the Netherlands, unemployment levels have remained low or even decreased during the crisis. Another fact: only 49 percent of U.S. workers are satisfied with their job versus 83 percent of EU workers.

Does it mean that European labor markets are perfectly sound? Certainly not – and Adam Davidson has a point here. The ongoing development of two-tier labor markets, especially in the South and East of the EU, a result of half-hearted reforms, is a dead-end street. The formula of flexicurity, which gives companies the flexibility to hire and fire employees and adjust their work hours, while supporting job-to-job transitions and providing laid-off employees with solid benefits and job re-training programs, can help fulfill Europe's promise of a free and humane economy. But the acceptance of flexicurity is not self-evident across the EU and much will depend on the launch of a 2.0 version of the formula in the spring of 2012.

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