A Way Out Of Europe's Labor Crisis (Part II) : Planet Money Nobel laureate Christopher Pissarides of the London School of Economics says Denmark's system of "flexicurity is a way to achieve both international competitiveness and a good social state. It offers a clear road map to labor reform. But it requires honest and trusted politicians."
NPR logo A Way Out Of Europe's Labor Crisis (Part II)

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

Greek protesters gather behind a banner reading "no to lay offs." Lousia Gouliakmaki/AFP/Getty Images hide caption

toggle caption
Lousia Gouliakmaki/AFP/Getty Images

Note: This is the second 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?

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

In the reconstruction period after the World War, European countries committed themselves to a "social state." In the social state there was to be full employment, equality of opportunity, and a minimum guaranteed living standard for everyone. Some governments chose to offer these benefits through the state. But many passed legislation that forced the employer to offer these services through employment protection, the minimum wage, employer health insurance and pensions, and many other benefits.

The problem with employer-provided social services is that they act negatively on employment. Employers are not good at providing social services. When they are forced to do it they become uncompetitive, they lose out to others in international markets, and their business suffers. Ultimately, the net loser is the worker that the legislation is meant to protect, especially those on the periphery, like married women and youths.

The challenge faced by European leaders is how to improve international competitiveness without undermining the social state. This is where flexicurity comes in. Make business as flexible as possible in the hiring, compensation and firing of employees, but let government take on the task of providing the social services and minimum income standards associated with the social state. The Scandinavian countries, led by Denmark, have shown how a well-functioning government can make the whole system work. Two problems remain and need to be solved: the quality and the high cost of government-funded social services. Of course, the two are related.

On the quality issue, governments need to be trusted that they will supply high quality services in the absence of the discipline of the market. Officials need to be trusted that they will not squander the money given to them by Parliaments. If governments cannot be trusted, the whole flexicurity system collapses. The public will not use it very much, they will look for alternatives, and they will also look for ways to avoid paying the taxes necessary to finance it. This is where I would put the failure of the Southern European countries to implement a good flexicurity system. Greeks and Italians do not trust that their governments will use tax revenue to provide good quality social care with minimum administrative cost. In contrast, the Danes and Swedes trust their elected representatives and so pay their taxes.

The cost issue is easier to deal with. Scandinavian countries have opted for an extensive system of state-provided social care. The taxes required are very high, but their citizens pay them. Other trustworthy countries, like Britain, opted for smaller systems. The required taxes are lower. But countries like Greece and Italy have limited systems with low funding requirements, not so much out of choice, but because the mistrust that their citizens have towards state-provided services is such that their governments would not find it possible to collect the taxes necessary for their funding.

Flexicurity is a way to achieve both international competitiveness and a good social state. It offers a clear road map to labor reform. But it requires honest and trusted politicians. Without them, the system will fail and either the social state or international competitiveness (or, in a worst-case scenario, both) will suffer.