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Does Europe need more flexible labour markets?

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

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Does Europe need more flexible labour markets?

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  1. 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

  2. LME countries: USA Canada Australia Ireland Great Britain New Zealand CME ('Rhineland'): Most continental European countries Japan 'Liberal Market Economies' (LME) versus 'Coordinated Market Economies' (CME)

  3. LME (Anglo-Saxon): 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 CME (Rhineland): 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 'Liberal Market Economies' (LME) versus 'Coordinated Market Economies' (CME)

  4. 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 1985 1990 1995 2000 2004 Cont.-European 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/). Differences in labour market institutions between LME en CME translate into 'automatic' wage restraint

  5. 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 1985 1990 1995 2000 2004 Cont.-European 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

  6. 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 1985 1990 1995 2000 2004 Cont.-European 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

  7. 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 1985 1990 1995 2000 2004 Cont.-European 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)

  8. … which is due to a lower growth of capital intensity (capital/output ratio)

  9. 'Flexible' Anglo-Saxon versus 'rigid' European countries:High labour productivity growth versus high employment intensity of GDP growth

  10. 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.

  11. 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.

  12. 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. 171-187 (downloadable from: www.eci.tbm.tudelft.nl).

  13. Why do the Anglo-Saxon countries realize lower labour productivity growth? (1) • Neo-classical factor substitution • Vintage effects: wage increase leads to quicker replacement of older, more labour intensive capital goods • Theory of induced technological change: A higher wage rate increases the labour-saving bias of newly developed technology • 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 • Schmookler's 'demand-pull' theory & the 'Verdoorn Law': higher effective demand enhances innovative activity and labour productivity growth

  14. 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!) • Shift of power in favour of top management favours dangerous management styles (less critical feedback from the shop floor) • 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

  15. 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.

  16. 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 Share of managers in working population (19 OECD countries, 1984-1997)

  17. 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!

  18. Download related papers from: www.eci.tbm.tudelft.nl (→ publications)

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