Chapter 1 7 : Economic Integration and Labour Market Institutions

1. Chapter 17: Economic Integration and Labour Market Institutions

2. The message from OCA theory • As an OCA, Europe mostly fails on the labour mobility criterion • A substitute to labour mobility is labour market flexibility • How does Europe do on this front?

3. Dismal labour market performance

4. But beware of averages!

5. Many other indicators of trouble • Not just the unemployment rate, also: • Low rates of labour participation • Youth unemployment • Duration of unemployment spells • General picture • Many people do not hold jobs • People can remain unemployed for years running • Problem deeper in larger countries, with recent improvements in the UK and the smaller countries

6. Why? • General assessment is that labour markets are rigid in most of Europe • A simple illustration: real wage stickiness Insert text fig 17-3

7. More generally • Real wage rigidity just one example • Other features include • Restrictions on hiring and firing • Restrictions on hours worked • Minimum wages • High unemployment benefits as disincentives to search jobs

8. A deep conflict • These features have been introduced to fight labour market imperfections and/or social objectives • They make labour market rigid but serve other purposes • No universal response to this deep conflict

9. A few examples (more details later)

10. What is the link with economic integration? • Deepening integration exacerbates competition • Firms compete by reacting quickly and forecefully to opportunities or shocks • Inflexible labour markets reduce the ability of firms to react • Indirectly, social systems compete against each other • The delicate balance achieved in each country becomes challenged

11. Labour market institutions • Existing institutions differ from country to country • They are the outcome of a long, and often conflictual, history • A look at the most important ones illustrates the challenges posed by integration

12. Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact: an illustration Insert text fig 17-4

13. Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact: involuntary unemployment • The role of the degree of centralization • Plant level: induces some wage restraint • National level: induces some wage restraint • Branch level: less restraint

14. Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact involuntary unemployment • The role of the degree of centralization Insert text fig 17-5

15. Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact: unemployment • The role of the degree of centralization • The integration and monetary union impact • One big market: current degree of coordination in collective negotiations decline • One central bank: more wage discipline • Will trade unions respond by organizing at EU level?

16. Minimum wage legislation • Social objectives • Protect the weakest • Reduce inequality • Economic impact: unemployment of the least skilled Insert text fig 17-6

17. Minimum wage legislation • Social objectives • Protect the weakest • Reduce inequality • Economic impact: unemployment of the least skilled • The integration and monetary union impact • Enhanced competition favours low cost countries • Accessions of CEECs will sharpen this aspect • Trade unions fear social dumping and call for harmonisation of social norms

18. Unemployment insurance • Social objective: protect workers from a major risk • Economic impact: • Paid out of labour taxes: raises labour costs • Generous benefits reduce incentives to search for jobs • Overall, less employment and more unempoyment

19. Unemployment insurance • Social objective: protect workers from a major risk • Economic impact: more unemployment • The integration and monetary union impact • Asymmetric shocks create temporary unemployment • Generous insurance may prolong the adjustment • Pressure to reduce generosity, mainly duration, of benefits. Trade unions fear social dumping

20. Employment protection legislation • Social objective: protect workers from employers’ arbitrariness • Economic impact • Reduces firing during downturns • Limits hiring during expansions • Overall no lasting effect on unemployment, but reduces firms’ ability to deal with adverse shocks

21. Employment protection legislation • Social objective: protect workers from employers’ arbitrariness • Economic impact: no effect on unemployment but reduces firms’ flexibility • The integration and monetary union impact • Harder to deal with adverse shocks • Pressure to reduce strictness of legislation. Trade unions fear social dumping

22. Payroll taxes • Social objective: solidarity among workers in fianncing unemployment, health, retirement • Economic impact: raises cost of labour, or reduces wages, or both Insert text fig 17-8

23. Payroll taxes • Social objective: solidarity among workers in financing unemployment, health, retirement • Economic impact: raises cost of labour, or reduces wages, or both • The integration and monetary union impact • Enhanced competition favours low cost countries • Incentive to either reduce welfare payments or raise other taxes. Politically difficult.

24. How to respond to deeper integration? • Deeper integration desirable because it enhances competition on the good markets • More competition raises the economic costs of many labour market institutions • A sharpening of the conflict between economic effectiveness and social objectives • Existing arrangements are threatened

25. Three possible evolutions • Two-speed Europe • Deep reforms • Social harmonization

26. Possible evolution No.1 • Two-speed Europe • Some countries flex their labour markets, others retain their highly social existing arrangements • Firms and risk-taking individuals move to the most flexible countries • Welfare-conscious are attracted by welfare-magnet countries • Part of Europe grows fast with low unemployment, another part grows slowly with permanently high unemployment

27. Two-speed Europe: already there?

28. Possible evolution No.2 • Deep reforms • Thatcher takes over Europe • Labour market institutions made more flexible • Labour axes reduced

29. Possible evolution No.3 • Social harmonization • The large countries export their welfare systems through social norms applicabel to all EU countries

30. In the end • There is no better way, just different socio-economic equilibria • A somewhat arbitrary typology • The continental model • The Nordic model • The Anglo-Saxon model • The Southern European model • and the evolving accessing countries