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This article explores different European social models and policy packages in response to the current crisis, analyzing their efficiency, equity, and sustainability. It examines the impact on employment outcomes, output, and unemployment rates, with a focus on the Nordic countries and their success in combining flexibility and security. The article also discusses standard explanations of unemployment response and explores the implications for labor markets and macroeconomic policy.
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Employment and Output Responses to the Current Crisis Jonathan Perraton University of Sheffield, UK
(Semi) Official View • “There are four different European social models, each with its own performance in terms of efficiency and equity. The Nordic and the Anglo-Saxon models are both efficient, but only the former manages to combine equity and efficiency. The Continental and Mediterranean models are inefficient and unsustainable; they must therefore be reformed.” – Andre Sapir (2006: 369; co-author, 2003 Agenda for a Growing Europe Report) • “In practice there are few feasible policy combinations to achieve satisfactory employment outcomes…. There have been two demonstrably successful broad policy packages in the recent past: one way is to emphasise product- and labour-market flexibility, though it may imply income inequalities… another way combines flexibility with security, but is more expensive” OECD – update on Jobs Strategy: • http://www.oecd.org/document/1/0,3343,en_2649_33927_38939649_1_1_1_1,00.html
Stylised Facts • Generalised falls in output since onset of ‘Great Recession’ • Variations in changes in unemployment rates and no systematic relationship with changes in output • Closing of EU-US unemployment gap; European unemployment rates had been falling before downturn • Relatively strong Nordic performance • Ambiguous as to whether relative success stories share common determinants • Historically, financial crises typically associated with large and persistent rises in unemployment
Output Falls • Largest typically associated with either housing market imbalances or trade surpluses • Housing market imbalances also associated with rise in budget deficit • High welfare expenditure not associated with rises in debt position • No clear relationship with countries’ banks’ exposure to US ‘toxic assets’
Standard Explanations of Unemployment Response • Various attempts to fit Okun’s Law explanations to explain outcomes • Historic data; differences not well explained by priors. Priors of higher elasticity, more flexible labour markets - weak relationship with labour market institutional variables; more general limitations of institutions-unemployment relations • Further, weak relationship between expected and actual unemployment from output on (historic) Okun law elasticities
Standard Presumed Mechanisms • Labour hoarding induced by EPL and/or firm-specific human K; risks of productivity falls, rising unit labour costs and jobless growth with recovery • Some evidence of such effects in countries with established short-time working arrangements • Nordic country adjustment patterns appear to differ – stronger outflows from unemployment (contrast to low inflows to unemployment countries)
Provisional Implications • Labour markets have worked relatively well in Nordics; post-1990s crisis reforms to financial systems relatively effective • Official (e.g. OECD) reports highlight dangers of lack of wage adjustment and advocate decentralisation; negative effects not (yet?) apparent – test case for wage-led growth? • Fiscal stabilisers effective, reducing reliance on monetary policy (effectiveness?) – latterly tightening of MP in Norway and Sweden • Potential role for macro policy autonomy? E.g. Norway’s different (and more flexible) inflation target than ECB