What can Irish policymakers learn from the ‘flexicurity’ economies of Europe?

This article will seek to explain why Ireland is experiencing an employment and unemployment crisis whilst other small open European economies are not. The immediate difference can be explained by domestic institutional frameworks of employment protection. It is simply easier to hire and fire in Ireland. Thus, whilst active labour market policies are important to lift people out of long term employment they are not a substitute for keeping people in employment. Countries with high internal flexibility at company level (including significant levels of employee participation) and well developed government policies and responsive institutions at the national level are best placed to deal with shocks to the labour market. Unsurprisingly, most small open European economies (Netherlands, Sweden, Finland, and Austria) fall into this category. Ireland has low levels of employment protection and minimal support is provided by the state for policies such as short term working, employment/training subsidies, early retirement schemes and active measures to redistribute work. To understand why Ireland has not developed similar policies to other small open economies exposed to international market forces one has to examine the historical evolution of its labour market and the power resources available to trade unions. Ireland increased its exposure to global market forces since 1987 but did not embed sufficient employment protection to secure its labour market against inevitable downturns in the economy.

Ireland, similar to small open European economies ‘globalised’ and actively sought to achieve socio-economic development through greater exposure to international trade. Ireland is an export economy. It exports almost 85 percent of what it produces. Most of this is accounted for by chemical and pharmaceutical products (think Viagra). But, the increased trend in exports, since 2000, is directly accounted for by internationally traded services, particularly the financial services sector. This is reflective of a wider trend across Europe from manufacturing to service based employment. Ireland has a dynamic export economy but it is relatively small and employs very few people when compared to the rest of the economy. In 2009 total full time employment in the ‘developed export’ economy was 272, 053. This is 14 percent of total employment in the labour market. In 1995 it was 228, 368. This was 15 percent of total employment at the time. In 1986, total employment was 202, 896 or just over 15 percent of total employment. Thus, whilst the number of jobs in the ‘export sector’ has increased, as a percentage of overall employment it has remained fairly stable. It has increased trade and exports but not jobs. At no stage over the past 25 years has export led economic growth solved Irelands long standing employment problem. Furthermore, and more important for understanding the huge unemployment crisis now facing the state, domestic policies failed to recognize the importance of securing employment protection or developing innovative policies to deal with labour market crisis . All of the emphasis was on making labour markets flexible. The real focus should have been on what many Europeans call ‘flexicurity’.

The strategy from the late 1980’s and reflected in successive social partnership agreements from 1987, was to increase national output via the traded sectors of the economy. I emphasise the national social pact agreements as these were mechanisms to advance the strategic interests of Irish trade unions. They are tri-partite and thus reflect the strategy of government, employers and trade unions. It is not a case of an embedded ‘consultative economy’ as witnessed in the Netherlands and Denmark but a half way house between full blown liberal markets and social democracy. What I like to call the Irish third way.  To achieve export led growth, successive reports from the tri-partite National Economic and Social Council (NESC) argued that Ireland needed to ‘learn’ policy lessons from small open European economies not the UK. In fact, the most detailed analysis was a report commissioned by NESC called ‘the Irish Economy in a Comparative Institutional Perspective’, and compared the economic performance of the Danish, Irish, Swiss, Finish and Austrian economies. The conclusion was that these economies were successful because of their institutional foundations and active industrial policies. This is reflective of a long standing literature in comparative political economy that empirically proves the deductive assumptions of neoclassical economics and its associated neoliberal policies are futile in explaining the success of most European economies. They are successful because of domestic policy choices to secure competitive and comparative advantage through niche market innovation not low costs or low taxes. This required a coordinated and active role for collective bargaining, trade unions and employee participation in socio-economic planning.

One of the big lessons taken this European study was the importance of generating a negotiated consensus at national level on the necessity of wage competitiveness. High employment was achieved through coordinated wage moderation. Trade unions recognized the importance of wage moderation to secure long term macro-economic and labour market gains for their members. High wages led to high inflation which in turn increased living costs which led to higher wages. This vicious cycle was quickly recognized as unsustainable in small open economies. Unlike the UK, were trade unions were unable to establish a coordinated strategy of wage coordination, given the fragmented and adversarial nature of their industrial relations regime. In Ireland, trade unions, from the late 80’s and early 90’s recognized that the most optimal strategy was to follow this ‘European route’. To achieve wage restraint but simultaneously increase disposable income of employees the early national partnership agreements contained successive measures to cut income tax.  Inevitably this benefited the Fianna Fáil government. It established a policy paradigm premised on low tax employment and low tax corporate investment. Low taxes were a domestic policy response to the employment problem.  The lesson not learned from Europe was that you need a sustainable tax base to fund the necessary social infrastructure to secure ‘the national economy’ from international economic risk.  This is the crucial point. Ireland exposed itself to international market forces and sought to advance its interests through increased market integration but it did not embed sufficient employment security to ensure its citizens were shielded from the excesses of market crisis. Irish policy decisions, mediated through social partnership, did not secure its labour market in the interest of long term economic development but increased its flexibility to secure maximum employment gain in the short run. Today and despite 10 years of almost full employment, there are more people on the live register than at any other stage in Irish history.

Full employment for a small open economy, in a context of increased globalization, market integration and Europeanisation, can occur through pure neoliberal self clearing markets or institutional flexicurity. In good times neoliberalism generates high levels of employment in relatively low skilled sectors but in bad times it leads to high levels of unemployment. In institutional flexicurity models high employment rates are secured through a variety of mechanisms to allow for company level flexibility to reduce costs and the re-distribution of work. Neoliberalism tends to produce domestic policies focused on low tax and managerial prerogative. Neoinsitutionalism produces domestic policies focused on the quality and flexibility of labour (or human capital if you’re an economist). The Netherlands is a particularly interesting case of the latter. They have maintained full employment since the late 1980s not through low pay and low taxes but through the redistribution of work and wage moderation. This approach to employment has become embedded amongst trade union, employer and government bodies, leading to what you might call the first ‘part time economy’. In response to economic crisis employment was maintained through a variety of employment protection mechanisms. Unlike Ireland, employment protection is considered a public good not a luxury.

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