This article in yesterdays Irish Times is a clear indication that those adopting a classical market economic analysis cannot solve nor understand the employment crisis in Europe or Ireland. There is nothing in the article that cannot be read from a 101 economics textbook or an introduction to labour economics in an OECD handbook. It completely overlooks the context specific problem in Ireland in a global context: a lack of demand and declining growth. It assumes a timeless, universal and linear relationship that equates lower wages with higher employment and takes a narrow focus on how to activate the long term unemployed (remember this supply side policy for activation is designed for periods of economic growth and full employment). Hence it implicitly advocates cutting wages as a mechanism to improve employment – without taking into consideration the effect this would have on aggregate demand.
The analysis is premised on hypothetical labour market – the closest being the USA -not the Irish labour market in a fixed EMU exchange rate regime experiencing a collapse in economic growth.
Wage restraint certainly helps employment in a period of investment and economic growth. But, only under very specific conditions that do not pertain to the present crisis. Furthermore, the wage restraint-employment creation relationship is only applicable to the high productivity export sectors. These are doing just fine in Ireland at the moment. Even when these sectors do create jobs they tend to be minimal. Ireland only experienced full employment with a boom in domestic demand. This institutional relationship between our export and domestic economy is the source of our problem. We have two economies that are unrelated: domestic and export. This is quite unlike the institutional configuration of other small open European economies; Netherlands, Austria, Switzerland, Finland, Norway and Sweden.
The OECD analysis (equivalent to that adopted in this article) can offer very little policy advise on employment generation in a recession because it does not consider (or at best ignores) the role of collective bargaining and institutional mechanisms to maintain existing employment, channel resources, share labour and reduce working time. All of this requires real human actors (preferably organised at a collective and encompassing level) in real-life political institutions coordinating their actions in the interest of sectoral employment growth. None of this occurs in pure markets but can only happen through business and industrial coordination. The state in Ireland is actually quite good at the latter but it needs more robust institutional coordination in specific sectors that are ‘non-market’ in design. Employers in Ireland are focused on their firm not the sector or national level. This absence of strategic coordination to ensure investment in skills, growth, and employment is the problem.
Classical economics is wedded to fixed assumptions about how labour markets operate that do not pertain to Ireland’s employment regime. If we are serious about solving this crisis we have to drop this model. It assumes a priori (i.e. not through empirical analysis) that increased competitiveness measured by a reduction in unit labour costs = increase in employment. This deductive logic does not and cannot take into account the configuration of variables that are central to explaining the absence of an employment crisis in other European countries; regulated labour law, dismissal procedures, comprehensive multi-employer bargaining, wage setting institutions, short term working schemes. These not only acted as an automatic stabilizer in the crisis but acted as a counter-cyclical measure against unsustainable jobs in good times. Furthermore, leads to a focus on quality not cost. This is what increases long term competitiveness.
Short term competitiveness will not solve Ireland’s employment problem and neither will making its already flexible labour market more liberalized. This is not to deny the importance of coordinating wages in the interest of employment growth. Ireland has proven itself capable of doing this in the past. But, employment and wage coordination must occur simultaneously to a coordinated strategy of investment growth that considers both the domestic and export economy. Activation of the long term unemployment is also important but focusing on this as the most important aspect of labour market policy indicates a broken compass not a comprehensive solution.
So, with all due respect to colleagues, friends and policymakers who use the a priori assumptions and deductive models of competitive labour markets as the solution to solving Ireland employment crisis – it won’t work. It is time to drop it and look to European institutional coordination and public policies for solutions.