To deal with the employment crisis in Europe we need a serious discussion on what exactly we mean by the ‘labour market’. On first observation, it is obvious. The labour market is the buying and selling of work (that is, by me and you) from those who are willing to pay. A person receives an income for doing something, usually from the state, community or market. It’s simple.
The problem, as oft pointed out by political-economists, is that ‘labour markets” are a complex social institution. They challenge the distinction between economy and society, and never approximate the four constituent properties, in theory, of a market. These are an anonymous good (I have a name), exchange between equals (say that to your boss), price leading to equilibrium (wall street traders deserve those salaries), and economic rationality (sure, nationalize the debt of zombie banks). The ‘labour market’ clearly fails the test. It is not a commodity.
Despite this blindingly obvious truth, policymakers (and journalists) across Europe rely upon these ‘equilibrium based labour market models’ to inform their research.This includes the ECB, the European Commission Departments; Competition, Enterprise and Industry, and Economic and Financial Affairs. Not to mention the OECD and the IMF. The infamous OECD ‘Jobs Study’ in 1994 explicitly proposed a market de-regulatory approach to solving the employment crisis in Europe. Flexibilisation of social institutions, to meet market requirements, would guarantee efficiency and equilibrium. Cuts in wages will lead to an improvement in employment. And therefore solve the crisis, sound familiar?
It immediately came in for systemic criticism from sociologists and economists. A large body of cross-country and time-series research showed that flexibility had negative effects on equality, income distribution, training levels, education, and commitment. What might be positive for one employer in a ‘perfect market’ is negative for everyone else. It is a classic collective action problem that ignores the collective benefits of regulatory institutions: organised employers, trade unions, tripartite forums for policy analysis, a minimum wage, a guaranteed income, sick-pay, maternity leave, health and safety, representation, employee participation, co-operative ownership (to name but a few). Political economists had shown that these social institutions are a central factor in explaining variation in economic and employment performance between market economies (USA, Ireland, UK) and social democratic economies (Nordice and Alpine Europe).
The labour market, as a social institution with collective benefits, has been subject to a long process of liberalisation and flexibilisation. Wage setting has been de-centralised and social policies increasingly aimed at activation or workfare. Research does show that in post-industrial economies many of the regulatory constraints, just outlined, inhibit change. This is probably true, given the expansion of technological, financial and market competition in our societies over the past 30 years. But policymakers across Europe also recognised that a combination of flexibility and security was required to ensure social stability.
This led to a policy discourse of ‘flexicurity’, championed by the Department of Employment and Social Inclusion in the EU Commission. Workers no longer needed guaranteed economic security, as a right, but active policies to enable them to adapt their skills in response to changes in the market. The outcome was an explosion in low-wage atypical employment, and a division between ‘insiders (secure) and outsiders (insecure)’, which in turn has fuelled much of the politicisation of labour relations in the EMU.
The flexicurity framework (advancing the use of supply-side labour market models to account for obvious deficiencies) replaced the OECD 1994 Jobs Study (a straight forward de-regulatory market approach with little concern for the collective effect on society). It attempted to combine the two interests of the labour-capital divide; flexibility and security. The small corporatist economies of Denmark and Sweden, later followed by the Netherlands, adopted a complex system of labour market and social policy reform. The outcome (after a lot of conflict, bargaining and problem solving) was a reconfigured welfare state, dependent on a high tax-GDP ratio, and a secure income replacement mechanism for the unemployed.
Or to be more precise, these countries introduced reforms that effect the labour market in the long run. These include tailored active labour market policies (for everyone, not just the unemployed), re-balancing social security contributions and changing the eligibility criteria for pensions, disability and early retirement. The narrow focus since the crisis has been to introduce reforms that are assumed to have an immediate impact on the capacity for labour markets to adjust to economic shocks: wage formation, employment protection and working time flexibility.
The EU Commission adopted the discourse of flexicurity after 2000 but quickly dropped it in response to the crisis. They failed to recognize that there could be no convergence on a flexicurity model across Europe. The diverse welfare, productivity, and labour-relations traditions can no more converge on a perfect market than a perfect model of flexicurity. This is not to deny the capacity for policy learning across European member-states. But the political and economic resources required to make a convergence between different welfare state traditions is not empirically evident (or available). Greece will not become Sweden. They require country-specific reforms that go far beyond wage cuts and active labour market policies.
In the Irish labour market the core problem is a collapse in domestic demand. Ireland had a construction and domestic consumption boom that crashed. For many of the unemployed the choice is either go back to education (and hope there will be a demand for your skill in the future) or emigrate (and search for a job elsewhere). A new employment regime requires imposing beneficial constraints on firms in the export sectors to link up with the local economy, re-thinking public sector employment (the Danes had a tax strike), guaranteeing a minimum income, introducing incentives for internal rather than external flexibility (i.e. to spread jobs around rather than cut wages) and establishing a fully funded national training-apprenticeship program. None of this will come from Dragons Den.