Labour Market Policy
The most erroneous liberal-market premise of the EMU is the assumption that labour market actors, particularly trade unions, either do not exist or are too weak to resist competitive downward pressure on wages. The design of Europe’s shared currency is premised on the non-existence of collective bargaining (Crouch, 2000) and shares the neoclassical assumption that labour markets can and do operate in perfectly competitive markets. This implicit design of the monetary union assumes that if asymmetric shocks hit, national economies, regions and sectoral industries will automatically adapt through a reduction in labour costs. This reduction in labour costs is presumed to act as a functional equivalent to currency devaluations at a macro level (see Hall and Gingerich, 2004).
Currency devaluation traditionally externalized excessive endogenous labour costs to the main trading partners of a given national economy (Crouch, 2000). Devaluation and exchange rate adjustments acted as a cushion to avoid social dislocation when national economies became over inflated. This option is no longer available for countries of the Eurozone. The implication is that an ‘internal devaluation’ must be pursued by Member States when confronted with an economic shock. This does not take into consideration the structural and current account imbalances within the Eurozone nor the distributional implications of shifting the burden of adjustment on to wages and public spending. But it is central to the Troika austerity program.
The assumption that the entire burden of cost adjustment can fall on labour market actors completely ignores the embedded and historically diverse institutional structures of collective bargaining in European economies. Collective bargaining and negotiated wage setting is one of the core features of coordinated market capitalism or ‘social Europe’. Every economy, with the exception of Ireland, Estonia and Slovakia, has collective bargaining coverage of over 60 per cent in the Eurozone. Austria, Belgium, Finland, France, Greece, Italy, the Netherlands, Slovenia and Spain all have collective bargaining coverage at 80 per cent or more (see Visser, 2009). This involvement of organized labour in wage setting makes it difficult to impose downward labour cost reductions across the economy. Neither will adjustment be so extensive that it can act as the functional equivalent to currency devaluation. Any adjustment in labour costs will be negotiated between labour market actors (at sectoral or national level) unless labour is so weak that it cannot resist a unilateral imposition of wage cuts. However, the rigid constraints of the EMU’s budget deficit requirement, and the newly proposed fiscal treaty, means that government as employer may have no option but to impose a reduction in pay rates in the public sector.
Given the institutionally and historically evolved structure of coordinated wage setting in Europe, one should not assume that organized labour markets are strategically incapable of reducing labour costs through collective bargaining. Most research indicates that those sectors most exposed to international competition have been capable of concession bargaining and internalizing significant levels of wage restraint (Hancké & Johnston, 2009, Traxler & Brandl, 2010, Crouch 2000) or adopting alternative labour market policies such as short-term working to reduce costs. The question for governments, however, is under what conditions can those sectors not exposed to international trade, particularly those within the public sector, do the same? This is a significant problem for countries under the conditions of a severe public finance crisis where public sector pay bargaining is systematically associated with national social partnership arrangements, as is the case in Ireland and much of southern Europe.
The Calmfors and Drifill (1988) model presented two scenarios for non-inflationary wage growth. On one side of the u-trough are self-clearing liberal markets. There is no empirical evidence to support this scenario (outside the US and the UK) even if it is deduced to be the most efficient mechanism of coordinating wages (see Soskice, 1990). On the other side of the u-trough are peak level wage bargaining actors who coordinate wages at a national level. This national level coordination is a required incentive for trade unions to internalize the costs of inflationary wage agreements. Most corporatist economies, however, have evolved away from national level coordination. This led many economists to conclude that the advent of the EMU would provide an incentive for the complete deregulation of wage setting akin to self-clearing markets. This did not occur. As illustrated by Crouch (2000), wage setting institutions evolved and adapted to new economic constraints. Most labour market actors adopted an ‘organized decentralization’ (Austria, Germany and Sweden) of collective bargaining whilst some integrated centralized wage negotiations into national tax-based income agreements (Finland and Ireland). Hence, whilst the new monetarist paradigm acted as a stimulus for institutions of coordinated wage setting to evolve, these institutions did not disappear. Wages and labour markets are still institutionally regulated by collective organizations.
The design and intellectual underpinnings of the EMU simply assumes that embedded institutions of collective bargaining do not exist, or if they do, the State and employers can effectively ignore them. No government in Ireland or southern Europe internalized the monetarist constraint that if confronted with a macroeconomic shock, and lacking the capacity to engage in currency devaluation, the entire burden of adjustment would have to fall on wage, labour and fiscal policy. Nor did they provide for collective buffers to offset the negative effects of an economic shock, as provided for in the Finnish income agreements.
The EMU was designed for a symmetric pan-European economy but operates in an asymmetric way (see Hancké et al., 2009). The narrow focus on wage-cost competitiveness and fiscal consolidation, central to the prescribed austerity programs in southern Europe, ignores the institutional diversity, complex problems and structural imbalances both across and within eurozone economies. Policy-makers in the ECB assumed that all eurozone economies would converge in both price and wage costs. Most of the evidence indicates, however, that post-EMU, national and regional economies increasingly diverged on these indicators (see Lane, 2009). Countries in the north and south shared a monetary currency but not the corresponding institutional governance required to coordinate economic policy. Market processes alone, and a narrow focus on liberalisation, have proved to be an ineffective means of European integration (see Scharpf, 2011).
From 1999 to 2008, large export countries at the centre of the eurozone (Germany) continued to run current account surpluses. This surplus capital and savings was channelled into peripheral economies of the eurozone (Ireland and Spain, in particular) creating an unnecessary oversupply of credit (facilitated by low ECB interest rates) that was channelled into a poorly regulated domestic financial market, which in turn channelled the cheap credit into real estate, as will be shown in later sections. This structural divergence cannot be accommodated by monetary policy alone. In the absence of a central government or a functional equivalent, each national economy operates as though it is institutionally independent. The crisis in the sovereign bond markets that emerged in 2008, however, provided an exogenous stimulus for all governments in the eurozone to recognize the extent of their financial interdependence and the instability of integrated European finance-capital markets. Yet the policy prescriptions adopted were oriented toward nationalistic austerity packages, not coordinated strategies of collective action to tackle structural trade and labour imbalances that had accumulated since 2000 (see Felipe & Kumar, 2011).
The implicit assumption of the EMU is that economic problems only emerge from budgetary indiscipline, not risky and unsustainable economic behaviour in the private market (see Pissani-Ferry, 2010). The growth and stability pact was designed on the basis that public spending is the primary problem facing national governments. The sovereign debt crisis, however, was the direct result of a collapse in a financial binge that fuelled asset price booms and the associated tax revenues the government had come to depend upon. Both Ireland and Spain experienced an asset price (housing) boom upon entry to the EMU. Non-fiscal asset price bubbles facilitated by cheap credit and low ECB interest rates created this problem, not government spending. Or, more precisely, the problem is not labour costs and government spending but the mismanagement of private capital by private actors coupled with an unsustainable tax base. The ECB, however, operates according to average (mean) indicators of labour costs and inflation across seventeen eurozone economies. Hence, whilst the Irish economy was overheating internally, the ECB continued to cut interest rates to encourage higher levels of economic growth in what was perceived to be the underperforming economies of France and Germany.
Furthermore, during the period 1999–2009, it was Greece, Germany, Italy and France that regularly exceeded the 3 per cent deficit requirement of the growth and stability pact. Ireland went from a stable budget balance to a fiscal deficit of 14.7 per cent in less than two years. Spain went from a stable budget surplus to a deficit of 10.1 per cent in less than 18 months. Spain actually ran a fiscal surplus in 2005, 2006 and 2007 (European Commission, 2010). This begs the question as to whether it is empirically feasible to use the statistical mean of the growth and stability pact, and the new fiscal compact treaty, as a basis for how national economies should manage their budget deficits in an economic crisis. With the exception of Greece, all European political economies, by this ‘fiscal’ indicator, behaved relatively prudently in the post-EMU era.
These fiscal indicators, however, mask the type and level of government tax and spend policies specific to particular national economies. Countries with property booms such as Ireland and Spain did not run a significant deficit but successive governments institutionalized an unsustainable low tax regime based around ‘political budget cycles’ (see Cousins, 2007). Government revenue became reliant upon consumption and pro-cyclical taxes (i.e. stamp duty on property) that evaporated when its liquidity-rich and credit-fuelled housing bubble burst. Furthermore, in the Irish case, successive tax-based incomes policies legitimized this process. The EMU is not designed to tackle unsustainable growth strategies of national economies or the structural composition of tax revenues. It simply assumes that government spending in itself is the problem. Therefore, the European Commission and international rating agencies never questioned the underlying economic growth or fiscal policy regimes of Ireland and southern Europe. They bought into the myth of market convergence.
The narrow focus on fiscal and cost competitiveness (central to European monetary policy and the Troika adjustment programmes) meant that when the crisis emerged in 2008, it was assumed the problems facing ‘peripheral’ economies of the eurozone (Greece, Ireland, Italy, Portugal and Spain) were the same. This was not the case. The Greek problem was definitively fiscal, related to government spending and specific to its own national economy. On the other hand, Ireland and Spain regularly ran budget surpluses and institutionalized a low tax regime that was supported by international bodies such as the IMF and the OECD. Both countries rank below the EU-27 average on two policy indicators that normally impact upon budget deficits: total government expenditure as a percentage of GDP, and total spending on social protection as a percentage of GDP. Total taxation as a percentage of GDP is also significantly below the EU-27. Yet given the neoclassical intellectual underpinnings of the EMU, both countries must cut expenditure to tackle their deficits despite having relatively low levels of public spending as a percentage of national income. The design of the EMU compels policymakers and national governments to pursue austerity even though empirically it is not making the economic problem worse. What is required is an intellectual paradigm change in how we approach economic problems in the Eurozone.
In a stochastic world, monetary constraints are the primary collective action problem facing countries in the eurozone, not fiscal deficits or wage competitiveness (Darvas, Pissani-Ferry, 2011). But the politics of fiscal adjustment is mediated through country-specific institutions of collective bargaining, industrial relations and social policy regimes (i.e. the historically embedded institutions in the labour market that provide the strategic capacity for trade unions, government and employers to engage with one another as social partners), which I will now examine.
The legal and institutional framework of collective bargaining is the most important variable in accounting for the diversity of responses to the economic crisis across Europe (Glassner & Keune, 2010). It is also the most important variable in accounting for the variaiton in national labour market regimes. National social pacts, as they evolved in Ireland and the southern European periphery in the build-up to EMU, were a particular mode of governance that can be distinguished from sectoral and firm negotiation in wage bargaining. They were a government-led process to involve organized interests in the formulation of public policy but systematically tied to the negotiation of wage restraint in sheltered sectors of the economy (Traxler & Brandl 2010). In the absence of this wage-setting or industrial relations function, social partnership provides an ‘expressive’ function that acts as a symbolic legitimation of government policy (see Traxler, 2010). The social dialogue arrangements of Central and Eastern Europe arguably fall into this latter category.
If government-led wage coordination is a political strategy to coordinate income policy in sheltered sectors of the economy (in particular, the public sector), then it is this form of centralized wage coordination that will come under greatest pressure for downward wage flexibility in the current crisis. Governments faced with the requirement to cut budget deficits have very little to trade with trade unions when public sector pay is a significant portion of general government expenditure. If centralized wage agreements only cover the unionized sectors of the economy (as is the case in Ireland and Italy but not Finland, the Netherlands or Slovenia), then wage-setting excludes the majority of the workforce. It is this structure of ‘inclusive’ and ‘exclusive’ bargaining that conditions whether the social partners adopt a market or collective bargaining response to the crisis. Governments operating within a labour market with ‘exclusive’ bargaining are more likely to pursue a unilateral strategy of adjustment. They can opt out of a social partnership agreement with little repercussion because trade unions have neither ‘carrot nor stick’ to be considered a necessary political partner. Governments only have to engage with public sector unions as an employer.
Coordinated wage bargaining that is inclusive across the economy confers significant bargaining power upon the social partners to negotiate labour cost reductions. This multi-employer type of bargaining (as witnessed in Austria, Germany, and the Netherlands) confers bargaining coverage of over 70 per cent and empowers trade unions and employer associations to coordinate their interests autonomously. Given this institutional structure, labour market actors are likely to use internal (firm/sectoral) and external (national) collective bargaining strategies when negotiating a cost adjustment, despite the constraints of the EMU. In this regard, it is those economies that have exclusive bargaining coverage (only Ireland, Estonia and Slovakia have collective bargaining coverage below 45 per cent in the eurozone) that are more likely to experience a fragmented collective bargaining regime. The microconditions in these labour markets do not act as a counter-force to asymmetric macroeconomic shocks, and limit the capacity to adopt a coordinated response. This is particularly the case when negotiated wage agreements are not just exclusive to particular sectors of the economy but contain no legal requirement on multinationals or small firms to implement negotiated wage settlements. This voluntarist dimension complements a market-based adjustment. Employer associations do not encompass the majority of firms covered by national wage agreements, making tripartite structures of social dialogue dependent upon the political preference of the government. This explains the ease with which the State eviscerated social partnership in many those countries most affected by the Eurozone crisis.
Hence, voluntarist institutions of social partnership that are primarily applicable to unionized sectors of the economy (periphery of the Eurozone), as opposed to inclusive and legally binding institutions of wage setting (core of the Eurozone), weaken the capacity of trade unions to be included as an encompassing actor in the politics of adjustment, and decrease the possibility of a negotiated response to the economic crisis. Higher levels of trade union and employer density increase the capacity for negotiated labour market cost reductions when combined with high levels of collective bargaining coverage. From the perspective of the government and employers, weak institutional foundations in the labour market make it easier for them to avoid social partnership, even if this is less effective than a negotiated adjustment based on deliberative agreement. Employer associations are organized on the basis of business lobby groups and their labour market strategies are primarily mediated by employment rights legislation (i.e. individual-based adjudication rather than collective bargaining).
Liberal market political economies (where market processes act as the main incentive for employment coordination) are supposedly better placed to internalize the macroeconomic shocks in the eurozone (this is not to say it is normatively preferable). In the EMU, only Ireland falls into this category. The neoliberal orientation of the Irish economy makes it easier to implement orthodox adjustment policies as the institutional complementarities governing the labour market, fiscal and wage policy fit the neoclassical design of the EMU. Conflict is primarily mediated through dialogue and adjudication via the voluntarist Labour Relations Commission. This dimension of social partnership has remained intact during the crisis whereas the national consensus-based approach to incomes policy and pay bargaining has collapsed, leading to the absence of coordination and increased deregulation of the labour market.
The implication is that there is no coordinated approach to the crisis aimed at a series of trade-offs to maintain employment in those countries, such as Ireland, lacking the institutional foundations characteristic of Cordinated Market Economiess (CMEs) in northern Europe. Southern European countries are in the worst of all worlds. They have neither flexible-liberal nor coordinated-market institutions to internalise a coherent labour market response. The outcome of the current labour market adjustment in these countries is to exacerbate the divide between insiders (usually young) and outsiders (usually close to retirement). Whether these countries can develop a new ‘third’ equillibrium is an empiricial question. But presently the conditions for such a social market response are non-existent. This does not bode well for the future employment prospects of those living in southern Europe – and the EMU as a whole.