Rising unemployment and social exclusion in many countries make it very unlikely that current levels of protection for the unemployed will be sustained in the near future unless there is a change in Europe’s economic policy. Although the European Commission emphasizes the need to reduce poverty and social exclusion, it does not propose actions to reduce inequalities in society. It is too focused on employment as the only way out of poverty and social exclusion in times when the labour market cannot offer a timely real solution. Also, the Commission does not adequately identify the need to address in-work poverty and quality work.
SHORTCOMINGS OF THE CURRENT SITUATION
Labour market policy is one of the policies that have achieved the greatest harmonization and development at the European level. The reason is that, if labour market policy is left entirely within individual Member States, it would risk impairing the single market. However, due to the differences in labour market traditions, most policy issues are left to the Member States even though the basis, coordination and monitoring lie with the European Commission. However, coordination through the open method has proved too weak and has not been able to avoid the use of labour policy to affect trade (social dumping) by countries experiencing difficulties.
In the early days of European integration, EU legislation attempted to set rather high minimum standards for the working conditions of employees. This meant progress in Southern Europe but also that Northern Europe could avoid competition from countries with cheaper labour. With a similar purpose, accession countries were endorsed with long periods of barriers to movements of their workers. During the eighties and nineties, there was a strong drive in most Member States for labour market flexibility through the introduction of temporary contracts and agency labour. Labour markets differ widely between the developed countries. Usually, the dividing line is drawn between continental Europe and the Anglo-Saxon world. Europe is deemed to have rigid labour markets while the USA a more flexible one. Even though in the sixties some papers pointed out that Europe’s labour protection encouraged investments in human capital and growth, the perception changed after the oil crisis. In times of rapid technological change, flexible labour markets facilitate the renewal of skills, something more important in this case than skills’ accumulation. Rigid labour markets then started to be considered among the main factors explaining why Europe’s economy had performed more poorly than that of the United States after the 80s.
FLEXICURITY: YES, BUT WHERE IS THE SECURITY COMPONENT?
Flexicurity was introduced to alleviate the adverse consequences of this flexibility for workers. The European Union tried a response that combined the flexibility of Anglo-Saxon labour markets and the security of European ones: An approach started in Sweden in the 80s, which was adopted by the EU in the 90s. The new paradigm was based on the idea that security for workers was not to be found on the job but on a set of tools and protection schemes provided or funded by public employment services. Even though workers would have to go through many different jobs in their lives and be unemployed in most transitions from one job to the next one, public employment services will provide them with the tools to make this transition as smooth and fast as possible. Social protection would at the same time guarantee their income along the process. However, flexicurity depended largely on tax financed assistance and training to the unemployed, something that made it little extensible to countries with weak public sectors or persistently high unemployment. The dominance of the flexibility component in Mediterranean countries generated acute social inequalities. These inequalities called for further flexibility, not by introducing new forms of contracts, but by lowering protection in regular ones. This move was justified by remarking the unfair contrast between the privileged situations of insiders on standard contracts as against the outsiders on the recently introduced ones.
The first decade of the monetary union coincided with the ten years of the Lisbon strategy. In the Lisbon Strategy, social policy was subordinated to improving the efficiency of labour market. The Lisbon strategy included targets for employment growth that were nearly achieved. Most of the employment growth took place in five member states – Italy, Spain, Greece, Portugal and Ireland- due to unsustainable and speculative flows of capital to them. The outbreak of crisis reversed all these employment gains. Almost 40% of the reduction of unemployment prior to the crisis, in the period 2002-2008, has been lost ever since.
The crisis hit the labour markets very hard and many Europeans are today unemployed. In many countries, it is the ordinary worker and not just the little employable who encounters increasing difficulties to find a job or to keep it. As a result, social conditions have deteriorated and poverty increased. Also, massive and persistent unemployment deteriorates the skills and employability of the work force turning unemployment into a social problem in the short and in the long run.
There is, therefore, an urgent need for policy action in the labour market. In some countries, the crisis has left millions of construction workers unemployed. They need new skills and qualifications to escape the poverty trap and return to employment. The task ahead is a difficult one: not only to train and give new skills to such a huge number of unemployed workers but also to stimulate job creation on a massive scale.
It cannot be emphasized enough that labour market policies have to be coordinated with Macroeconomic policy, for example a true growth initiative, to bring about the desired effects. In a nutshell, the first condition for inclusive growth is growth itself.
However, the European Commission fails to acknowledge that labour policy cannot be the same at the time of growing and shrinking of the economy. In the first case you can aim at making economic growth as labour intensive as possible but in the latter you have to prevent job losses and over adjustments to falling demand. Short time working arrangements and policies aimed at making lowering wages easier were an effort to gain competitiveness and a greater share of total demand. Even though it can work at the firm level, since this is a zero sum game, it has limited effectiveness at the country level and even less at the European level. However, the most troubled countries need to regain competitiveness in the long run to reduce the imbalances they had built up prior to the crisis. Since competitiveness is a relative concept, they need wages growing at a slower pace than in the more competitive countries. A less painful adjustment can be achieved if wages in the latter grow faster and the euro depreciates at the same or even faster rate to avoid that the EU looses competitiveness in global markets.
ANOTHER SOCIAL AGENDA?
In this context, the EU launched the Europe 2020 Strategy as a revised version of the Lisbon Agenda. Europe 2020 is a growth strategy aimed at promoting a smarter and a more sustainable and inclusive economy in the European Union. This general objective is divided into five more specific ones on employment, innovation, education, social inclusion and climate/energy to be reached by 2020. Europe 2020 Strategy will be implemented by Member States with the support of the European Commission. Each Member State will set its own national targets and will program how to achieve them in its National Reform Programmes. Progress will be reviewed on a regular basis through the open coordination method. The European employment rate target is 75% for the 20-64 years old age group by 2020. The EU also targeted the reduction of people at risk of poverty and social exclusion in, at least, 20 million people from a total of 113 million. However, current national targets set up in the Member States’ National Reform Programmes, all added up, fall short of the EU target by 8 million people, that is, 40% of the global target. This is not a very good start.
An inclusive economic growth is a crucial aspect of the Europe 2020 Strategy and one of the most outstanding features of the European social model. It not only reflects Europe’s solidarity but also its need to become competitive in global markets. Inclusive growth promotes social stability, a key factor for growth. Social cohesion and social capital enhance competitiveness and, finally, only a truly inclusive growth takes full advantage of all human resources and human capital in a society.
Economic growth cannot be truly sustainable if the majority of the population does not participate in it or does not enjoy its benefits. However, the number of severely materially deprived people in Europe has increased by more than 300 000 people during this crisis. They are those people who cannot afford basic necessities of life such as eating meat, fish or a protein equivalent every second day, a washing machine, a tv set, a telephone or to pay the utilities or their accommodation rent.
The number of people in such harsh living conditions has not increased much but behind this relatively small figure, one finds sharp contrasts between individual countries. We find that while it has increased by almost a million people in the United Kingdom, it has decreased by close to seven hundred thousand people in Denmark. So, even though if at the aggregate level, the situation looks more or less stable, figures at country level are worrisome.
Although the European Commission emphasizes the need to reduce poverty and social exclusion, it does not propose actions to reduce inequalities in society. It is too focused on employment as the only way out of poverty and social exclusion in times when the labour market cannot offer a timely real solution. Also, the Commission does not adequately identify the need to address in-work poverty and quality work. It should give more importance to the need of strengthening social protection schemes instead of considering it as just a wrong incentive to work. In the end, social services as a support mechanism for the excluded are downplayed and the focus is on services assisting people to get non existing jobs. To make things worse, budgetary constraints and falling aggregate demand will refrain job creation in the coming years. As long term unemployment rises, disposable income declines and poverty increases. The increase in the number of those benefitting from social protection systems will continue to add pressure on welfare systems while budget constraints and austerity measures try to downsize them.
As an overall conclusion we find that even though the European Commission acknowledges that we are going through a severe crisis, its recommendations have the flavour of believing in supply side shortages, mismatches or market failures as the ultimate cause of unemployment. For example, it is far from clear that diminishing protection in permanent contracts will result in easier access to employment. As Greece and Ireland have shown, such changes take time while in the interim, spending cuts and recession keep forcing job losses up, not down. In the case of Southern Europe, for example, it is more likely that it will result in more unemployment since laid-off workers will hardly be substituted by new ones.
There are great inconsistencies between European policy recommendations. Even though they acknowledge that job losses will increase in the coming years and that there will be little job creation, they recommend supply side measures as if unemployment were only caused by poor activation of the work force. These measures have failed to deliver the expected results. Even though there is no evaluation assessment or analysis of the reasons of this failure, the Commission still emphasizes the need to maintain or accelerate the pace of reform and austerity. Even though we hear some calls for growth lately they are nothing but a new way of calling austerity and supply side reforms. Public budgets are under heavy pressure since one of the distinct characteristics of the crisis in the European Union has been volatility and episodes of acute rationing in public debt markets. This leaves little margin when it comes to designing policies aimed at fighting back the crisis, fighting unemployment, poverty or social exclusion.
Rising unemployment and social exclusion in many countries make it very unlikely that current levels of protection to the unemployed will be sustained in the near future unless there is a change in Europe’s economic policy.
There are also some other components of the “Shared Commitment for Employment” worth commenting on. The European Investment Bank Group will be set up as a new facility to provide micro-credits to start new businesses. Behind this policy underlies the assumption that entrepreneurial spirit is more frequent among the disadvantaged or any other targeted group than in the general population as a whole or that newly started businesses are more likely to succeed in today’s difficult economic environment than long established companies that have accumulated know how and experience.
To a great extent, the European Commission recommendations are of the type “one size fits all” when there are great differences in the situations that countries like Ireland, Germany, Spain, Luxembourg or Poland are going through. Active labour market policies need more evaluation but, grossly, public efforts to reduce unemployment must be further directed towards counselling, assisted job search and monitoring. The positive effects of an intensified and earlier effort in active labour market policies are well documented in the Nordic countries. The increase in employment is more valuable than the increased cost of counselling. This cost-benefit analysis should be updated and generalized to take into account the current situation in most European labour markets and to test the validity of its results in other countries different from the Nordic ones.
The author of this article, José Antonio Poncela, is a member of the Editorial Board of Read-Online.Org. He was a former General Director of Budgets, Economic Planning and European Funds at the Government of Castilla-La Mancha. He is a researcher at CEET and a lecturer of Macroeconomics at the University Carlos III. (Contact: Jose-Antonio.Poncela@Read-Online.org )
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