Balancing risks in the labour market

Date: 01/05/1997

By Simon Coss

THE European 'social model' has consistently been held up by both the Commission and most EU governments as the 'civilised' way to run a modern developed economy.

Supporters say this approach is infinitely preferable to the brutality of the United States' 'sink or swim' capitalism. The exact form the model takes varies between member states, but the guiding principle remains the same - employers, employees and politicians should agree on how to run their economies.

However, an increasing number of critics argue that a system which aims at reaching consensus on employment policy actually ends up dividing societies and erecting barriers between the employed and unemployed.

Many companies complain that legislation designed to protect workers' rights acts as a disincentive to businesses to take on new staff. In an age when 'flexible labour markets' is the economic rallying cry, employers say they must be able to hire - and fire - staff in response to market demands.

If taking on someone to do a job which may only last a short time means being obliged to make long-term guarantees about their future employment or paying high social security and pension charges, many companies simply will not bother. Over-regulation, argue critics, is blunting Europe's competitive edge.

The effects of this reaction can already be detected in Europe's employment statistics. Youth unemployment is particularly high, suggesting that those attempting to enter the jobs market for the first time are facing increasing difficulties.

For the 'free marketeers', the answer to the current problem is simple: de-regulate, cut away the red tape and let businesses and industry get on with it.

But others see it differently. The European Trade Union Confederation (ETUC) concedes reforms are needed but, unsurprisingly, rejects the arguments put forward by advocates of the laissez-faire approach.

“Europe's trade unions have a vested interest in European competitiveness. We do not oppose the principle of greater flexibility in labour markets, but this should be counterbalanced with certain employment guarantees,” says ETUC general secretary Emilio Gabaglio.

“I seriously doubt whether a demotivated, poorly paid and exploited workforce is truly an asset to the European Union.”

In any case, Gabaglio contests the argument that European employers are drowning in a sea of red tape. “Are we sure they are so bound up in regulation? It seems to me it is used as a bit of a bogeyman,” he says, adding that the EU has simply arrived at the stage where certain minimum requirements are now in place.

The ETUC points to recent developments in Union rules on worker consultation, such as the 1994 European Works Council Directive, as the way forward.

This law obliges all companies employing over 1,000 people, and with 150 staff in at least two member states, to set up committees of management and workers which must be consulted in the event of any major company restructuring, such as factory closures.

It is this directive, along with European rules on mass redundancies, which are at the heart of current union protests over the carmaker Renault's sudden decision to close its profitable factory in Vilvoorde, Belgium.

The Commission also warns against abandoning the social model. Indeed, Social Affairs Commissioner Pádraig Flynn argues that far from having a stifling effect on economic growth, well thought-out social policy actually encourages competitiveness. “There is nothing competitive about poor levels of education, poverty and high levels of crime,” he said in a recent attack on what he called the “competitiveness pessimists”.

Flynn also argues that, overall, Europe pays no more for its social security systems than other developed countries. “We hear Europe must be uncompetitive because employers have to pay high non-wage costs on top of wages to fund our burdensome social security systems. But what is this money used for? Education, health, pensions, social insurance which employees in other regimes fund from take-home pay. They pay from a different pot, but they pay,” he said in a speech earlier this year.

But while there may be serious differences of opinion over how best to proceed, all sides agree changes to the Union's current social security regimes are needed.

The current set-up in most EU member states dates back to the period immediately after the World War II. National systems of education and training, taxation, social security, labour law and labour relations were based on assumptions about work and society which are no longer valid.

At that time, most people expected to be in employment - often in the same job - for all of

their working lives. Unemployment benefits were designed as a safety net for the unfortunate few who found themselves temporarily 'between jobs'.

The twin spectres of mass and long-term unemployment, which have become ever more apparent over the last 20 years, have effectively blown such assumptions out of the water. This massive drain on the system is further compounded by the 'demographic time bomb' of an ageing population whose pensions and health care have to be paid for by a shrinking workforce.

Critics argue that social security systems have now become barriers between the employed and unemployed: the rules and guarantees which protect those in work also serve to exclude those looking for employment.

In addition, many of Europe's unemployed find themselves caught in so-called 'benefit traps' where the amount of money they receive in state allowances adds up to more than they could earn by re-entering the labour market.

This often happens because supplementary benefits, such as assistance with rent payments or certain child care allowances, are linked to unemployment. The result is that the moment someone takes on a job, his or her household costs rocket.

The Commission has just issued a comprehensive report on the future of social protection in

the Union which addresses these key problems. It stresses that any changes to systems must be made by national governments, but argues that the Commission can play a coordinating role.

The report notes that social security systems currently account for almost a third (28&percent;) of the average gross domestic product of the 15 EU member states. “The challenge is to align social protection to the new situation without abandoning its core values of solidarity and cohesion,” it states.

One of the key areas highlighted for improvement by the Commission is to make unemployment systems more 'employment friendly'. This can be done “by ensuring that they provide clear incentives for job-seekers to take jobs or participate in other employment enhancing activities, while still providing a safety net for the jobless,” says the report.

In other words, member states need to start making payment of benefits conditional on evidence that people are genuinely looking for work.

Another controversial suggestion - aimed at reducing the 'pensions drain' - is that member states should reverse the recent trend towards offering attractive early retirement deals, “in order to maintain opportunities for older workers to stay in the labour market”.

Whatever route governments choose to go down, it is clear that the current generation of young Europeans entering the workforce for the first time cannot rely on the certainties and security their parents enjoyed. Finding and keeping a job within the EU is an increasingly risky business.