Barroso’s ambition of jobs-for-all needs policy pot-pourri

Date: 02/09/04

JOSE Manuel Barroso is promising to revitalize the EU's Lisbon Strategy of economic modernization with its goal of achieving full employment. He pledges to "boost the reform process and give new impetus to Europe's economy".

The soon-to-be Commission chief's emphasis seems to be on boosting competitiveness: he has appointed apparently reform-minded commissioners to key economic posts such as trade, competition and the internal market. But at the same time, he has acknowledged the importance of the European social model of high labour-market protection and promised to deal with the negative effects of globalization and delocalization

Barroso will not lack for policy advice on how to tackle the EU's employment problems and growth deficits. Last month, an International Monetary Fund (IMF) executive board report identified the eurozone's key structural challenge as raising long-term growth. In order to reverse the falling numbers of people in work, the IMF recommended "strengthening the incentives to work" through reforms to the tax-benefit systems and "lengthening working lives". In July, an Organization for Economic Cooperation and Development (OECD) policy brief insisted that "wage flexibility should be raised".

With eurozone unemployment at 9.0% compared to 4.6% in the US and EU growth of 2% lagging behind the US performance of 4.5%, the case might appear settled that urgent and drastic action is needed to improve Union employment prospects. There is much talk of greater labour market flexibility over wages and protection.

But Stephen Nickell, an economist at the London School of Economics (LSE), argues in a recent paper that "there is not a European unemployment problem". Average unemployment in the EU may be higher than in any of the developed countries of the OECD but in 2002 nine of the then EU's 15 member states had jobless rates lower than any of the non-EU OECD countries, including the benchmark US. As Nickell explains, there is an unemployment problem in the four largest economies of continental western Europe - France, Germany, Italy and Spain. "Exclude these four countries and the famous European employment problem more or less disappears," Nickell argues.

In addition, his research appears to undermine support for the calls for more labour market flexibility. Nickell says that there is "little evidence" to back up common assumptions that the causes of high unemployment are excessive levels of job protection, high benefits or trade union membership. For example, the evidence that high levels of employment protection have a "decisive effect" on unemployment is "mixed at best".

Nor is there much proof that generous levels of unemployment benefit push up jobless levels. He cites the example of Denmark and Sweden which have high rates of payment but relatively low unemployment.

What emerges from Nickell's study is that there is a complex interaction between a range of factors on unemployment, including benefit rates, how long they are paid and the eligibility criteria, active labour market policies, trade union membership and coordination of pay bargaining.

The challenge for policymakers is to find the right mix to deal with the specific nature of the situation in each country. Nickell highlights the fact that unemployment in Italy, Spain and to a lesser extent in France is concentrated among young people and women. Barriers to part-time work and tax rates on the wages of women whose husbands work are among the causes

Yet a question mark hangs over the emphasis on measures which only address the labour market supply, encouraging people back into the labour market, be they the unemployed, female or older workers.

Andrew Glyn, lecturer in economics at Corpus Christi College Oxford, labels as "monomaniacs" those who claim that greater labour market flexibility is the only way to boost employment. The evidence for labour market reform having an effect is "extremely weak", he claims. Glyn stresses the importance of wider macroeconomic policy on demand in the economy and accuses the European Central Bank of being "too cautious" and concentrating on fiscal consolidation and deficit reduction rather than economic growth. While the UK has a better track record in job creation than other EU member states, he argues that the country benefited from a devaluation when sterling was ejected from the Exchange Rate Mechanism and a "monstrous consumer boom" which had increased demand for goods and services. Germany, on the other hand, is still struggling from the massive cost of reunification, which has required it to pump around 5% of its gross domestic product into the former East Germany since 1989.!

Over the next six months, the buzz words of reform, flexibility and employment will top the EU's political agenda as the debate in Germany intensifies and the Union gears up to revitalize the Lisbon Strategy under the new Commission.

In September, the Commission will issue its report on the EU's employment market and is expected to recommend Sweden as the model for job creation thanks to its success in the high-wage, high-skill part of the services sector.

By 1 November, the Dutch former prime minister Wim Kok, who, as leader of his country's trade unions, negotiated the agreement with the government and employers that is said to be at the heart of the Dutch employment miracle, has to produce a new report on how to streamline and boost the Lisbon Strategy to help the EU achieve its goal of becoming the most competitive economy in the world.

But success in boosting employment and growth will come from a range of policy changes to increase incentives to work while ensuring that all policy levers are being moved to boost demand. It will probably not be enough to ask workers to share the existing amount of work around by settling for lower wages, longer hours and lower employment protection. The EU risks becoming a scapegoat for all the Union's social ills if it is seen as an instigator in reducing people's quality of life

• Simon Taylor is a Brussels-based freelance journalist.

Article discusses the prospects of the designated Barroso Commission to tackle unemployment in the EU. It refers to a study by LSE Economist Stephen Nickell who argues that Europe's unemployment problem originates from France, Germany, Italy and Spain.

• Primary Source

EconPapers: Working Papers: Centre for Economic Performance, LSE: CEP Discussion Papers: A Picture of European Unemployment. Success and Failure http://cep.lse.ac.uk/pubs/download/dp0577.pdf

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