Europe lags behind as production slows

By Anna McLauchlin

Date: 17/03/05

Despite much talk of the importance of overhauling Europe's labour markets during the past few years, serious action is still "rare", according to a study on labour market reform published by the Organisation for Economic Co-operation and Development (OECD) earlier this month.

The widening gap between gross domestic product (GDP) levels in the US and the EU is, the study claims, a result of slowing worker productivity in Europe since the mid-1990s and weak employment rates. In some member states, such as

Austria, Belgium, France and Luxembourg, there are strong disincentives to stay at work past the age of 55 because of the way that the pension system works. In others, such as Denmark and Sweden, disability programmes are actually used as a way of retiring for a significant percentage of the population.

The OECD study says that German Chancellor Gerhard Schröder's Agenda 2010 programme is a "useful step in the right direction". The programme aims to lower benefit levels for the long-term unemployed as well as reduce the period for which the unemployed are eligible for such benefits. But Germany's voters have not embraced it and Schröder's Social Democrat Party may yet pay the electoral price.

Other member states, the report says, have taken more tentative steps. Austria, France, Finland, Germany, Italy and Portugal, for example, have reformed either their pension systems or their early retirement schemes, which should see people staying in the job market for longer.

Some member states (Ireland, the Netherlands, the UK, Denmark and France) have extended or introduced reforms to cover labour taxes or unemployment benefit, raised work incentives for the low-paid, or combined 'in-work benefits' such as income tax credits with a reduction in employers' social security contributions.

But, the OECD argues, though these measures increase employment in the sectors of society targeted, they risk raising effective marginal tax rates in those income areas where in-work benefits are withdrawn, which can lead to an overall decline in hours worked.

The solution, the organisation claims, is for governments to ensure that they boost employers' demand for labour at the same time as making it more attractive to work, for example by loosening employment protection laws found in the Czech Republic, France, Greece and Portugal, which make it harder to hire and fire staff. It also recommends that some governments, such as Italy and Spain, change their centralised wage negotiation process to make sure that wages reflect productivity.

On 1 March 2005 the Organisation for Economic Cooperation and Development (OECD) published a report entitled 'Economic Policy Reforms: Going for Growth' in which it says that despite much talk of the importance of overhauling Europe's labour markets during the previous few years, serious action was still 'rare'. Article includes summaries of the report's case-by-case recommendations on France, Germany, Britain and Italy.

• Primary Source

OECD: Economics: Economic Policy Reforms: Going for Growth http://www.oecd.org/document/51/0,3343,en_2649_34325_44566259_1_1_1_1,00.html

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