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chapter 8
- 1. © Baldwin&Wyplosz TheEconomics of European Integration Economic Integration and Labour Market Institutions
- 2. © Baldwin&Wyplosz TheEconomics of European Integration The message from theory • Europe mostly fails on the labour mobility criterion • A substitute to labour mobility is labour market flexibility • How does Europe do on this front?
- 3. © Baldwin&Wyplosz TheEconomics of European Integration Dismal labour market performance Unemployment rate (%) 0 2 4 6 8 10 12 1970 1974 1978 1982 1986 1990 1994 1998 2002 EU Euro area USA
- 4. © Baldwin&Wyplosz TheEconomics of European Integration But beware of averages! 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 BIG 4 UK SMALL 8 US 1969 1985 2003
- 5. © Baldwin&Wyplosz TheEconomics of European Integration Many other indicators of trouble • Not just the unemployment rate, also: – Low rates of labour participation – Youth unemployment – Duration of unemployment spells • General picture – Many people do not hold jobs – People can remain unemployed for years running – Problem deeper in larger countries, with recent improvements in the UK and the smaller countries
- 6. © Baldwin&Wyplosz TheEconomics of European Integration Why? • General assessment is that labour markets are rigid in most of Europe • A simple illustration: real wage stickiness
- 7. © Baldwin&Wyplosz TheEconomics of European Integration labour wages S D D1 A L W W1 A’1 A1 L1L’1
- 8. © Baldwin&Wyplosz TheEconomics of European Integration More generally • Real wage rigidity just one example • Other features include – Restrictions on hiring and firing – Restrictions on hours worked – Minimum wages – High unemployment benefits as disincentives to search jobs
- 9. © Baldwin&Wyplosz TheEconomics of European Integration A deep conflict • These features have been introduced to fight labour market imperfections and/or social objectives • They make labour market rigid but serve other purposes • No universal response to this deep conflict
- 10. © Baldwin&Wyplosz TheEconomics of European Integration A few examples (more details later) Market failure Standard solution Economic Cost Dominant power of employers Minimum wages, labour protection laws, mandatory negotiations Reduces competition on the labour market Information asymmetry: no good knowledge of workers’ skills and effort at work Collective wage negotiations Reduces competition on the labour market Workers are vulnerable to job uncertainty Mandatory health and unemployment insurance, retirement benefits Raises labour costs and reduces demand for labour
- 11. © Baldwin&Wyplosz TheEconomics of European Integration What is the link with economic integration? • Deepening integration exacerbates competition • Firms compete by reacting quickly and forecefully to opportunities or shocks • Inflexible labour markets reduce the ability of firms to react • Indirectly, social systems compete against each other • The delicate balance achieved in each country becomes challenged
- 12. © Baldwin&Wyplosz TheEconomics of European Integration Labour market institutions • Existing institutions differ from country to country • They are the outcome of a long, and often conflictual, history • A look at the most important ones illustrates the challenges posed by integration
- 13. © Baldwin&Wyplosz TheEconomics of European Integration Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact: an illustration
- 14. © Baldwin&Wyplosz TheEconomics of European Integration Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact: involuntary unemployment • The role of the degree of centralization – Plant level: induces some wage restraint – National level: induces some wage restraint – Branch level: less restraint
- 15. © Baldwin&Wyplosz TheEconomics of European Integration Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact involuntary unemployment • The role of the degree of centralization
- 16. © Baldwin&Wyplosz TheEconomics of European Integration Collective negotiations • Social objective: protect workers from bosses’ excessive powers • Economic impact: unemployment • The role of the degree of centralization • The integration and monetary union impact – One big market: current degree of coordination in collective negotiations decline – One central bank: more wage discipline • Will trade unions respond by organizing at EU level?
- 17. © Baldwin&Wyplosz TheEconomics of European Integration Minimum wage legislation • Social objectives – Protect the weakest – Reduce inequality • Economic impact: unemployment of the least skilled
- 18. © Baldwin&Wyplosz TheEconomics of European Integration Minimum wage legislation • Social objectives – Protect the weakest – Reduce inequality • Economic impact: unemployment of the least skilled • The integration and monetary union impact – Enhanced competition favours low cost countries – Accessions of CEECs will sharpen this aspect – Trade unions fear social dumping and call for harmonisation of social norms
- 19. © Baldwin&Wyplosz TheEconomics of European Integration Unemployment insurance • Social objective: protect workers from a major risk • Economic impact: – Paid out of labour taxes: raises labour costs – Generous benefits reduce incentives to search for jobs – Overall, less employment and more unempoyment
- 20. © Baldwin&Wyplosz TheEconomics of European Integration Unemployment insurance • Social objective: protect workers from a major risk • Economic impact: more unemployment • The integration and monetary union impact – Asymmetric shocks create temporary unemployment – Generous insurance may prolong the adjustment – Pressure to reduce generosity, mainly duration, of benefits. Trade unions fear social dumping
- 21. © Baldwin&Wyplosz TheEconomics of European Integration Employment protection legislation • Social objective: protect workers from employers’ arbitrariness • Economic impact – Reduces firing during downturns – Limits hiring during expansions – Overall no lasting effect on unemployment, but reduces firms’ ability to deal with adverse shocks
- 22. © Baldwin&Wyplosz TheEconomics of European Integration Employment protection legislation • Social objective: protect workers from employers’ arbitrariness • Economic impact: no effect on unemployment but reduces firms’ flexibility • The integration and monetary union impact – Harder to deal with adverse shocks – Pressure to reduce strictness of legislation. Trade unions fear social dumping
- 23. © Baldwin&Wyplosz TheEconomics of European Integration Payroll taxes • Social objective: solidarity among workers in fianncing unemployment, health, retirement • Economic impact: raises cost of labour, or reduces wages, or both
- 24. © Baldwin&Wyplosz TheEconomics of European Integration Payroll taxes • Social objective: solidarity among workers in financing unemployment, health, retirement • Economic impact: raises cost of labour, or reduces wages, or both • The integration and monetary union impact – Enhanced competition favours low cost countries – Incentive to either reduce welfare payments or raise other taxes. Politically difficult.
- 25. © Baldwin&Wyplosz TheEconomics of European Integration How to respond to deeper integration? • Deeper integration desirable because it enhances competition on the good markets • More competition raises the economic costs of many labour market institutions • A sharpening of the conflict between economic effectiveness and social objectives • Existing arrangements are threatened
- 26. © Baldwin&Wyplosz TheEconomics of European Integration Three possible evolutions • Two-speed Europe • Deep reforms • Social harmonization
- 27. © Baldwin&Wyplosz TheEconomics of European Integration Possible evolution No.1 • Two-speed Europe – Some countries flex their labour markets, others retain their highly social existing arrangements – Firms and risk-taking individuals move to the most flexible countries – Welfare-conscious are attracted by welfare- magnet countries – Part of Europe grows fast with low unemployment, another part grows slowly with permanently high unemployment
- 28. © Baldwin&Wyplosz TheEconomics of European Integration Two-speed Europe: already there? Average annual rowth rates 1995-2003 0 0.5 1 1.5 2 2.5 3 3.5 4 Big Three UK USA CEEC Three Small Nine
- 29. © Baldwin&Wyplosz TheEconomics of European Integration Possible evolution No.2 • Deep reforms – Labour market institutions made more flexible – Labour axes reduced
- 30. © Baldwin&Wyplosz TheEconomics of European Integration Possible evolution No.3 • Social harmonization – The large countries export their welfare systems through social norms applicabel to all EU countries
- 31. © Baldwin&Wyplosz TheEconomics of European Integration In the end • There is no better way, just different socio- economic equilibria • A somewhat arbitrary typology – The continental model – The Nordic model – The Anglo-Saxon model – The Southern European model – and the evolving accessing countries
- 32. © Baldwin&Wyplosz TheEconomics of European Integration Migration flows
- 33. © Baldwin&Wyplosz TheEconomics of European Integration Migration Flows Source: World Bank (2007)
- 34. © Baldwin&Wyplosz TheEconomics of European Integration Migration Flows Source: World Bank (2007)
- 35. © Baldwin&Wyplosz TheEconomics of European Integration L2 International Labor Mobility MPL MPL MPL* MPL* Home employment O Foreign employment O* A B C L1 Migration of labor from Home to Foreign Total world labor force Marginal product of labor