European Employment Lawyers Association Conference 4-6 June 2015 Limassol, Cyprus

European Employment Lawyers Association Conference

4-6 June 2015Limassol, Cyprus

How is the wider economic climate influencing the

direction of employment law?

Prof. Dr. Klaus-Stefan Hohenstatt, Partner, Freshfields, Germany

Dr. Abi Adams, University of Oxford

Prof. Dr. Jeremias Prassl, University of Oxford

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What are we going to cover today

Introduction Crisis & Labour Law Reforms across the EU• The Economics Perspective • The Employment Law Perspective

Discussion Greece• The Employment Law Perspective • The Economics Perspective

Discussion Concluding remarks 3

Global trend (ILO): Labour market reforms 08 - 13

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Long term unemployment in Europe: 2007,2010,2014

0

10

20

30

40

50

60

70

80

2007Q1 2010Q1 2014Q1

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Labour productivity growth in Europe:2000-2012

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Employment Law: Only one (minor?) aspect• Recent insights from new methods have shown that

“Estimated effects prove to be relatively modest in most cases – certainly more modest than the intensity of the debate would suggest.”

• Too much or too little can harm productivity; in between is the plateau where both positive and negative effects can be found and most effects are redistributive.

• “Overall, labour policies and institutions are neither the major obstacle nor the magic bullet for creating good jobs for development in most countries.”

Source: World Development Report 2013, p 258.

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Labour market reforms in Europe

• European Governments under pressure to make local labour markets more flexible as a response to the euro zone crisis

• Countries looking at retaining existing or attracting new investors through more flexible labour and employment laws

• Substantial political pressure on member states which lack behind

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What is changing in Europe?

Changes can be categorized as follows:

Micro flexibility measures

• Ability of the system to reallocate workers to jobs needed to sustain growth

Macro flexibility measures

• Ability of the system to adjust to macroeconomic shocks

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Labour market reforms in Europe – some examples

Belgium

• Reform of notice periods; higher retirement age; Limitations for “bridging pensions” for employees; action plan for employment of workers > 45 y.; limitations for outsourcing

France

• Pension reform (retirement age 67 by 2022); Partial unemployment scheme; higher tax on stock options, high severances and pensions; “generation contract”; reform of collective dismissals; “don’t close – sell!”

Spain

Italy

• New rules on early retirement; possibility of opt-out from certain CBA provisions (such as working time and salaries) in economic crisis; more clarity around economic grounds for dismissal; reduction of severance; softening of rules around collective redundancies

• Strengthening of open-ended employment agreements; reduction of dismissal protection for newly hired; tougher rules on unemployment benefits

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No unified approach for reforms in Europe

• Most member-states focus on the sustainability of their pensions system

• Tendency to tougher rules on unemployment benefits

• No clear strategy concerning the tension between high employment protection and the flexibility of the job market

• National agendas not aligned

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The Economics Perspective

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Overview

1. The Economic Climate

2. Cyclical v. Structural Drivers

3. The Case for Structural Reform

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The Economics Perspective - Overview

1. The Economic Climate

2. Cyclical v. Structural Drivers

3. The Case for Structural Reform

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GDP Growth, constant prices

Source: IMF World Economic Outlook Database15

Change in Unemployment since 2008

Source: ECB16

Final Stress and Unemployment

Source: ECB17

The Economics Perspective - Overview

1. The Economic Climate

2. Cyclical v. Structural Drivers

3. The Case for Structural Reform

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Types of Unemployment

1. Cyclical- Laid off during a downturn.

2. Structural- ‘Permanent’ mismatch between number looking for jobs and jobs available.- Rooted in functioning of labour market at the microeconomic level.

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Types of Unemployment

• Different policy prescriptions for alleviating different types of unemployment.

1. CyclicalAggregate demand management.

2. Structural Structural reforms and measures aimed to

improve matching & productivity.

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Types of Unemployment

• Difficult to identify the extent of cyclical/structural unemployment in the economy.

• General consensus that unemployment at the

beginning of the crisis was largely cyclical.

• Now this is up for debate....

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Measuring Structural Unemployment

• NAWRU: Non-Accelerating Wage Inflation Rate of Unemployment

- Unemployment rate that keeps inflation constant.

• Evidence that this has risen in the euro area. . . • But issues with measurement and the influence

of the business cycle (Estrella & Mishkin (2000); EC (2013)).

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The Economics Perspective - Overview

1. The Economic Climate

2. Cyclical v. Structural Drivers

3. The Case for Structural Reform

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Mismatch

• Unemployment and unfilled jobs coexist. - Skill mismatch. - Low mobility.

• Some evidence of an increase in mismatch in some countries.

-Shift in the Beveridge curve, suggesting a change in matching efficiency.

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Evolution of euro area Beveridge curve

Source: ECB25

Evolution of euro area Employment

Source: ECB26

Hysteresis

• Evidence that cyclical unemployment could be turning permanent.

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Jobless Rate for 1 year or more

Source: Eurostat28

Job Finding Rate by Duration of UE, Euro area

Source: Commission Services based on Eurostat data29

IMF Policy Response: ‘Micro-Flexibility’

• Reforms to employment protection- Too much is harmful — lower

reallocation, increasing unemployment duration.

- Asymmetry between permanent/temporary contracts

• Reforms to unemployment insurance - Potential efficiency losses. - Need high quality ALMPs.

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Current Account Balances

Source: Eurostat31

Balance of Payments Crisis

• Internal devaluation.

• Attract inward investment.

• Increase productivity.

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Conclusion

• Unemployment experiences diverging across the eurozone.

• Different types of unemployment require different policy responses.

• There might be a case for structural reform given fears of hysteresis, mismatch and poor competitiveness.

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Employment Law & Financial Crises

in Europe

IS THERE A LINK?

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Outline

• Financial Crises and Employment Law Reform

I. No Causative LinkII. Contingent Crises, Permanent ReformsIII. Corresponding Reforms?

A brief survey of several Member States

• Unintended Consequences?

I. Hamper RecoveryII. Deepen Public Deficits

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Paradox I: a Causal Link?

• The Origins of ‘The Crisis’

• Different Member States, Different Crises

– The United Kingdom

– Greece

• Employment Law as a Trigger?

‘fiscal deficits are not the consequence of excessive welfare state spending or of over-regulation of the labour market within the member states most affected by the crisis’

Prof S Deakin, 2012 36

Paradox I: a Causal Link?

• Heterogeneous Crises, Uniform Policy Prescriptions– Austerity– Deficit Reduction and Structural Reforms

• But NB the very different motivations

– Bail-out Conditionality (Portugal, Greece, …)– Democratic Choice (UK General Election 2010, …)

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Paradox II: Contingent Crisis, Permanent Reforms?

• Crises as Contingent Events

– Cyclical vs. Structural Problems

– Short-Term emphasis (e.g. EFSF)

• Reforms as Deep-Rooted, Permanent Structural Changes

– And a near-complete lack of innovation

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Paradox III: Corresponding Reforms?

• The Role of Employment Law in Austerity

• 3 Broad Areas of Reform:

– Facilitate Termination of Employment

– Lower Wages and Pensions

– Procedural Changes to limit role of Judicial & Social

Partner oversight

NB: vast differences across the Member States! 39

Key Reforms

Unfair Dismissal Protection– Hugh Collins: the tail which wags the whole dog

Sylvaine Laulom: four major trends– Emphasis Employer’s Unilateral Decision Making

– Reduce or Reshape Sanctions

– Relaxation of Collective Redundancy Standards

– Increase Qualification Thresholds

… or remove protection entirely (UK)

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Key Reforms

• Wages and Pensions– General Measures

– Targeted Measures

• Public Sectors

• Old / Young Workers

• Procedural Changes– The Diminishing Role of Collective Bargaining

– Reducing the Role of Judicial Scrutiny

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Paradox III: Corresponding Reforms?

• Remember the Goal: Deficit Reduction

– Stimulate employment to ensure GDP growth

– Lower public sector expenditure

• Yet Evidence Suggests the Contrary

– UK Government Consultation 2013

– CBI: rapid pace of change as the only main problem42

A DANGEROUS CONTRADICTION

• Responding to Financial Crises with Employment Law Reforms

– The Danger of Unintended Consequences

I. DISPARATE IMPACT

– especially on young Workers, and the socially weakest

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A DANGEROUS CONTRADICTION

II. PRECIPITATING DEEPER CRISES

– Employment Termination and the Risk Shift• Jacob Hacker (Yale)

– Employment Law as a Risk-Distribution Mechanism• Once dismantled, individuals to bear the burden

– Significant Impact on Public Finances• Direct: Unemployment Benefits• Indirect: Activation Policies

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CONCLUSIONS

• Financial Crises and Employment Law Reforms

– 3 Contradictions

I. No Causative LinkII. Contingent Crises, Permanent ReformsIII. Corresponding Reforms?

– A Potentially Dangerous Mismatch45

How is the Wider Economic Crisis Influencing the Direction of

Employment Law?

Questions and Discussion

Employment Law Reforms in

Europe

THE GREEK STORY

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Overview

• Employment Law Reforms in Greece

I. Bailouts and Memoranda

II. Employment Law Reforms: the first wave

III. Employment Law Reforms: the second wave

IV. Greece under ΣΥΡΙΖΑ

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I Background

• Since 1990s: slow, piecemeal reforms

– Law on the Books vs. Labour Market Realities

• May 2010: €110bn Loan Facility Agreement

– Accompanied by ‘Memoranda’

– The ‘Troika’: European Commission, ECB, IMF

• NB: legal scrutiny (nearly) impossible 49

II The First Wave of Reforms

• 2010-13 Draft Programme

– Memorandum of Economic and Financial Policies (MEFP)

– Memorandum of Understanding on Specific Economic

Policy Conditionality (MOU)

• Multi-Pronged Approach– Lower Public Expenditure

– Structural Changes• Lower Private Sector Wages

• Revise Employment-Protective Legislation50

II The First Wave of Reforms

• Lowering of Employment-Protective Standards [examples]

– 3863/2010: facilitate dismissals

– 3899/2010: 2 year probation period; flexible work

– 3986/2011: unrestricted FT contract renewal

• Dismantling of Collective Bargaining Apparatus– 3845/2010: targeted exclusions (young, long-term

unemployed)

– 3899/2010: fundamental changes to standard-setting via

centralised Collective Bargaining 51

III The Second Wave of Reforms

• Spring 2012– ‘Second Economic Adjustment Programme for Greece’

• Source of Funds: primarily EFSF (small IMF contribution)

• 4046/2012 – New Loan Agreement & Structural Reforms

– As of 14 February, ban on agreements to increase salaries until unemployment rate falls below 10%

– 22% wage reductions across the board; further 10% for young workers (< 25 years) 52

III The Second Wave of Reforms

• 4093/2012: ‘Approval of the Mid- term Fiscal Strategy for 2013– 2016 – urgent implementation measures of law 4046/2012 and of the Mid-term Fiscal Strategy 2013–2016’

• DISMISSAL – Notice Period shortened and severance pay cut

• In force 12 November 2012

• PENSIONS – Retirement age upped by 2 years– Pensions cut between 5% and 20%

• In force 1 January 2013

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III The Second Wave of Reforms

• 4093/2012 (cont’d)

MINIMUM WAGES– Set centrally by government– In force 1 April 2013

NB: Greek poverty level = €6,000-7,000[ILO/EUROSTAT 2011] 54

III The Second Wave of Reforms

• Did it work?

– Net Reduction in Labour Cost…

– … but ongoing financial crisis

• Social Partner Reaction?

– both Employee and Employer sides critical

– Fear of deeper recession caused by

unemployment and reduction of wages below

minimum living standards 55

IV Greece under ΣΥΡΙΖΑ

• 25 January 2015: Parliamentary Elections– Left-Wing Party Controls 149/300 Seats– Alexis Tsipras (PM); Yanis Varoufakis (Finance Minister)– Elected on explicit anti-austerity platform

• Renegotiations Commence– ‘The Brussels Group’– Cash-Flow Pressures Mount

• Changing Priorities given Outstanding Payments (?)– IMF – Structural Reforms– ECB – Primary Budget Surplus 56

IV Greece under ΣΥΡΙΖΑ

• April 2015: increasingly tense stand-offs

– Payments Continue• Limited Reforms: VAT, maintain ENFIA (?)

– Rejection of Creditor Demands• Pension System Reform• Further Labour Market Liberalisation

– Reversal of Previous Bailout Measures• Public Sector Re-Hiring• Slow Reactivation of Collective Bargaining 57

IV Greece under ΣΥΡΙΖΑ

• Yet many Difficult Questions Remain

– Collective Bargaining

– Pensions• Entitlement• Administration

– But cf. Collective Redundancy Changes• ILO Report (?)

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What Happens Next?

• Liquidity Crisis Continues to Worsen

– Final Bailout Tranche still Frozen– ECB retains €1.9bn of Greek bond profits

• 5 June 2015 (today): €300m due

– Major Repayments to ECB loom in July / August

• What is the Real Role of Labour Market Conditionality? 59

The Economics Perspective

GREECE

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Overview

1. Stabilisation Policy and Structural Reforms

2. Reform Impact

3. The Future

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Overview

1. Stabilisation Policy and Structural Reforms

2. Reform Impact

3. The Future

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GDP Growth

Source: IMF World Economic Outlook Database63

Government Debt

(a) Primary Deficit (b) 10-yr Gov Bond Yields

Source: Eurostat

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Unemployment rate

Source: Eurostat65

Labour Market

• Large informal sector.

• Highly regulated formal sector.

• Uncompetitive: In 2008, 26 out of 27 EU27 countries for competitiveness.

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Policy Levers

• Stabilisation Policy

-Business cycle management. - Debt crisis management.

• Structural Policy - “Changing the fabric of the economy" (IMF, 2013). - Includes permanent labour market reform.

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Policy Levers

• Business cycle management - Stimulate demand.

• Crisis management - Austerity.

• Structural Policy - Reform of certain labour market

institutions (whilst keeping the impact on demand in mind) 68

Policy Levers

• How to stimulate the economy while keeping confidence of creditors?

• Not just “what reform" but “what reform, when"

• Further difficulty: time inconsistency - Optimal to delay fiscal consolidation (and

structural reform). - But question marks over credibility of

future reform. 69

Frontloading and Conditionality

• Sub-optimal frontloading of consolidation.

• ‘Conditionality’: attach conditions to the provision of benefits.

- Balance likelihood of reform against cost of consolidation.

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Overview

1. Stabilisation Policy and Structural Reforms

2. Reform Impact

3. The Future

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Simulations of Alternative Reform Programmes

Source: Macroeconomic Policy Institute (2015)72

Underestimated Costs

“The program initially assumed a multiplier of only 0.5 despite staff’s recognition that Greece’s relatively closed economy & lack of an exchange rate tool would concentrate the fiscal shock. Recent iterations of the Greek program have assumed a multiple of twice the size" (IMF, 2013) 73

Underestimated Costs

• The unprecedented reduction in labour income had decisive knock on (multiplier-accelerator) effects on aggregate demand and growth. Employees lost 50% of their purchasing power as a result of wage reductions, price index changes and the reduction in social security benefits" (Greek Finance Ministry)

• Labour market and other structural reforms contributing to collapse of demand.

• Current account deficit closed by import collapse. 74

Overview

1. Stabilisation Policy and Structural Reforms

2. Reform Impact

3. The Future

75

Stabilisation Policy

• Greece’s main aim is to roll over its existing debt. • “Macroeconomic stabilisation can be achieved through

growth and increased efficiency in tax collection rather than through public expenditure cuts, which have reduced the revenue base and led to an increase in the debt ratio. We think that the whole of Europe will benefit from Greece being given the chance of a fresh start [...] it was after substantial debt relief that the German economy was able to grow and reform itself in the 1950s."

Letter from 18 eminent economists, 2015 76

Structural Policy

• Education reform

• Product market reform

• Tax system & collection

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Conclusions

• Greece is in the midst of a depression.

• Austerity and reforms have had a much larger negative impact than predicted.

• Re-evaluation of current strategy is required.

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How is the Wider Economic Crisis Influencing the Direction of

Employment Law?

Discussion

The Concept of the EmployerJeremias Prassl

Associate Professor, Magdalen College, Oxford

Employment law struggles to adapt to complex modern work arrangements because the concept of the employer has become riddled with internal contradictions: the unitary counterparty to the contract of employment is defined by reference to a series of multi-functional tests. These problems can only be addressed by the careful development of a functional concept of the employer as the entity, or combination of entities, exercising the functions regulated in a particular domain of employment law. This book will assist practitioners and academics in employment, discrimination, corporate and tort law by exposing the defects in our current understanding of the employer, and by developing a new concept appropriate for both traditional and emerging work arrangements, without abandoning a coherent underlying framework.

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THE CONCEPT OF THE EMPLOYER

• Proposes a novel, employer-based approach to problems arising from multilateral employment relationships

• Develops a clear solution, with specific discussion of agency work, Private Equity, and corporate groups

• Draws on case studies from the author’s fieldwork in the Private Equity industry, as well as comparative perspectives from English, German, US, and EU law

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