Split: March 2006

Lecture 2:

Modernising or Americanising the European Social

Model

Nick Adnett

LECTURE OUTLINE

Is the European Social Model obsolete?

– Origins– What do we know about its

effects?

Do we need more flexible labour markets in the EU?

Differences between EU and US employment regulation

Differences in labour market behaviour and performance between EU and US

Is the European Model being Americanised?

Issue 1: Is the European Social Model Obsolete?

In second-half of C20th:

Fordist technology + solidaristic wage bargaining

+ Increased economic

integration wage interdependence and

wage convergence

Compressed wage bargaining and allowed trade-offs between social rights and real wage– allowed levelling-up of social

protection

A HISTORY OF SOCIAL EUROPE?

‘Fordism’/Social Cohesion

↓

European Social Model↓

‘Euro-sclerosis’/Neo-liberalism↓

Deregulation/Flexible Labour Markets

‘New’ Economy/Third Way(s)↓

Regulation for Competitiveness(addressing the trade-offs between

economic and social objectives)

Which are the harmful

regulations?

Econometric studies find that employment protection & representational rights can be positively related to social and economic performance

Strong trade unions when linked to co-ordinated bargaining not harmful

High unemployment benefits of long-duration are harmful

Issue 2: Do We Need More Flexible

Employment?

Types of Flexibility; Numerical flexibility

– growth of part-time, temporary and self-employment

Functional flexibility– flexible specialisation and

economies of scope

Temporal flexibility– esp. in service sector

Flexibility in the location of work

INCREASING INTERNAL AND

EXTERNAL FLEXIBILITY

Numerical & internal flexibility:– extra hours & part-timers, flexible

working time

Numerical & external flexibility:

– temporary contracts, sub-contracting, agency workers

Functional & internal flexibility:

– multi-tasking, internal mobility

Functional & external flexibility:

– consultants, out-sourcing specific tasks

Flexibility in OECD Labour Markets

Increased need for flexibility:

» Globalisation» Technology / New Economy» ↑ economic integration

BUT in EU: Inter-regional and

international migration levels low

Job and worker turnover increasing but relatively low

High firm and industry specific skills limit inter-sectoral mobility of labour and increase costs of job loss

EU and US Labour Markets: Differences

in Employment Regulation

US – Supremacy of laissez-faire

– rational forward-looking decision-makers in competitive markets generate socially optimal outcomes

» ‘employment at will’ policies• waivable employment rights

conferred on employer• bi-lateral bargaining about the

terms of employment contracts

» requires legally enforceable contracts + freedom of contract

• self-enforceable through reputation effects?

The European Social Model: mandatory employment rights

Markets produce sub-optimal outcomes

Market failure– Asymmetric information

» Signalling failures – sickness + job security

» Ignorance: rights and costs of regulation– Incomplete employment contracts

» Agency problems and opportunistic behaviour – hold-up problems

Equity– Markets create too much inequality

» Minimum wages, state retirement pensions

– Markets create too much risk and uncertainty» Sickness and unemployment benefits and

insurance

EU and the US: Differences in Labour

Market Behaviour

US– High job growth

» High business start-ups– High participation rates

» High female and older worker participation rates

– Fast service sector growth– High annual working hours– Market-driven wage fixing– High wage inequality– Low unemployment but high

incidence of social exclusion» High relative deprivation

– Employment at will» Few mandatory benefits

• but anti-age discrimination law

EU and the US: Differences in Labour

Market Behaviour (contd.)

EU– Slow employment growth

» Low start-ups– Low participation rates

» Especially mothers and older workers

– Slow service sector growth» Lack of marketisation of home

production– Compressed wage structure

» Centralised wage-fixing + high minimum wage

– Persistent levels of high unemployment

– High levels of social protection» health, unemployment and

retirement benefits

EU and US: Differences in Labour Market Performance

Benefits of US-style labour markets– faster rate of job creation– employment to population rate 10

points higher than EU ave.– Low unemployment– higher annual hours of working

But: growth of labour productivity

» High labour turnover– growth of wage and wealth inequality

» inequality not influence US happiness, (perceived greater social mobility)

– no LTU problem but imprisons 3% of male employment (equivalent to 11% in prison or under supervision)

EU and the US – convergence?

Similarities: ‘Making Work Pay’ policies (esp. lower

benefits of shorter duration) to reduce unemployment

More fragmented (decentralised) bargaining

– but may add to insider-power

Emphasis upon policies which encourage higher basic literacy, numeracy and vocational competency amongst the young reduce labour market inequality

BUT: ‘Hire and Fire’ flexibility reduces firm-

specific training and lowers productivity growth and innovation.

Different combinations of wage & non-wage costs and productivity can yield the same unit labour costs.

– Importance of diverse aspirations, custom & practice and institutions.

The Case For A Targeted Strengthening of Social

Policy

Need to strengthen incentives for firm-specific training

– employment protection

e.g. Acquired Rights Directive Modern production technologies

create more asymmetric information– favour co-operative managerial approach

e.g. Works Council Directive

Protect workers from undesirable consequences of greater flexibility: work intensity and unpaid overtime hours– unequal distribution of costs of family

rearing and caring e.g. Working Time Directive

Parental Leave Directive

Aiginger, K. and Guger, A. (2005) The European Socio-Economic Model: Differences with the USA and changes over time. WIFO Working Paper.

Prepared questions:

1. Identify the three characteristics of the European Socio-economic model. What does Aiginger consider to be the three ‘pillars’ on which the success of Denmark, Finland and Sweden have been based?

2. What are the main differences between the ‘Old’ and ‘Reformed’ European Model?

3. To what extent is the ‘Reformed’ European Model distinct from the US model?