How do we resolve worryingly high unemployment across Europe? In a time of crisis, would reform actually intensify unemployment? If we are to break the back of slow labour markets, policymakers need to learn from Europe’s success stories. Labour markets especially in southern Europe have to be reformed – presenting policy prescriptions to that effect.
Unemployment continues to rise in the Eurozone. There is a lasting suspicion that these markets are not flexible enough; that wage growth does not respond sufficiently to unemployment. Labour market reform has featured prominently in the bailout agreements reached between the Troika and Greece, Portugal, and Ireland. Reform surely must be a good thing? But what is it meant to achieve? What should and can be done? Are we ready?
Recent European Commission estimates of structural unemployment rates in 2013 are 6% for Germany and Denmark, 8% for Italy, 13% for Portugal, 15% for Ireland, and 18% for Spain (Orlandi 2012); versus actual unemployment of 5.4% in Germany (November 2012), 7.9% in Denmark, 11.1% in Italy, 16.3% in Portugal, 14.6% in Ireland and 26.6% in Spain. The most recent unemployment figure for Greece was 26% in September 2012.
The estimated structural rates are obtained by smoothing the actual unemployment rate series, so they have followed the recent rises to some extent, and may exaggerate the structural component and under-represent the demand-deficient component. In fact, it would seem that not only is demand in the doldrums but the structural unemployment rate is also very high in many countries.
The difficulty in proposing a programme of reforms to labour markets is that of striking the right balance. We are operating in world of the second best. How far should reforms go in the direction of liberalisation? What are the trade-offs between – and what is the right combination of – security for the employed, income inequality and higher average real incomes?
Draghi, Mario (2012), “The future of the euro: stability through change”, European Central Bank, published in Die Zeit, 29 August.
EEAG (2013), EEAG Annual Report on the European Economy, Munich, CESifo.
Orlandi, Fabrice (2012), “Structural unemployment and its determinants in the EU countries”, European Economy, Economic Papers, 455, May.