Tuesday, April 21, 2009

Flexicurity rules!

Back from Lisbon, where indeed it did rain all week. Weather forecasts are not so bad after all - they certainly lick social scientists for predictive power.

Anyway, the talk in Lisbon - at least in my group - was all about 'flexicurity'. What does this mean? Well, it means combining labour market flexibility - loose regulation of hiring and firing - with security - generous welfare payments for the unemployed. The idea is that flexibility is a good thing, because it creates lots of jobs, and security is a good thing, because... well, because being out of work is bad enough without having to starve as well.

The appeal of income protection for workers is obvious enough, but of course generous unemployment coverage has been under fire for years now, on the grounds that it is expensive, and disincentivizes the unemployed from getting back into work. The same line of argument - most powerfully developed in the OECD's 1994 Jobs Study - is often accompanied by criticism of laws restricting dismissal (employment protection legislation, or 'EPL'), on the grounds that they disincentivize firms from hiring, therefore creating more unemployment than the market would generate.

But those clever people in Denmark have apparently overcome this dilemma. In Denmark, hiring and firing legislation is very loose, yet unemployment benefits are very generous. So generous in fact that workers receive a high proportion of their previous salary for some time after losing their jobs. But because of the liberal labour market which creates many new jobs, Danish workers can easily find work after being sacked, so unemployment is low and benefits are affordable.

So, it's a free lunch! We can have labour market flexibility and low unemployment, without the nasty drops in income associated with unemployment.

Is this too good to be true? Well, there is another crucial part to this story. Denmark has a very well-resourced and efficient set of institutions responsible for 'activation' - placement services matching available jobs to available workers, and training schemes to develop the necessary skills for workers to change jobs. Most countries lack this, so flexicurity may work less well elsewhere.

Moreover, Denmark has other advantages - very high GDP per capita, an efficient revenue service and sound fiscal position, and high levels of social trust, so that people tend not to abuse the system by avoiding work when it is offered.

Flexicurity is a great idea, but would it work in other places? The European Commission thinks so, but there are a number of reasons to doubt its effectiveness in the countries I study.

In Britain, we have flexibility without much security (let's call it 'flexinsecurity'): unemployment benefits are very low, so losing one's job is bad news, unless you can find a new one quickly. Our flexible labour market does generate lots of jobs, but not always the right ones to meet the needs of the unemployed. So jobs are destroyed in the industrial parts of the UK, and new ones are created in the South-East, where living costs are so high that moving to where the jobs are only makes sense for immigrants prepared to put up with uncomfortable living conditions. Our jobs boom of the last decade and a half has seen massive immigration but the persistence of unemployment in many regions.

In Southern Europe, we have more rigid labour markets, with strict EPL, but weak welfare institutions - let's call this 'insecurigidity' (OK, I'm not a poet). So, some workers are very protected (ironically, those benefiting from strong employment protection tend to be the ones who would get most unemployment benefit) - the so-called 'insiders' - whilsts others have neither secure jobs nor generous welfare provision - 'outsiders'. Unemployment tends to be high, but poverty is quite high too. Not a great combination.

So how do these countries with their disfunctional arrangements become like the virtuous Danes?

Britain would need to improve training and drastically increase unemployment benefits. This could have a disincentive effect, but it could be averted by linking generosity to work history, thus incentivizing fired workers to get back in the labour market without penalizing them for losing jobs. Our current arrangements make no distinction between the newly unemployed and the permanently unemployed, which disincentivizes the latter from joining the workforce if they can't command a high wage in the labour market. This kind of reform, of course, requires big improvements to our education and training system, and an increase in spending on benefits. A + B = tax increases, never popular around here. The other problem is that Britain has created lots of jobs, but many of them are not that attractive - fruit picking in the fens, serving in coffee bars in expensive central London. Is a low-skilled unemployed person in Caerphilly realistically going to be 'activated' into these jobs?

In Southern Europe, problems are similarly intractable. The inadequacy of unemployment compensation acts as a political obstacle to serious EPL reforms, yet does little to bring the unemployed into the workforce, since 'outsiders' are often protected by strong family structures and therefore only take jobs which suit their living arrangements. The other big issue seems to be the 'social trust' question - most Spaniards or Italians would find the prospect of unemployment benefits of Danish standards a recipe for permanently high unemployment and fiscal crisis.

So, the big question ultimately remains: why do Danes work when being unemployed is such a good deal?

Answers on a postcard please.