Split: March 2006 L ecture 1 The Lisbon Strategy: a critical assessment Nick Adnett

LECTURE OUTLINE n Key Trends in European Labour Markets n The Luxembourg Process & Lisbon Strategy n The Changing Economic & Demographic Environment –impact upon economic and social objectives of EU n Modernising Social Europe –some key principles

European Labour Markets n Employment growth has been slow & participation rates low n Decline in the participation rate of elderly males + rise in that of prime-age females n The labour force is ageing n The intensity of work is increasing, yet work is spread more thinly n Deindustrialization is continuing

European Labour Markets ( contd.) n Gender gaps are still large –pay gap, occupational crowding n  Demand for unskilled workers n Labour market inequality is increasing n Unemployment is still high and unevenly distributed n Collective bargaining is becoming more fragmented n EU Labour markets are relatively highly regulated.

ISSUE 1:INCREASING LABOUR MARKET INEQUALITY n increasing employment inequality –growth of flexible working part-time, temporary –high unemployment unemployment incidence highly skewed –growth of early retirement n increasing wage inequality –relative and absolute decline in lowest wage groups –education premiums risen

Increasing Wage Inequality n Causation increased supply of unskilled workers or contraction in demand? increased supply (demographic, rising female share, immigrants) unlikely to dominate since trends appear common across industrialized economies and employment share of unskilled /less qualified workers fallen investigations concentrated upon sources of reductions in demand

Causes of Reduced Demand for Low-skilled workers Possible factors: n Technological change –New technology is education- biased n Globalization –Outsourcing of low-skilled jobs out of OECD n Institutional factors –decline of unions –deindustrialization –decline in average firm size

Globalization n Increased world trade + GATT- inspired reductions in tariff- barriers caused export of low- skilled jobs to NIC’s –outsourcing –fall in the relative price of less skill- intensive –BUT: mfg. imports from low-wage economies have small share of developed economies markets skill-intensity of production risen across all sectors in developed economies

ISSUE 2: UNEMPLOYMENT PERSISTENCE n Uneven distribution of unemployment experience n Increases in unemployment difficult to reverse –hysteresis n Negative duration dependence –problem of the long-term unemployed Policy Response: n activation and promotion of ‘churning’

ISSUE 3: SLOW EMPLOYMENT GROWTH n Rise in European unemployment in 70s & 80s due to longer spells n Flows out of unemployment relatively low in Europe Europe has a ‘hiring’ problem n low proportion of trade in fast growing world markets n inflexible labour markets?

The Luxembourg Process n Amsterdam Treaty –required a ‘co-ordinated strategy for employment’ n Luxembourg Summit (1997) adopted a common European Employment Strategy (EES): –four pillars: improving employability, developing entrepreneurship, encouraging adaptability and strengthening equal opportunities –four horizontal objectives: raising overall employment rates; extending lifelong learning;raising quality of employment & strengthening social partner involvement. –Member States transform the 19 guidelines into annual National Action Plans (NAPs).

EU EMPLOYMENT STRATEGY: Key Themes n activation of passive policies –targeting of LTU/social exclusion n lower tax burden on firms n human capital investment n active ageing policies n processes: benchmarking, target-setting, monitoring, evaluation and peer review. n Emphasis upon ‘soft’ convergence

THE RECENT EVOLUTION OF THE EMPLOYMENT STRATEGY n Employment targets, led to: –‘Making Work Pay’ reforms –gender pay gaps –family friendly work practices –active ageing policies n ‘New Economy’ taken seriously –lifelong learning & skill gaps n  Co-ordination of economic, employment and social policies n Quality of employment n Social partner involvement

The LISBON STRATEGY Objective: By 2010, the EU should be the most dynamic, competitive, sustainable, knowledge-based economy, enjoying full employment and strengthened economic and social cohesion.

LISBON STRATEGY Targets set: n Employment rate of 67%(70%) overall and 57% (60%) for women by 2005 (2010) n Increasing average EU employment rate for older workers (55-64) to 50% by 2010 n Improving basic skills, particularly IT and digital, to make EU the most competitive and dynamic knowledge- based economy n Modernise EU labour markets and promote labour mobility

MODERNISING THE EUROPEAN SOCIAL MODEL A CHANGED ECONOMIC ENVIRONMENT? n New production technologies –holistic firms n Knowledge-driven economy –need for flexible employees n EMU –  labour market flexibility desired n Globalisation –  impact of domestic regulations on national employment n Demographics –↑ dependency rate

Some Guidelines for Reform n Co-ordinate employment, social and macroeconomic policies n Respect national differences: lack of convergence of institutions, workplace norms and degree of social solidarity n Design complementary policy packages dismantle harmful constraints but replace with efficient policies which maintain distributional objectives. n Choose objectives linked to social welfare employment rates?

Freeman, R. (2004), Are European Labour Markets as Awful as All That? LSE, Centre for Economic Performance Discussion Paper No Prepared Questions: 1. Interpret the data in Table 1 and identify the reasons for the much higher US employment rate. What are main conclusions from comparisons of real wages and wage dispersion in the EU and US? 2. What are the main institutional differences between the EU and US? To what extent are these institutional differences a cause of the different overall employment rates? 3. What does Freeman argue are the main areas where EU labour market institutions could be improved?