1. Labor Market Reforms and Macroeconomic Policy in the Lisbon Agenda
Different Roads to Full-Employment Ronald Schettkat professor of economics Bergische Universitaet Wuppertal, Germany
Labor Market Reforms and Macroeconomic Policy in the Lisbon Agenda
Brussels March 20/21, 2006

2. US Climbing up the stairway to higher
employment requires labor market reforms
The most common hypothesis explaining the US advancement in employment is that features of the European labor markets, like strong unions, employment protection, high minimum wages etc. etc. impede Europe’s employment from growing.
Climbing up the stairway of labor markets
requires labor market reforms
That’s in a nutshell the message send out by the OECD, ECB and many other policy advisers and policy makers bought into this advice. Often one gets the impression, that Europe just has to subscribe to labor market reforms and jobs will fall from heaven.
The OECD director for Employment, Labor and Social Affairs, John Martin, joined us for this conference and his view –that is my impression- goes beyond the narrow labor institutions view, when he argues that ….
Sclerotic labor markets in Europe Eurosclerosis ?

3. One road to high employment?
Well functioning labor markets are a necessity for dynamic, open economies
But are well functioning labor market sufficient?
Was the assertion right that European labor markets are overly rigid?

4. Institutional Fitness Landscapes
Economic fitness
Economic fitness
low
high
low
high
regulation
regulation

5. The example of the Netherlands
The welfare state institutions in the Netherlands were after the reforms more generous than the German institutions
Dutch dismissal protection is much stronger than in Germany
Yet: the Netherlands achieved record low unemployment rates in the 1990s
Dutch macroeconomic policy: monetary, fiscal, wage export surplus

6. Can downward wage flexibility integrate the low-skilled unemployed
Can downward wage flexibility integrate the low-skilled unemployed? Expectation wage compression hypothesis
employed
unemployed EU US

7. Skill Structure for the Employed and the UnemployedUS
Germany
Employed
.10
.10
250
500
250
500
D1 (239)
Median (291)
D1 (207)
Median (292)
Unemployed
.10
.10
250
500
250
500
D1 (210)
Median (277)
D1 (119)
Median (257)

8. In 1970 Europe and the US and were on the same iso-employment curve but the US had higher productivity and income
product demand/ capita [d]
demand = supply
In 1970 the US achieved a higher income per capita than Europe because it was technologically more advanced. But the employment rate and hours worked were roughly similar to Europe.
To illustrate this:
When productivity increases, the economy moves towards the origin in the supply- demand diagram. That is, that less labor is needed to produce a constant output. To keep the initial equilibrium, demand needs to increase as well.
The level of final demand in the economy must take pace with the supply improvements (productivity growth) to keep the employment constant.
In 1970 Europe and the US were on the same iso-employment curve, income and demand was higher in the US because of higher productivity. The US was technologically more advanced than Europe. Both, Europe and the US, achieved equilibrium at roughly the same employment rates.
In 1999, however, the US and the European countries are on very different curves than in The US raised demand per head more than productivity grew and consequently the US moved to a higher employment curve. The European countries (less so the UK and Spain) caught-up to US productivity levels but expanded demand less than productivity and consequently moved to lower employment in 1999.
US 1970
demand
Europe 1970
labor demand / output [s]
rising productivity

9. In 2000 productivity in Europe has converged to US productivity, but employment (participation and hours) is much higher in the US than in Europe
product demand/ capita [d]
demand = supply
US 2000
Since the US and France, the Netherlands and Germany (though less the UK and Spain) are roughly at the same productivity level as the US in 2000, the difference in employment must be related to a substantial part to aggregate final demand.
For sure, a supply-side explanation referring to productivity growth only will also fail because it would require the US and the European countries to remain on their initial employment curve and all countries should have been in a narrow demand-supply cluster in 2000, which they are not.
However, just referring to the demand side is unsatisfactory as well because it does not explain why the US raised demand per head of the population so much through additional labor input.
No wonder, one of the big miracles in economics and in policy is
WHY THE US MOVED TO MUCH HIGHER EMPLOYMENT LEVELS WEHREAS EUROPE EXPIERIENCED EVEN DECLINING EMPLOYMENT PER HEAD OF POPPULATION
US 1970
Europe 2000
Europe 1970
labor demand / output [s]

10. Climbing up the stairway to high Employment requires well functioning
labor markets
“Such specific policies should,
of course, be accompanied by
support to aggregate labour demand
and, more generally, higher economic
growth – issues which go beyond the
scope of this volume”
John P. Martin
Director for Employment, Labour and Social Affairs
The most common hypothesis explaining the US advancement in employment is that features of the European labor markets, like strong unions, employment protection, high minimum wages etc. etc. impede Europe’s employment from growing.
Climbing up the stairway of labor markets
requires labor market reforms
That’s in a nutshell the message send out by the OECD, ECB and many other policy advisers and policy makers bought into this advice. Often one gets the impression, that Europe just has to subscribe to labor market reforms and jobs will fall from heaven.
The OECD director for Employment, Labor and Social Affairs, John Martin, joined us for this conference and his view –that is my impression- goes beyond the narrow labor institutions view, when he argues that ….
“Such specific policies should, of course, be accompanied by support to aggregate labour demand and, more generally, higher economic growth – issues which go beyond the scope of this volume”
John we are happy to have you here and we are very keen to get your views on our work.

11. Eurosklerose through the design of macroeconomic €-sklerose ?
Institutions in Europe?
€-sklerose ?
The most common hypothesis explaining the US advancement in employment is that features of the European labor markets, like strong unions, employment protection, high minimum wages etc. etc. impede Europe’s employment from growing.
Climbing up the stairway of labor markets
requires labor market reforms
That’s in a nutshell the message send out by the OECD, ECB and many other policy advisers and policy makers bought into this advice. Often one gets the impression, that Europe just has to subscribe to labor market reforms and jobs will fall from heaven.
The OECD director for Employment, Labor and Social Affairs, John Martin, joined us for this conference and his view –that is my impression- goes beyond the narrow labor institutions view, when he argues that ….
“Such specific policies should, of course, be accompanied by support to aggregate labour demand and, more generally, higher economic growth – issues which go beyond the scope of this volume”
John we are happy to have you here and we are very keen to get your views on our work.

12. The End
Thanks
For more information:

13. But is the theoretical assertion correct that well functioning labor markets are sufficient to
Europe suffers from distortet labor markets

14. Americans are workaholics, Europeans prefer leisure?
Economists like to stress differences in incentives for diverging economic performances. Everybody is the same, want the same and if two people don’t do the same they must face different price structures.
However, many non-economists believe that preferences differ not only between individuals but also between nations and continents Another popular view:
American are workaholics and Europeans prefer leisure
These 2 hypotheses are just popular versions of the more general hypotheses in the literature on changing economic structures.
Let me locate major hypotheses to explain the rising shares of service sector employment, which constitute the literature on structural economic dynamics in demand and supply space: