1. Split: March 2006 Lecture 2: Modernising or Americanising the European Social Model Nick Adnett

2. LECTURE OUTLINE n Is the European Social Model obsolete? – Origins – What do we know about its effects? n Do we need more flexible labour markets in the EU? n Differences between EU and US employment regulation n Differences in labour market behaviour and performance between EU and US n Is the European Model being Americanised?

3. Issue 1: Is the European Social Model Obsolete? In second-half of C20th: n Fordist technology + solidaristic wage bargaining + n Increased economic integration –  wage interdependence and wage convergence n Compressed wage bargaining and allowed trade-offs between social rights and real wage – allowed levelling-up of social protection

4. A HISTORY OF SOCIAL EUROPE? ‘Fordism’/Social Cohesion ↓ n European Social Model ↓ ‘Euro-sclerosis’/Neo-liberalism ↓ n Deregulation/Flexible Labour Markets ‘New’ Economy/Third Way(s) ↓ n Regulation for Competitiveness (addressing the trade-offs between economic and social objectives)

5. Which are the harmful regulations? n Econometric studies find that employment protection & representational rights can be positively related to social and economic performance n Strong trade unions when linked to co-ordinated bargaining not harmful n High unemployment benefits of long-duration are harmful

6. Issue 2: Do We Need More Flexible Employment? Types of Flexibility; n Numerical flexibility – growth of part-time, temporary and self-employment n Functional flexibility – flexible specialisation and economies of scope n Temporal flexibility – esp. in service sector n Flexibility in the location of work

7. INCREASING INTERNAL AND EXTERNAL FLEXIBILITY n  Numerical & internal flexibility: – extra hours & part-timers, flexible working time n  Numerical & external flexibility: – temporary contracts, sub-contracting, agency workers n  Functional & internal flexibility: – multi-tasking, internal mobility n  Functional & external flexibility: – consultants, out-sourcing specific tasks

8. Flexibility in OECD Labour Markets Increased need for flexibility: » Globalisation » Technology / New Economy » ↑ economic integration BUT in EU: n Inter-regional and international migration levels low n Job and worker turnover increasing but relatively low n High firm and industry specific skills limit inter-sectoral mobility of labour and increase costs of job loss

9. 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?

10. The European Social Model: mandatory employment rights Markets produce sub-optimal outcomes n 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 n Equity – Markets create too much inequality » Minimum wages, state retirement pensions – Markets create too much risk and uncertainty » Sickness and unemployment benefits and insurance

11. EU and the US: Differences in Labour Market Behaviour n 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

12. EU and the US: Differences in Labour Market Behaviour (contd.) n 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

13. 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)

14. EU and the US – convergence? Similarities: n ‘Making Work Pay’ policies (esp. lower benefits of shorter duration) to reduce unemployment n More fragmented (decentralised) bargaining – but may add to insider-power n Emphasis upon policies which encourage higher basic literacy, numeracy and vocational competency amongst the young reduce labour market inequality BUT: n ‘Hire and Fire’ flexibility reduces firm- specific training and lowers productivity growth and innovation. n Different combinations of wage & non- wage costs and productivity can yield the same unit labour costs. – Importance of diverse aspirations, custom & practice and institutions.

15. The Case For A Targeted Strengthening of Social Policy n Need to strengthen incentives for firm- specific training – employment protection e.g. Acquired Rights Directive n Modern production technologies create more asymmetric information – favour co-operative managerial approach e.g. Works Council Directive n 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

16. 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?