Labour Mobility, Unemployment Benefits and Minimum Wages
We are all under the spell of magic words such as “mobility”, “globalization”
and “flextime”. It seems as though we move around more frequently, that we
change jobs more often and that our jobs are less secure. The facts, though, are
different.
The world is less globalized today than it was at the beginning of the century.
Job tenure has not declined (in the first 8 years of every job) and labour
mobility did not increase despite foreign competition, technological change and
labour market deregulation. The latter led to an enhanced flexibility of firms
and of hiring and firing practices (temporary or part time workers) but this is
because many workers actually prefer casual work with temporary contracts to a
permanent position.
Granted, people have been and are moving from failing firms and declining
industries to successful ones and booming sectors. But they are still reluctant
to change residence, let alone emigrate. Thus, jobs remain equally stable in
deregulated as in regulated labour markets.
Yet, this phobia of losing one’s job (arising from the aforementioned erroneous
beliefs) serves to increase both the efficiency and productivity of workers and
to moderate their wage claims.
It is safe to assume that collective bargaining led to increased wages and,
thus, to less hiring and less flexible labour markets. It is therefore
surprising to note that despite the declining share of unionized labour in two
thirds of the OECD countries – unemployment remained stubbornly high. But a
closer look reveals why. Both France and the Netherlands (where unionized labour
declined from 35% of the actually employed to 26%), for instance, extended the
coverage of collective agreements to non-unionized labour. It is only where both
union membership and coverage by collective agreements were both reduced (USA,
UK, New Zealand, Australia) that employment reacted favourably. Thus, at the one
extreme we find the USA and Canada where agreements are signed at the firm or
even individual plant level. At the other pole we have Scandinavia where a
single national agreement prevails. All the rest are hybrid cases. Britain, New
Zealand and Sweden decentralized their collective bargaining processes while
Norway and Portugal centralized it. The evidence produced by hybrid cases is not
conclusive. Decentralized bargaining clearly reduced wage pressures but
centralized bargaining also moderated wage demands (union leaders tended to
consider the welfare of the whole workforce. Still, it seems that it is much
preferable to choose one extreme or the other rather than opt for hybrid
bargaining. The worst results, for instance, were obtained with national
bargaining for specific industries. Hybrid Europe saw its unemployment soar from
3 to 11% in the last 25 years. Pure system USA maintained its low rate of 4-5%
during the same quarter century. These opposing moves cannot be attributed to
monetary or fiscal policies. This is because all economic policies are geared
towards increasing employment. Budget cuts, for instance, depress demand and job
formation in the short term but, by lowering real interest rates, they encourage
investment and job formation in the longer term.
The cycle is:
Employment protection laws make it hard to fire workers and hard for fired
workers to find new jobs. The longer one is unemployed, the lesser the chances
of employment. Skills rust and the long term unemployed become the unemployable.
Gradually, desperation sets in and the unemployed stop looking for a job. Their
absence is conspicuous in that they do not restrain the wages paid to the
employed. They have become part of the structural unemployment.
Blanchard and Wolfers studied 20 countries between the years 1960-96. They
applied 8 market rigidities to their subjects. The average unemployment
increased by 7.2% in this period. But in countries with strict employment
protection unemployment rose by double the amount in countries with lax labour
legislation. The country with the most generous unemployment benefits saw its
unemployment rate grow by five times the rate of the stingiest country. And in
countries with highly coordinated wage bargaining, unemployment has grown by
four times its growth in countries with decentralized bargaining.
It is difficult to isolate these parameters from the general decline in
productivity, the increase in real interest rates and technological change and
restructuring. Still, the results are fairly unequivocal. Other research (the
1994 OECD one year study, the DiTella-MacCullouch study) seems to support these
discoveries:
That flexibility is a good thing. It encourages employment, it leads to higher
output and to a higher GDP per capita. The reason a transition from a rigid to a
flexible labour market does not yield immediate results is that it increases the
participation in the labour force. The rate of unemployment is, thus, affected
only later, it lags the changes. But flexibility leads to lower rates of
unfilled vacancies and to a lower persistence of unemployment over time.
Unemployment in Europe is structural (in Germany it has been estimated to be as
high as 8.9%). It is the cumulative result of decades of centralized wage
bargaining, strict job protection laws, and over-generous employment benefits.
The IMF puts structural unemployment in Europe at 9%. This is while the USA’s
structural rate is 5-6% and the UK reduced its own from 9% to 6%. The remedies,
though well known, are politically not palatable: flexible wages, highly mobile
labour, flexible fiscal policy.
Deregulation makes labour markets more flexible because it forces the worker to
accept almost any job. Cutting or limiting jobless benefits has largely the same
effect. Employers feel more prone to hire people if they can negotiate their
wages with them directly and on a case-by-case basis and if they can fire them
at will. Hence the debilitating effect of minimum wages and other wage controls
as well as of job protection laws.
But all these steps must be implemented together because of their synergy.
Research has demonstrated the impotence and inefficacy of half hearted half
measures.
Some hesitant steps have been adopted by the governments of Germany and France
(which trimmed jobless benefits), by Italy (which stopped linking benefits to
inflation), by Belgium, Spain and France, which reduced the minimum wage payable
to young people. Spain established two classes of workers with an increased
bargaining power granted to those with permanent employment. Yet, some measures
yielded quite unexpected and unwanted results. France legislated a reduced
working week. Other countries imposed a freeze on hiring with the aim of
attrition of the workforce through retirement. Yet, these last two remedies led
to an increase in the bargaining power of the remaining workers and to real wage
increases.
The only clear causal relationship is between unemployment benefits and the
level of employment. The lower the unemployment benefits, the more people seek
work and wages decrease. As a result, firms hire more workers. But, firms hire
even more when dismissing workers is made easier and cheaper.
Paradoxically, the easier it is to fire workers, the more workers firms are
willing to take on and the more secure workers feel knowing that their chances
of being hired are better. They look harder for work and find it, reducing the
level of unemployment and the costs to the state of jobless benefits. Having to
spend less on unemployment benefits, the government can either cut taxes of
improve the allocation of its resources. In both cases the economy improves and
provides an added incentive to work. This is because, in a vigorous growth
economy, the value of an extra worker is higher than the combined costs of his
hiring and firing. This is especially true since the reservoir of the unemployed
is comprised of the unskilled, the young and women, whose remuneration is closer
to the minimum wage. In the USA the minimum wage is 35% of the average wage (in
France, it is 60%, in Britain it is 45% and in the Netherlands it is declining
relative to the median salary). It is a fact that when wages are downward
flexible – more lowly skilled jobs are created. A 1% rise in the minimum wage
reduces the probability of finding a job by 2-2.5%.
There is a debate raging between the proponents of minimum wages (they reduce
poverty and increase the equality of wealth distribution) and their opponents
(they destroy jobs). The OECD stated clearly that wage regulation couldn’t deal
with poverty. The reason is that, as opposed to common opinion, few low paid
workers live in low-income households and few low-income households have low
paid workers. Thus, the benefits of the minimum wage, such as they are, largely
bypass the poor.
Again, it is important to realize that unemployment is not a universal
phenomenon. It is concentrated among the young and the unskilled. 11% of all
people under the age of 25 in the USA are unemployed, almost three times the
national average. A shocking 28% of those under the age of 25 are unemployed in
France. The OECD says that a 10% rise in the minimum wage reduces teenage
employment by 2-4% in both the high and low minimum wage countries.
In view of these facts, many countries (USA, UK, France) introduce “training
wages” – actually, minimum wage exemptions for the young. But the minimum wage
is still a high percentage of mean youth earnings (53% in the USA and 72% in
France) and thus has a prohibitive effect on youth employment.
There is no disputing the facts that minimum wages compress the earnings
distribution and reduce wage disparities between ages and sexes but they have no
effect on inequality and the reduction of poverty among households. In US
households with less than half the median household income only 33% of the
adults have a low paid job (The equivalent figure in the Netherlands is 13% and
in the UK – 5%). In most poor households no one is employed at all. On the other
hand, many low earners have high paid partners. In the USA only 33% of earners
of less than two thirds of the median wage live in households whose income is
less than 50% of the national median household income. In the UK the figure is
10% and in Ireland – 3%. In each 5-year period only 25% of low paid Americans
are in a poor family at some point (the figure is 10% in the UK).
These statistics show that minimum wages hurt poor families with teenagers (by
making teenage employment prohibitive) while benefiting mainly the middle class.
Unemployment and Inflation
Another common misperception is that there is some trade off between
unemployment and inflation. Both Friedman and Phelps attacked this notion.
Unemployment seems to have a “natural” (equilibrium or homeostatic) rate, which
is determined by the structure of the labour market. The natural rate of
unemployment is consistent with stable inflation (NAIRU – Non Accelerating
Inflation Rate of Unemployment).
Making more people employable at the prevailing level of wages can lower NAIRU.
This should lead to a big drop in unemployment together with a tiny increase in
permanent inflation. Phelps actually sought to lower NAIRU and raise the incomes
of the working poor. Stiglitz calculated that the changing demographics of the
labour force and the3 competition in markets for goods and jobs reduced NAIRU by
1.5% in the USA. R. Gordon, D. Staiger and M. Watson support these findings.
It emerges, therefore, that the gap between the estimated NAIRU and the actual
rate of unemployment is a good predictor of inflation.
The Rhineland Model the Poldermodel and Other European Ideas
The Anglo-Saxon variety of capitalism is intended to maximize value for
shareholders (often at the expense of all others, including the workers).
The Rhineland model is capitalism with a human face. It calls for an economy of
consultation among stakeholders (shareholders, management, workers, government,
banks, other creditors, suppliers, etc.)
In the Netherlands there is a Social and Economic Council. Its role is advisory
and it is semi-corporatist. Another institution, the Labour Foundation is a
social partnership between employees and employers.
But the Netherlands succeeded in reducing its unemployment rate from 17% to less
than 5% by ignoring both models and inventing the “Poldermodel”, a Third Way.
Wim Duisenberg, the Dutch Banker (currently Governor of the European Central
Bank), attributed this success to four elements:
Improving state finances
Pruning social security and other benefits and transfers
Flexible labour markets
Stable exchange rate.
The Dutch miracle started in 1982 with the Wassenaar Agreement in which
employers’ organizations and trade unions agreed on wage moderation and job
creation, mainly through decentralization of wage bargaining. The government
contributed tax cuts (which served to replace forgone wage increases). This
fiscal stimulus prevented a drop in demand as a result of wage moderation.
Additionally, restrictions were placed on social security payments and the
minimum wage. For instance, increases in wages were no longer matched by
corresponding increases in minimum social benefits. Working hours, hiring,
firing and collective bargaining were all opened up to labour market forces. The
strict regulation of small and medium size businesses (which drove up labour
costs) was relaxed. Generous social security and unemployment benefits (a
disincentive to find work) were scaled back. The Netherlands did not shy from
initiating public works projects, though on a much smaller scale than France,
for instance. The latter financed these projects by raising taxes and by
increasing its budget deficit. The result could well be a reduction in
employment in the long run (the effect of taxation). In the absence of monetary
instruments such as devaluation (due to the EMU), the only remedy seems to be
labour market flexibility.
Such flexibility must include a substantial adjustment in sickness benefits,
vacation periods, maternal leave and unemployment benefits.
The long term (more than 12 months) unemployment in Europe constitutes 40% of
the total unemployment. About HALF of the entire workforce under the age of 24
is unemployed in Spain. It is about 28% in France and in Italy. Germany, Austria
and Denmark escaped this fate only by instituting compulsory apprenticeship. But
the young become the kernel of long-term unemployment. This is because a tug of
war, a basic conflict of interests exists between the “haves” and “have-nots”.
The employed wish to defend their monopoly and they form labour cartels. This is
especially true in dirigiste Europe.
While in the USA, 85% of all service jobs created between 1990-5 paid more than
the average salary – this was not the case in Europe. Add to this the immobility
of labour in Europe and a stable geographical distribution of unemployment
emerges, not ameliorated by labour mobility.
The Dutch model sought to battle all these rigidities:
The Dutch reduced social security contributions from 20% (1989) to 7.9% and they
halved the income tax rate to 7% (1994).
They allowed part time workers to be paid less than full timers, doing the same
job.
They abandoned sectoral central bargaining in favour of national bargaining –
but more decentralized.
They cut sickness benefits, unemployment insurance (benefits) and disability
insurance payments (by 10% in 1991 alone – from 80% to 70%).
They made it harder to qualify for unemployment (in 1995 no benefits were paid
to those who chose to remain unemployed).
The burden of supporting the sick was shifted to the employer / firm. In 1996,
the employer was responsible to pay the first year of sickness benefits.
Even the Dutch model is not a success. More than 13% of the population is
receiving disability benefits. Only 62% of the economically active population is
in the workforce (the rest dropped out of it).
But compare its experience to France, for instance.
The LOI ROBIEN prescribes that companies should be spared social security
obligations for 7 years if they agree to put workers on part time work instead
of laying them off. Firms abused the law and restructured themselves at the
government’s expense.
The next initiative was to reduce the working week to 35 hours. This was based
on the “Lump of Labour Fallacy” – the idea that there is a fixed quantity of
work and that reducing the working week from 39 to 35 hours will create more
jobs. In reality, though, labour demand changes only in response to changes in
productivity and in the workings of the labour market itself (rigidities). A cut
in the working week reduces productivity and destroys jobs rather than foster
job formation.
In Spain, a permanent employee fired is entitled to receive up to 45 days’ pay
multiplied by his or her tenure in years. The result is that firms are afraid to
hire or fire workers. The government – faced with more than 22% unemployment –
permitted part time contracts with less job protection. Today, 30% of all
employed Spaniards work this way. Yet, this led to the creation of a two-tiered
workplace where it is easier to fire the part-timer (even if he is valuable)
rather than the permanent (and better earning) worker. Additionally, wages are
thus disconnected from productivity.
