Commission staff working document
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2: LABOUR MARKET REFORMSAs already set out in the previous section of this chapter, in the second half of 2008, the EU economy entered a recession that continued for most of 2009, although in 2010 there were renewed signs of growth. The impacts of this recession have taken a severe toll on the economic well-being of many European citizens over the past two years. In the euro area alone, GDP contracted by 4 % in 2009, unemployment surged, and public debt rose to unprecedented levels. However, the latest figures, relating to the third quarter of 2010, show that GDP has begun to rise again, by 1.9 % in the eurozone and by 2.2 % in the EU27, compared with the third quarter of 2009. European labour markets have reacted to the economic slowdown of 2008 and 2009 with a gradual but steady decline in employment that has yet to come to an end. Around 4 million jobs were lost in Europe in 2009 and the rate of unemployment reached 9.4 % in the last quarter of the year, despite some moderate signals of economic recovery appearing in some countries. The latest figures, relating to November 2010, show that unemployment is still climbing, with a eurozone rate of 10.1 %, compared with 9.9 % in November 2009, and an EU27 rate of 9.6 %, compared with 9.4 % in November 2009. Figure 1.10 below gives details of GDP and employment growth in the EU27 from 1996 to 2009. Figure 1.10: GDP and employment growth 
Source: Commission services. GDP growth is year-on-year growth. During 2008 and 2009, the deterioration of the labour market in the US was accompanied by a drop in the participation rate (the fourth quarter of 2009 was some 2 % lower than the level in the first quarter of 2008). Conversely, a moderate drop in employment was accompanied by an increase in participation in the EU and the euro area. This should be seen as a positive development for the prospects of the recovery, as a fall in participation during the recession can also turn into a persistently low labour supply during the recovery. Unemployment at record high levels for a long period may in fact mean that those without jobs, especially those with a low attachment to the labour market, may give up searching because of their relatively low employment chances. Skills mismatch and unconditional welfare policies can further worsen this discouragement to participating in the labour market, while activation policies and support to workers affected by economic change can encourage people to remain in the labour market and facilitate their transition to new jobs. The first signal of discouragement is a decrease in labour force participation, which usually means a falling unemployment rate in the short run. In the long run, a low participation rate hampers the functioning of the labour market, through shortages of labour supply and higher wage pressures, and can be a bottleneck for economic growth. Avoiding such effects in labour markets is of crucial importance in averting a lasting negative impact on potential output after a crisis. This is why the European Economic Recovery Plan19 (EERP) placed considerable importance on measures to prevent unnecessary labour shedding which would have entailed great losses in human capital and had a lasting negative impact on potential output. The EERP also called for priority to be given to those reforms which can support aggregate demand, employment and/or household income during the crisis, while at the same time improving adjustment capacity to enable a faster recovery when conditions improve. In line with this, in spring 2009 the European Commission issued a number of guiding principles for labour market and social policy action contingent to the crisis,20 including:
By contrast, it stated that measures such as indiscriminate tax-funded support for jobs in declining sectors or regions, which could delay necessary restructuring, large direct job-creation schemes in the public sector not sufficiently targeted at specific vulnerable groups and early retirement or other policies that push workers out of the labour market needed to be avoided. European labour markets have reacted very differently to the crisis in terms of labour turnover. Many countries have recorded on average a low labour turnover. However, while in the Nordic countries, high turnover is associated with efficient labour market activation policies and low hiring and firing restrictions, in France and Spain this appears to be a consequence of a segmented labour market. As a result, one can draw the conclusion that there is a faster labour market response to the first signs of recovery in those countries with more flexible labour market institutions, as they enable better transitions in the labour market.21 Together with changes in the number of jobs, firms have also used changes in working hours as a tool to adjust labour input during the crisis. Labour hoarding is the normal response of firms that prefer to keep their experienced workers during the early stages of a recession, especially if high-skilled workers are difficult to find when the recovery takes hold. By cutting hours, firms can keep their wage costs down and save jobs during difficult periods. In addition, government-sponsored short-time schemes have also been widely used in many EU Member States. These schemes have been reinforced in some countries and introduced for the first time in others (see also section 3 of this chapter, which focuses on short-time working).22 Many countries responded to the impact of the severe economic crisis that hit the EU economy by extending the coverage or generosity of unemployment benefits, by reinforcing other social benefits, and/or by introducing generous short-time work schemes. Measures have also been reinforced to support activation and facilitate transitions to new jobs. Temporary labour market and income support measures amount to 0.4 % and 0.2 % of GDP in 2009 and 2010 respectively — and represent a large share of all temporary measures in 2009 and 2010 respectively. Three main types of measures can be identified:
These measures have played a role in shaping the impact of the crisis on labour market developments in the EU, where, compared to the US, participation rates have in general held up well and unemployment increases have been more muted than could have been expected. Even so, the crisis has clearly shown the underlying structural weaknesses of the European labour markets, which ultimately need to be tackled, irrespective of the prevailing cyclical conditions. Pre-existing long-term challenges (such as ageing, globalisation and technological change) have also remained unchanged, if not intensified by the crisis. Further, the crisis has added two new dimensions to existing challenges. First, with the unemployment rate increasing almost everywhere, the burden of adjustment has been unequally spread across various socio-economic groups. Second, public finances will be extremely constrained in the coming years. Within this new environment, the focus has to be first and foremost on well-targeted policies (for example to activate those with low levels of skills or who are unemployed on a long-term basis) with low or no direct budgetary impact and designed in such a way as to avoid deadweight losses. At the same time, measures that have adverse effects on inter-sectoral mobility, such as short-time working schemes, should be discontinued as the recovery gains strength and replaced by policies that promote job reallocation, thus helping to smooth the impact of restructuring on workers. As the deterioration in economic growth bottoms out and fiscal space diminishes, the emphasis needs to switch from measures aimed at containing labour shedding to measures aimed at returning to a sustained growth path. Careful design and sequencing of exit strategies are also important in order to avoid the risk of policy mistakes that could induce another recession and to ensure that the withdrawal of short-term support is performed efficiently. The ECOFIN Council of 16 March 2010 identified a number of principles to underpin the coordinated withdrawal of short-term measures in labour and product markets,23 which complement existing principles on fiscal exit strategies. As far as the labour market is concerned:
Although effective, the measures enacted in response to the crisis have been in many cases ad hoc. As such, they are more mistake-prone than policies adopted during relatively normal, ie non-crisis, times. Nevertheless, some crisis-related measures that have desirable characteristics could become part of a consistent labour market policy framework to deal with future aggregate demand shocks. For example, a number of Member States (such as Finland, France, Latvia, Italy, Portugal, and Slovenia) have taken steps to improve the coverage of unemployment benefits, some have increased the activation of displaced workers (such as the Czech Republic, Denmark, and the UK) and some have enhanced the effectiveness of public employment services in order to cope with the increased numbers of unemployed people (Germany, Belgium, Finland, Hungary, and the UK). Countries such as the Netherlands, Hungary and Slovenia have introduced short-time working schemes imposing strict conditionality on firms to deal with risks of deadweight losses or to avoid prolonging the moment of inevitable closure of a company. While expenditure on these measures should be reversed as the recovery gains momentum, the institutional infrastructure set up for their implementation should remain, to cope with future cyclical fluctuations. Over a longer time horizon, the flexicurity agenda is an appropriate framework to highlight the importance of labour market reforms in moving towards a better adjustment to shocks. Reforms enhancing the flexibility and security of the labour market and the response of wages to local labour market conditions and productivity developments will increase the resilience of the EU economy to these shocks. Reforms that shift the focus from protection on the job to insurance in the market should reconcile workers’ demands for protection from unemployment and income risks with the need of firms to respond quickly to swings in consumer preferences and to the challenges and instability created by technological progress and globalisation. An integrated strategy based on interventions in employment protection, lifelong learning and activation policies may contribute to improving the adjustment capacity of labour markets and smoothing the employment and social impact of restructuring. Increasing participation, improving labour market matching and enhancing workers’ employability through better skills are needed to minimise the social consequences of the crisis, to preserve European human capital and labour productivity in the long run, and, ultimately, to return to strong growth. As mentioned above, the Europe 2020 strategy24 has identified three broad priorities in this context: smart growth; sustainable growth; and inclusive growth, with two initiatives being particularly relevant for the labour market: an agenda for new skills and new jobs; and ‘Youth on the Move’. The different policies needed to achieve these priorities will need to be sequenced intelligently to ensure the effectiveness and time-consistency of the European reform agenda. As stated by the European Council of 16-17 June 2010, the Europe 2020 strategy responds to: ‘the challenge of reorienting policies away from crisis management towards the introduction of medium-to longer-term reforms that promote growth and employment and ensure the sustainability of public finances. It constitutes a coherent framework for the Union to mobilise all of its resources and policies and for the Member States to take coordinated action.’ With the Europe 2020 strategy, the EU is indeed acting to strengthen its instruments to deliver a successful structural reform agenda in the coming years. The strategy will involve a stronger policy framework at EU level, organised around two strands, addressing on the one side key macro-structural challenges at country level, including macroeconomic and fiscal stability issues, and on the other side a number of thematic policy areas, including labour market policies. The first strand will be implemented in the framework of a reinforced Stability and Growth Pact and through the Broad Economic Policy Guidelines. The second will allow a much more in-depth horizontal assessment of key structural reforms through the National Reform Programmes and Integrated Guidelines. More specifically, macro-structural country surveillance will have a wide scope and be carried out through the use of existing Treaty-based coordination instruments — the Integrated Employment and Broad Economic Policy Guidelines, set up in the framework of the Lisbon Strategy (and through its successor strategy, Europe 2020), and the fiscal surveillance in the framework of the Economic and Monetary Union — that will be aligned in time but kept distinct. Policy coordination on fiscal policy would be conducted through the Stability and Growth Pact, whereas coordination on all other (non-fiscal) macro-structural policies would be carried out in accordance with the Integrated Guidelines and thus cover internal/external imbalances, macro-financial stability, competitiveness, employment and growth weaknesses. The thematic surveillance would focus on structural reforms of a microeconomic nature needed to achieve the goals of the Europe 2020 strategy. The policies pursued under thematic surveillance in the context of the seven flagship initiatives and three EU-level instruments outlined in the Commission’s 3 March 2010 Communication on its Europe 2020 strategy (see above) aim to galvanise actions at national and EU level to achieve measurable progress towards the five headline targets (on employment, research and development and innovation, energy and climate change, education, and social inclusion), which are a representation of the main dimensions and objectives of the strategy. For an overview of the Europe 2020 strategy, see table 1.2 below. Table 1.2: Europe 2020 architecture
Source: Commission Communication Europe 2020 — A strategy for smart, sustainable and inclusive growth, 3 March 2010. The next section of this chapter looks in more detail at a key labour market response to the recent crisis: short-time working. Directory: pub -> ECD ECD -> Commission staff working document ECD -> Table of contents I instruments Error: Reference source not found ECD -> Table of annexes annex I: Glossary 4 ECD -> En commission of the european communities brussels, 12. 12. 2008 com(2008) 853 final annex annex II to VIII ECD -> Report from the commission to the european parliament and the council european community safa programme aggregated information report ECD -> Report from the commission european community safa programme ECD -> Commission of the european communities brussels, 24 2008 ECD -> Commission staff working document ECD -> Communication from the commission to the european parliament, the council, the european economic and social committee and the committee of the regions ECD -> Annex I iccat species Download 1.43 Mb. Share with your friends:
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