Transcript Two-tier reforms of EPL: a honeymoon effect?

Flexicurity: do they know
how to get there?
Tito Boeri
(Università Bocconi and Fondazione RDB)
ReflecT Conference
Tilburg, January 30, 2009
• Lisbon strategy (2000): “need to improve the
adaptability of workers and enterprises.”
• Integrated Guidelines (2002): “Member States
are asked to promote flexibility combined with
employment security (…).”
• 2006 Spring European Council: “need to
develop comprehensive policy strategies ….
reforming labour market and social policies
under an integrated flexicurity approach.”
• 2007 Recommendations of the Flexicurity Group
• European Parliament deliberations with the
agreement of social partners. Support of the
ETUC. Flexicurity is politically correct.
Will ever come true?
The words of the veteran, Jean-Claude
Juncker:
“Politicians know what they should do, but
they do not know how to be re-elected
after they do the things that they know
they should do”
Do they really know how to do it?
Outline
• Why we need flexicurity.
• Why we are not getting it. Pros and Cons
of two-tier reforms.
• How to complete the reforms: a tenure
track and the wage-productivity link
Why flexicurity?
Every year in a typical OECD country:
• 15 percent of jobs destroyed and about
the same proportion created
• a firm with 100 employees has about
•
30 hirings
•
30 separations
• (higher turn-over in services than in
manufacturing)
Reallocation, growth and security
•
•
•
•
The reallocation of jobs and of workers is
associated with productivity gains (up to 50% of
productivity gains associated with reallocation)
Employment growth is higher in firms with
higher productivity growth
Process of creative destruction described by
Joseph Schumpeter Capitalism, Socialism and
Democracy, 1942
Problem: workers face important risks
How to reconcile reallocation with
protection?
• Two common ways of protecting individuals
against the risks of unemployment:
– unemployment insurance (UI)
– legal restrictions against dismissals (EPL)
• There exists a clear trade-off between the use of
EPL and the use of UI.
• UI is more mobility friendly than EPL
• Flexicurity involves high UI and low EPL.
80
R²=0.76
The tradeoff
60
Dk
40
Nth
Fin
Aut
Bg
Swd
20
Nw Ger
Fra
Sp
Pt
Ita
0
Gre
1
1.5
Job protection
2
Unemployment benefits and job protection in the end of the 90’s
A theory for the Flexicurity Tradeoff
• Value of employment is increasing in UBs
(b) and EPL (F) via Nash bargaining
(r+ δ ) W = b (1- β) + β y + r F+ δ U
• Decline in F must be compensated by
increase in b (or higher productivity, y)
The flexicurity tradeoff
at constant productivity
b
w0
w1
F
Outline
• Why we need flexicurity.
• Why we are not getting it. Pros and Cons
of two-tier reforms.
• How to complete the reforms: tenure track
and wage setting
Reforms of EPL confined to temporary contracts
Dual track strategy
A “political feasibility” thm
• Reform at the margin.
• Leave aside incumbents.
• New comers are not represented in the
political process.
• But is this dualism transitory or persistent?
• Is dual track leading to flexicurity or to
segregation?
15
67
66
14
65
13
64
63
12
62
11
61
10
60
1995
1996
1997
1998
1999
2000
2001
% of employees with temp. contracts
2002
2003
2004
2005
2006
Employment rate EU 15
Employment rate EU15 (%)
% of employees with temporary contracts
The growth of temporary
employment in Europe
A port of entry?…
% of employees with temporary contracts
1
0.9
0.8
0.7
France
Denmark
Netherlands
Italy
Spain
Portugal
0.6
0.5
0.4
0.3
0.2
0.1
0
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19
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25
26
Age
27
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… or a dead end?
Spain
2004
2003
Permanent Contracts
Fixed Term Contracts
Unemployment
Inactivity
Permanent
Contracts
97,2
4,8
2,5
0,4
Fixed Term
Unemployment Inactivity
Contracts
1,1
1,0
0,7
82,6
9,0
3,5
20,1
67,0
10,4
2,4
3,9
93,3
Effects of two-tier systems
• Radical EPL reforms affect both hiring and
separations. Small, if any, effects on
employment/unemployment.
• Transitional dynamics of two-tier reforms is
different: under good times a “buffer stock” of
“temps” is built-up. Under bad times “temps” are
laid-off
• More elasticity of employment to output in both
directions (more jobs created during upturns,
more unemployment inflows during downturns)
• More turnover, accommodated by TEMPs
From jobless growth to
growthless job creation?
3
Spain
2
Ireland
1
Netherlands
Italy
apparent elasticity
in the US
Finland
Greece
Belgium
Portugal
United Kingdom
France
Luxembourg
Denmark
Sweden
0
% yearly change in employment rate
4
1994-2005
Austria
Germany
0
2
4
empl_year
Y1
% yearly
change in real GDP
6
8
Outline
• Why we need flexicurity.
• Why we are not getting it. Pros and Cons
of two-tier reforms.
• How to complete the reforms: a tenure
track and the wage-productivity link
Do two-tier reforms create political
support for radical reforms?
• Changing majorities but ..
• Concentration of labor market risk on the
temps. More insecurity.
• Temps in between employment and
unemployment: low wages, low on the job
training and high insecurity
Timing of the radical reform in
Spain
0.65
0.6
Regular long-term employees
/ active population
0.55
0.5
0.45
0.4
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00
01
But Europeans are unhappy…
Fully satisfied as a % of
respondents
Satisfaction with work or main activity in EU10
18
17
16
15
14
13
12
1994
1995
1996
1997
1998
years
Source: ECHP
1999
2000
2001
…and crisis is bound to make
them even less happy
• Recessions with many temporary
contracts involve larger layoff rates
• Many workers with temporary contracts
are not covered by unemployment
insurance
• And low wages prevent them from getting
insurance in financial markets
• Risk of derailment of reforms
How to complete the transition to
flexicurity?
Difficult to expand UI coverage at low
tenures (moral hazard)
Better to create tenure track to permanent
contracts (no segregation into temporary
contracts).
And decentralised wage bargaining that
rewards productivity rather than simply
tenure
A tenure track
• Open-ended contracts involve a gradual
buildup of protection (e.g. 15 days of
severance every 3 months of tenure)
• Thus employers are not discouraged from
offering opend-ended contracts to new
hires and invest in their training
• Human capital as the best employment
protection
Any change involves wage losses insofar as wage
increases are mostly related to tenure
(unconditional wage-tenure profiles,source ECHP)
600
mean wage
500
400
300
200
100
0
1
2
3
4
5
6
7
8
9
10
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18
19
tenure
Germany
UK
France
Italy
Spain
Sweden
20
Final remarks
• Two-tier reforms as a politically viable strategy to
reform labor markets.
• They temporarily increase the employment
content of growth, but create longstanding
asymmetries and large unemployment infliws
during recessions. Increasing dissatisfaction.
Risk of derailment of reforms
• Segmentation can be reduced by building up
consensus for more radical reforms .. if policymakers know how to do it