Supplementary memorandum by Professor
J R Shackleton
These comments are intended to amplify some
of the points made in my oral evidence.
EMPLOYMENT PROTECTION
1. Employment protection is one of the central
issues of this Green Paper. Legislation to limit the freedom of
employers to dismiss workers is found throughout the European
Union. It varies considerably, however. In the UK and Denmark
restrictions on firing workers, though not negligible, are still
fairly limited. But in many EU countries, such as France, Italy
and Spain, restrictions are extensive. Permission may have to
be sought from labour courts to make people redundant, costly
compensation has to be paid, and redundancies are made on the
basis of social criteria such as family responsibilities rather
than economic factors.
2. Although this type of job protection
has an obvious appeal to employees, its wider economic effects
can be damaging. It has long been argued that, although employment
protection legislation may have the effect of reducing dismissals
in cyclical downturns, it will also tend to deter employers from
taking on workers in the early stages of recovery. This will in
turn tend to lengthen the duration of unemployment for those who
lose their jobs, or are entering or returning to the labour market.
3. This theoretical argument has been buttressed
recently by evidence that has come forward at both macro- and
micro-economic levels to suggest that tight employment protection
legislation can be damaging and divisive.
4. The World Bank has devised various indices
of employment regulation based on an examination of legal restrictions
and financial costs. Cross-country analyses indicate that overall
employment tends to be lower where employment protection is greater.1
Similarly, higher degrees of employment protection are associated
with higher unemployment of women and young people, with a greater
reliance on temporary and other forms of "atypical"
employment, and a larger proportion of activity in the informal
or "black" economy.
5. These aggregate analyses can be backed
up with microeconomic evidence. For example, matched plant studies
show that young people and those without much work experience
are less likely to be employed in French plants than in equivalent
plants in the UK.2 Comparative analysis of manufacturing industries
shows that strong employment protection laws reduce growth in
sectors such as fashion clothing, footwear and textiles where
demand is volatile.3 And examination of individuals' transition
rates from unemployment to employment and from temporary to permanent
employment are higher in the UK, with only limited employment
protection, than in most EU countries.
6. All this supports the European Commission's
view that greater flexibility in the job market is important in
reducing unemployment and the segmentation of the workforce into
"insiders" and "outsiders".
THE DANISH
"FLEXICURITY" MODEL
7. However the dominant view in Europe is
that an "Anglo-Saxon" solution, where employment regulation
is reduced to British/American/Australian levels is unacceptable.
Instead the current favourite model amongst EU policy-makers is
the "flexicurity" approach. Although elements of this
model apply in other countries, notably the Netherlands, most
attention has focused on Denmark.
8. The Danish model involves (a) limited
job protection, with very few restrictions on hiring and firing
(b) high levels of social security payments for those out of work
(c) active labour market policy, with stringent conditions about
job search and retraining for those receiving benefits.
9. The attraction of this model to continental
Europeans is that Denmark's set-up seems to generate similar low
levels of unemployment (around 5 per cent), and high levels of
employment of women (70 per cent) and younger people (60 per cent),
as the UK—but with less inequality and fewer people in poverty.
10. However there are caveats to be attached
to the Danish model. First, it is very expensive. Denmark is a
high-tax economy and spends about 4.5 per cent of its Gross Domestic
Product on labour market programmes (compared with less than 1
per cent of GDP in the UK).
11. Second, the Danish policy is not a soft
option. It is the tough benefit conditions, introduced after 1993
reforms, which make the system work: prior to these reforms unemployment
was high in Denmark.
12. There are also doubts about the transferability
or the Danish model. In Denmark unions (covering even today about
75 per cent of the workforce) have historically been moderate
and pursued social consensus. There has never been a tradition
of strong employment protection laws, as they were felt not to
be needed in this environment. Clearly in countries like France,
Germany and Italy there have been very different traditions and
it is difficult to see an easy transition to Danish-style policies.
13. More controversially, it has been suggested
that the "flexicurity" model is only sustainable in
countries with a high degree of public-spiritedness. Survey data
suggest that the Danes are very much opposed to welfare cheating,
while people in countries such as France and Greece are a great
deal more permissive4.
THE DANGERS
OF THE
GREEN PAPER
14. The Green Paper is important in identifying
issues about the role of labour law in affecting economic performance.
However it does present some dangers.
15. For one, it is not clear that action
at the European level, and a common approach, are what is needed.
The problems of high unemployment, low growth and labour market
segmentation found in countries such as France and Italy need
changes to their own national systems. Some countries with
similar problems (for example Spain and Germany) have already
taken steps to reform their employment protection laws. But why
should we make changes in British law to reach a common system?
The process of doing so is likely to be time-consuming and expensive.
16. Moreover a common approach to labour
law across the EU runs the risk, as a result of the inevitable
horse-trading which accompanies all European harmonisation processes,
of successful economies such as the UK having to import some of
the problems of our European neighbours. There is considerable
suspicion that the UK's generally liberal economic policies are
a form of "unfair competition". For example there is
considerable opposition to UK(and US)-style takeovers of firms,
which can lead to redundancies, and it is plausible to imagine
some countries insisting on Britain restricting the grounds on
which such redundancies can be made as a quid pro quo for
their relaxing other aspects of employment protection.
17. Another issue is that the Green Paper
continues to see the "social partners" as a key element
in reform, when arguably they constitute a large part of the problem.
In many parts of the EU, organised labour and employers' associations
act as a highly conservative force. The unions restrict competition
in labour markets, while industry and other producer associations
discourage product market liberalisation, particularly in services.
18. Unions are losing membership throughout
the EU, and under-represent those "outsiders" (for example
younger workers, women returners, immigrants) who are losing out
in the labour market. Union strength is disproportionately in
the public sector, where they resist change and act as a powerful
lobby group for expanded state spending. Similarly industrial
and other employers' associations represent the interests of large
rather than small businesses, and those in traditional industries
rather than new ones.
19. In the UK, the unions do not have the
sort of veto powers which they often exercise in France, for example
(despite the French unionisation rate now having fallen below
10 per cent, less than that of the USA). If the adoption of harmonised
European labour laws involved extending union power in the UK,
this would not be something to be undertaken lightly.
March 2007
REFERENCES
1. Botero, J, S Djankov, R LaPorta, F Lopez-de-Silanes
and A Shleifer "The Regulation of Labor" Quarterly Journal
of Economics November 2004.
2. Siebert, W S "Labour market regulation:
some comparative lessons" Economic Affairs September 2005.
3. Micco, A and C Pages Economic Effects
of Employment Protection: Evidence from International Industry-level
Data World Bank October 2006.
4. Algan, Y and P Cahuc "Civic attitudes
and the Design of Labour Market Institutions: which countries
can implement the Danish flexicurity model?" http:/www.columbia.edu/cu/alliance/documents/Homepage/Paper-Cahuc.pdf
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