Blog Post

Bonne et mauvaise flexibilités

Jean Pisani-Ferry believes that the crisis is posing the question of labour-market flexibility in a new light. In the past, the key was to encourage reallocation of jobs between sectors and companies and to ensure a gradual return to full employment. Now, it is a question of absorbing a violent shock while minimising the immediate […]

By: Date: June 28, 2009 Topic: Global Economics & Governance

Jean Pisani-Ferry believes that the crisis is posing the question of labour-market flexibility in a new light. In the past, the key was to encourage reallocation of jobs between sectors and companies and to ensure a gradual return to full employment. Now, it is a question of absorbing a violent shock while minimising the immediate social costs and the long-term economic costs. In both cases, some social models will be seen to be more equitable or more effective than others.

One of the striking features of the current crisis is the extent to which companies have reacted in step with each other. World wide they are responding at the same time to the same information, and indicators show perfectly parallel expectations.
Except on one point – employment. In the space of a year the unemployment rate has climbed eight points in Spain and six points in Ireland but has remained practically unchanged in Germany and the Netherlands, and has only risen by one‐and‐a‐half points in France.
In part these differences of course reflect the uneven severity of the recession – even if developments have been simultaneous, the degree to which growth has gone into reverse varies from one country to another. But this explanation does not apply either to Germany or to Spain. Germany is at the same time one of the countries which has seen the steepest plunge in output and where the labour market has suffered the least.
And in spite of the property crisis, Spain is not among the countries with the biggest drop in GDP.
The key to this paradox lies in the way employment markets have adjusted. Spain is the world champion of fixed‐term contracts. Following the Franco era, which had witnessed the introduction of legislation highly protective of workers, the labour market was made more flexible at the margin through the creation of fixedterm contracts, which today make up one third of all labour contracts (as against less than 5% in the US).
More than anywhere else, such contracts have become an established way of life in Spain. Though not equitable, this situation was tolerable as long as the boom lasted. But as soon as the cycle flipped, businesses put a stop to temporary contracts and unemployment leapt.
On the other hand Germany has since last autumn been making huge use of Kurzarbeit, or short‐time working, which provides leeway to adjust annual working time downwards. The company cuts monthly wages in accordance with hours worked and the government makes up two thirds of the loss incurred by the worker.
This form of adjustment is often part of German collective bargaining agreements, and has been given a push by the stimulus plan.
So both economies are flexible in the sense that companies are adjusting their employment levels and reducing their costs, but they are going about it in very different ways. Spain is putting the burden of adjustment on young people and the less qualified, whereas Germany is relying on flexible working hours and spreading the social cost of reducing them.
There are limits to contrasting the two models. In Spain, the construction sector will not recover for a long time and preserving jobs there would be pointless. And in Germany, while a temporary reduction in working time will cushion the shock for a few quarters, it is clear that unemployment is now set to rise considerably.
But even if the contrast will appear less stark, it will not disappear.
These collective choices are not only to be distinguished by their social impact. They also risk having different economic effects. The priority for employment policy in the immediate future will be to ensure that the unemployment triggered by the crisis does not lead to a permanent loss of a part of the labour force. The danger is great, as it was precisely this which happened in Europe with the early retirers in the 1980s, and also in most countries which have suffered serious financial crises. Even if they do not retire, workers spending a lengthy period away from the jobs market lose their skills and their motivation, and can only subsequently be employed at considerable cost. The OECD has thus estimated that even after the immediate employment effects have been absorbed, the crisis might entail a rise in so‐called structural unemployment of one‐and‐a‐half points in the euro area. Significantly, it expects this increase to be much bigger in Spain (more than two‐and‐a‐half points) than in Germany (half of one point).
The crisis is therefore posing the question of labour‐market flexibility in a new light. In the past, the key was to encourage reallocation of jobs between sectors and companies and to ensure a gradual return to full employment. Now, it is a question of absorbing a violent shock while minimising the immediate social costs and the long‐term economic costs. In both cases, some social models will be seen to be more equitable or more effective than others.

This op-ed was published in Le Monde, Kathimerini, El Pais, Corriere della Sera and Handelsblatt.


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