mar 9 2004 lesson 10 by john kennes international monetary economics
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Mar 9 2004
Lesson 10
By
John Kennes
International Monetary Economics
Mar 9 2004
EMU and Labor Markets
Mar 9 2004
• Financial markets match lenders and borrowers – the operation of these markets is improved by
transparency created by euro– Creation of international intermediaries
• Labor markets match workers and jobs– The operation of these markets is is improved by
transparency created by euro– Creation of international intermediaries
Labor Markets (1)
Mar 9 2004
• The Mundell OCA criteria is that labor markets are better integrated– The existence of the euro pushes this agenda– Controversy:
• Is there a tradeoff between labor market integration and the welfare state?
Labor Markets (2)
Mar 9 2004
• A subsitute for labor mobility is labor market flexibility
• How does Europe do on this front?
Labor Markets (3)
Mar 9 2004
Dismal Labor Market Performance
Unemployment rate (%)
0
2
4
6
8
10
12
1970 1974 1978 1982 1986 1990 1994 1998 2002
EU Euro area USA
Mar 9 2004
Beware of Averages!
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
BIG 4 UK SMALL 8 US
1969 1985 2003
Mar 9 2004
• Not just the unemployment rate– Low rates of labour participation– Youth unemployment– Duration of unemployment spells
• General Picture– Many people do not hold jbs– People can remain unemployed for years running– Problem deeper in larger countries, with recent
improvements in the UK and smaller countries
Many other indicators of trouble
Mar 9 2004
• General assessment is that labor markets are rigid in most of Europe
• A simple illustration: real wage stickiness.
Why?
Mar 9 2004
Labor Market Adjustment to an Adverse Shock
Mar 9 2004
• Real wage rigidity just one example• Other features include:
– Restrictions on hiring and firing– Restrictions on hours worked– Minimum wages– High unemployment benefits as disincentives to
search for jobs
More generally
Mar 9 2004
• These features have been introduced to fight labour market imperfections and/or meet social objectives – economic justice
• They make labor market rigid but serve other purposes
• No universal response to this conflict
A Deep Conflict
Mar 9 2004
A Few Examples(more details later)
Market failure Standard solution Economic cost
Dominant power of employers
Minimum wages, labor protection laws, mandatory negotiations
Reduces competition on the labor market
Information asymmetry: no good knowledge of worker skill’s and efforts at work
Collective wage negotiations
Reduces competition on the labor market
Workers are vulnerable to job uncertainty
Mandatory health and unemployment insurance, retirement benfits
Raises labor costs and reduces demand for labor
Mar 9 2004
• Deepening integration excerbates competition• Firms compete by reacting quickly and
forcefully to opportunities or shocks• Inflexible labor markets reduce the ability of
firms to react• Indirectly, social systems compete against
each other• The delicate balance achieved in each country
becomes challenged.
What is the link with Monetary Integration?
Mar 9 2004
• Existing institutions differ from country to country
• They are the outcome of a long, and often conflictual, history
• A look at the most important ones illustrates the challenges posed by monetary integration.
Labor Market Institutions
Mar 9 2004
• General assessment is that labor markets are rigid in most of Europe
• A simple illustration: real wage stickiness.
More generally
Mar 9 2004
• Social Objective: protect workers from employers’ excessive powers
• Economic impact: an illustration.
Collective Negotiations
Mar 9 2004
Collective Negotiations
Mar 9 2004
• Social Objective: protect workers from employers’ excessive powers
• Economic impact: an illustration.
Collective Negotiations
Mar 9 2004
• Social Objective: protect workers from employers’ excessive powers
• Economic impact: Involuntary unemployment• The role of the degree of centralization:
– Plant level: induces some wage restraint– National level: induces some wage restraint– Branch level: less restraint
Collective Negotiations
Mar 9 2004
Bargaining Coordination and Employment
Mar 9 2004
• Social Objective: protect workers from employers’ excessive powers
• Economic impact: Involuntary unemployment• The role of the degree of centralization• The monetary union impact
– One big market: current degree of coordination in collective negotiations decline
– One central bank: more wage discipline
• Will trade unions respond by organising at the EU level
Collective Negotiations
Mar 9 2004
• Social Objective– Protect the weakest– Reduce inequality
• Economic impact: unemployment of the least skilled
Minimum Wage Legislation
Mar 9 2004
Unemployment in France by Age Group(% of group labor force)
Mar 9 2004
• Social Objective– Protect the weakest– Reduce inequality
• Economic impact: unemployment of the least skilled
• The monetary union impact– Enhances competition favours low cost countries– Accession of CEECs will sharpen this aspect– Trade unions fear social dumping and call for
harmonization of social reforms
Minimum Wage Legislation
Mar 9 2004
• Social Objective: protect the wokers from a major risk
• Economic impact– Paid out of labor taxes: raises labor costs– Generous benfits reduce incentives to search for
jobs– Overall, less employment and more unemployment.
Unemployment Insurance
Mar 9 2004
• Social Objective: protect the wokers from a major risk
• Economic impact: more unemployment• The monetary union impact
– Asymmetric shocks create temporary unemployment
– Generous insurance may prolong adjustment– Pressure to reduce generosity, mainly duration of
benefits. Trade unions fear social dumping
Unemployment Insurance
Mar 9 2004
• Social Objective: protect workers from employers’ arbitrariness
• Economic Impact:– Reduce firing during downturns– Limits hirings during expansions– Overall no lasting effect on unemployment, but
reduces firms ability to deal with adverse shocks.
Employment Protection Legislation
Mar 9 2004
• Social Objective: protect workers from employers’ arbitrariness
• Economic Impact: no effect on unemployment but reduces firms’ flexibility.
• The integration and monetary union impact– Harder to deal with adverse schocks– Pressure to reduce strictness of legislation. Trade
unions fear social dumping.
Employment Protection Legislation
Mar 9 2004
Strictness of Protection Against Dismissals
Mar 9 2004
• Social Objective: solidarity among workers in financing unemployment, health, retirement
• Economic impact: raise cost of labor, or reduces wages, or both.
Payroll Taxes
Mar 9 2004
• Social Objective: solidarity among workers in financing unemployment, health, retirement
• Economic impact: raise cost of labor, or reduces wages, or both.
• The monetary union impact– Enhanced competition favours low cost countries– Incentives to either reduce welfare payments or
raise taxes. Politically difficult.
Payroll Taxes
Mar 9 2004
• Deeper integration desirable because it enhances competition on the goods markets
• More competition raises the economic costs of many labor market institutions
• A sharpening of the conflict between economic effectivessness and social objectives.
• Existing arrangements are threatened
How to Respond to deeper Integration?
Mar 9 2004
1. Two-speed Europe2. Deep reforms3. Social Harmonisation
Three Possible Evolutions
Mar 9 2004
• Two-speed Europe• Some countries flex their labor markets others
retain their highly social existing arrangements
• Firms and risk-taking individuals move to most flexible countries
• Welfare conscious are attracted by welfare magnet countries
• Part of Europe grows fast with low unemployment, another part grows slowly with permanently high unemployment
Possible Evolution No. 1
Mar 9 2004
Two-speed Europe: Already There?
Average annual rowth rates 1995-2003
0
0.5
1
1.5
2
2.5
3
3.5
4
Big Three UK USA CEEC Three Small Nine
Mar 9 2004
• Deep reforms• Thatcher takes over Europe• Labour market institutions made more flexible• Labour axes reduced
Possible Evolution No. 2
Mar 9 2004
• Social harmonization– The large countries export their welfare systems
through social norms applicable to all EU countries
Possible Evolution No. 3
Mar 9 2004
• There is no obvious better way, just different socio-economic equilibria
• A somewhat arbitray typology:– The continental model– The Nordic model– The Anglo-Saxon model– The Southern European model– And the evolving accessing countries
In the End
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