Thursday, 10 May 2012

Modern Titanics (6) - Rigidity of the labour markets

This is a typical case of unintended consequences.

In the boom period following the end of the WW II but before globalisation, trade unions had substantial power in negotiations with public and private sector employers.   Obviously they used this power to clinch substantial job protection for their members.

In some countries in Europe this protection is so embedded that it is almost impossible for employers to fire anyone except for grave disciplinary reasons, and where it is possible to fire employees it is in any case very expensive due to compensation payments compulsorily due by law.

What works in a closed economy does not necessarily work in a globalised economy.    Countries like Spain, Greece, Italy and France with large public sectors and very rigid labour laws, started losing their international competitiveness as employers could not adjust their workforce to reflect the economic cycle.

The result is that in countries where labour laws are very rigid, employers became very cautious of taking on new employees and all sort of strange devices where used to engage labour outside the normal employer/employee relationship.   These range from illegal undeclared employment, contract fixed term contracts, consultancy contracts, service provider contracts, part-time employment and similar unsatisfactory arrangements.

The result is that the employment situation is worse in those countries with the most rigid labour market.   What was meant to defend people in employment has evolved into a barrier to keep people out of employment.    In fact there has developed a generational conflict.   The older generation already in employment continues to enjoy their long held protection while the younger generation with better skills and education remains blocked out of the labour market.   In all European countries unemployment among the younger generation is much higher than the average national unemployment rates.  Often it is twice the average.

This is a modern Titanic which unless addressed will lead to generational conflicts and lost generations.  It leads to tremendous waste of resources as the state provides expensive education to younger generations who then cannot use their skills in the labour market to sustain economic development.

So what's the solution?   Should Europe adopt US style flexible hire and fire labour codes to render their economies competitive and capable of creating job opportunities for the younger generation?

The experience of Scandinavian countries and of Germany shows that there are other models apart from the law of the jungle as in the US that can deliver the bacon without throwing away all social conquests made by unions and employees.   What is needed is a re balancing.

Employers have to have the flexibility to temporarily or permanently reduce their workforce to remain competitive at all stages of the economic cycle.   The maintenance of international competitiveness is a must if a country is to provide fair employment opportunities to its youth.    But this does not have to mean that redundant employees  be thrown on the dole with all its social consequences.

What it means is that the state has to take responsibility for providing its work force with life long learning opportunities so that employees can protect their employability through multi-skilling.     There must not be involuntary unemployment.   Any involuntary unemployed must be attached to a training programme to render the employee employable through acquisition of skills that are in demand in the labour market.

Education, even life long education, is the best investment that countries can make in their economic development and often it is self financing through economic growth and saving on social unemployment benefits.

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