EU must reform labour markets to reduce unemployment

2004

A lack of flexibility in wages, over-indulgent treatment of the unemployed and poor attitudes towards older workers are largely to blame for the "shocking" and "intolerable" levels of unemployment in some parts of Europe.

In a hard-hitting report, Policies for Full Employment, Richard Layard and Stephen Nickell from the Centre for Economic Performance at the London School of Economics argue that there is no such thing as "the European unemployment problem". The fundamental problem, they say, is high unemployment in four of the five large countries (France, Germany, Spain and Italy)

Nevertheless, only two-thirds of people between the ages of 15 and 64 in the 15 European Union Member States are in work, while Europe is at risk of missing its target of 70 per cent employment by 2010 unless changes are made to the employment policies of Member States.

The UK, meanwhile, has already exceeded the overall target for 2010 and also has a lower unemployment rate than the United States.

More people in the UK are in jobs than ever before and for the first time in nearly half a century it has the highest employment and lowest unemployment rates of the major industrialised countries.

Elsewhere in Europe, however, the picture is very different, with unemployment rates in Spain over 11 per cent and France, Germany and Greece over nine per cent.

But, the report argues, changes in labour and employment policies can eliminate long-term unemployment and ensure that all who want work can find it within a reasonable time.

"We believe that the best results can be achieved by concentrating heavily on the two main factors: the treatment of unemployed people, and the flexibility of wages," the report says.

The report, published on the eve of the Spring European Council, argues that helping older people to remain in work and inactive people to return to jobs can play a vital role in raising employment levels.

A central plank of the report’s argument is that a welfare-to-work approach is crucial to reduce benefit dependency. “It should not be possible for a person to continue in unemployment year after year, living on benefit,” the report states unequivocally.

"The state should have the duty to secure offers of work or training for everybody within one year of becoming unemployed. And in return the individual should have the obligation to take advantage of these offers."

"In other words, the right to benefits must be matched by an obligation to get a job if jobs exist. There must be a “test of willingness to work”."

Similar conditions should apply to income support from the state for non-working mothers, the authors argue, with reduced subsidies to inactivity for single mothers, more child-care help and more opportunities to work part-time all key elements in reducing the number of non-working mothers.

Early retirement, age discrimination and the potential ramifications of Europe’s ageing population is another area to fall under the critical microscope. The tide of early retirement should be reversed, it argues, and fiscal subsidies to early retirement and discrimination against older workers need to be removed.

"Individuals and employers should be encouraged to think in terms of a longer working life,” the report says, “Individuals should continually upgrade their skills and vary their work in order to avoid burnout."

"Retirement ages should where appropriate be increased. All fiscal subsidies to early retirement should be phased out, and companies forced to disclose their own costs of early retirement."

Wage flexibility is another issue highlighted. “Much of Europe’s unemployment is concentrated in regions like Southern Italy, Southern Spain and Eastern Germany, while at the same time there is nearly full employment in other parts of the same country – Lombardy, Catalonia or Bavaria. This is a clear sign that relative labour costs are too high in the high unemployment regions."

Britain’s Work and Pensions Secretary, Andrew Smith, welcomed the report as "timely" and urged his counterparts in other EU countries to act on the advice. Whether European governments have the political will to push through such changes, however, is another matter entirely.

A full copy of the report is available here

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