The Labour Divide | Page 9

in the last 25 years. Pure system
USA maintained its low rate of 4-5% during the same quarter century.
These opposing moves cannot be attributed to monetary or fiscal
policies. This is because all economic policies are geared towards
increasing employment. Budget cuts, for instance, depress demand and
job formation in the short term but, by lowering real interest rates, they
encourage investment and job formation in the longer term. The cycle
is: Employment protection laws make it hard to fire workers and hard
for fired workers to find new jobs. The longer one is unemployed, the
lesser the chances of employment. Skills rust and the long term
unemployed become the unemployable. Gradually, desperation sets in
and the unemployed stop looking for a job. Their absence is
conspicuous in that they do not restrain the wages paid to the employed.
They have become part of the structural unemployment. Blanchard and

Wolfers studied 20 countries between the years 1960-96. They applied
8 market rigidities to their subjects. The average unemployment
increased by 7.2% in this period. But in countries with strict
employment protection unemployment rose by double the amount in
countries with lax labour legislation. The country with the most
generous unemployment benefits saw its unemployment rate grow by
five times the rate of the stingiest country. And in countries with highly
coordinated wage bargaining, unemployment has grown by four times
its growth in countries with decentralized bargaining. It is difficult to
isolate these parameters from the general decline in productivity, the
increase in real interest rates and technological change and
restructuring. Still, the results are fairly unequivocal. Other research
(the 1994 OECD one year study, the DiTella-MacCullouch study)
seems to support these discoveries: That flexibility is a good thing. It
encourages employment, it leads to higher output and to a higher GDP
per capita. The reason a transition from a rigid to a flexible labour
market does not yield immediate results is that it increases the
participation in the labour force. The rate of unemployment is, thus,
affected only later, it lags the changes. But flexibility leads to lower
rates of unfilled vacancies and to a lower persistence of unemployment
over time. Unemployment in Europe is structural (in Germany it has
been estimated to be as high as 8.9%). It is the cumulative result of
decades of centralized wage bargaining, strict job protection laws, and
over-generous employment benefits. The IMF puts structural
unemployment in Europe at 9%. This is while the USA’s structural rate
is 5-6% and the UK reduced its own from 9% to 6%. The remedies,
though well known, are politically not palatable: flexible wages, highly
mobile labour, flexible fiscal policy. Deregulation makes labour
markets more flexible because it forces the worker to accept almost any
job. Cutting or limiting jobless benefits has largely the same effect.
Employers feel more prone to hire people if they can negotiate their
wages with them directly and on a case-by- case basis and if they can
fire them at will. Hence the debilitating effect of minimum wages and
other wage controls as well as of job protection laws. But all these steps
must be implemented together because of their synergy. Research has
demonstrated the impotence and inefficacy of half hearted half
measures.

Some hesitant steps have been adopted by the governments of Germany
and France (which trimmed jobless benefits), by Italy (which stopped
linking benefits to inflation), by Belgium, Spain and France, which
reduced the minimum wage payable to young people. Spain established
two classes of workers with an increased bargaining power granted to
those with permanent employment. Yet, some measures yielded quite
unexpected and unwanted results. France legislated a reduced working
week. Other countries imposed a freeze on hiring with the aim of
attrition of the workforce through retirement. Yet, these last two
remedies led to an increase in the bargaining power of the remaining
workers and to real wage increases. The only clear causal relationship
is between unemployment benefits and the level of employment. The
lower the unemployment benefits, the more people seek work and
wages decrease. As a result, firms hire more workers. But, firms hire
even more when dismissing workers is made easier and cheaper.
Paradoxically, the easier it is to fire workers, the more workers firms
are willing to take on and the more secure workers feel knowing that
their chances of being hired are better. They look harder for work and
find it, reducing the level of unemployment and the costs to the state of
jobless benefits. Having to spend less on unemployment benefits, the
government can either cut taxes of improve the allocation of its
resources. In both cases the economy improves and provides an added
incentive to work. This is because, in a vigorous growth economy, the
value of an extra worker is higher than