Can Europe Make It?

The European social agenda: from flexicurity to flexibility “Tout Court”

European workers are less protected than ever: a song soon considered as the “anthem of a generation” in Portugal asked what was wrong with a world where, “even to become a slave you have to study”. 

Alexandre Afonso
17 December 2013

Before the Eurozone crisis, “flexicurity” was the model to follow for all European countries. For those confronted with sluggish growth and high unemployment, the agenda promoted by European institutions was a combination of flexible labour markets with few restrictions on the ability of employers to hire and fire, an encompassing safety net with generous income support in periods of unemployment, and active labour market policies designed to get jobseekers back into employment through training and upskilling.

These objectives were largely promoted through “soft”, non-constraining tools, such as the Open Method of Coordination and other “mutual learning” mechanisms. It is striking to note that the model that is now promoted – this time with hard financial constraints – by the EU in the countries of southern Europe, particularly those subjected to domestic adjustment programmes, issubstantially different. While the flexibility component has come centre stage, the security dimension has mostly vanished. This change in agenda has had a number of implications for the objectives promoted by the EU, as cost competitiveness is gaining prevalence over innovation and skills.

Even if the actual merits of flexicurity have been somewhat exaggerated, it could at least in theory constitute a coherent agenda to achieve the kind of high-wage, high quality, high innovation economy that the EU was trying to promote in its – now largely obsolete – Lisbon Strategy formulated in 2000. Its general goal was to make Europe “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion". With hindsight, these objectives seem very far away, especially as the austerity and flexibility policies carried out in the south are largely undermining them.

Social protection models are not only a dead weight on innovation and growth, but can also foster these objectives because of the kind of incentives that they provide to individuals and firms. The central tenet of the flexicurity model was that it focused on the protection of workers rather than the protection of jobs. In many countries of southern Europe, the focus had traditionally been the other way around. With weak social protection arrangements in comparison with northern Europe – with the exception of pensions – the burden of protection in southern Europe generally fell on individual firms, through high restrictions on hiring and firing, or high severance pay.

Basically, unable or unwilling to provide a strong public social security net for bad times, many governments preferred to force employers to keep workers in employment instead. In a country with more capital and a better education system like France, this could force employers to make the best out of their employees, leading to higher productivity levels per hour worked than in Germany or Britain, but in Spain, Italy, Greece or Portugal, it tended to lock up firms with an older low-skilled, low productive workforce. Low productivity growth has been a recurring feature of these countries.

An important effect of restrictive employment legislation was that it created a strong “insider-outsider” divide which made it more difficult for young, often more skilled, workers to enter the labour market. Firms were forced to retain their older workforce, and may be reluctant to hire younger workers difficult to fire in times of recession. In southern Europe and in Spain in particular, firms sought to overcome these constraints by the massive expansion of fixed-term contracts, which came to represent a third of all Spanish jobs, and were the first to disappear when the crisis started, besides the collapse of the construction sector. As fixed-term contracts typically lowered incentives for companies to train workers, they hampered productivity as well.

The flexibility component of flexicurity sought to tackle this problem by removing the burden of protection on firms, though a flexibilisation of employment contracts and reduced severance payments. However, this loss in security could be compensated by more protection by the state, through enhanced income support and active labour market policies. There were a number of advantages to this. As workers could rely on this public safety net, they could devote more time to finding better jobs, taking time off to improve their skills or creating their own business.

The safety net acts as “grease” for the labour market. If the safety net is absent or set at very low levels, workers will seek to find jobs as quickly as possible, even below their standard of qualification. Trained physicists stacking shelves may be perceived as proof of character, but they also represent a huge loss of human capital for society. At the same time, the cost of this social security net leads employers to invest in their workers: since they are expensive, they’d better be productive, as the French case demonstrates. Germany, now the poster child of competitiveness, is not competitive because it practices the lowest wages in Europe, but because of the value of goods and services it is able to produce for the money its workers cost, which is a combination of both wages, skills and technology.

The recent reforms backed by European institutions that have been implemented by cash-strapped governments in Portugal, Spain, Italy or Greece essentially remove the employment security element that characterised labour markets in these countries, but without compensating for this with a public safety net. As finance ministries have been calling the tune of reforms, such expensive measures have clearly been ruled out.

The government of Mariano Rajoy introduced a sweeping labour reform in 2012 which provided for lower severance pay and the possibility for firms to opt out of collective labour agreements. In Portugal, constraints on dismissals have been lowered, but instead of compensations in public social security, they have been accompanied by cuts in unemployment benefits and other social security schemes instead. Along similar lines, spending for science and technology has also been cut. As workers become both cheaper and more easily disposable, the most likely competitive option is a low-cost, low-wage, low-skill path, as employers face even lower incentives to invest in them, and young people face lower incentives to invest in skills because of low returns.

In Portugal, there were reports of job ads for architects and engineers for 500 euros a month for a 6-month contract, and the starting salary for a trilingual mechanical engineer could be lower than for a welder or a locksmith. A song soon considered as the “anthem of a generation” in this country asked what was wrong with a world where “even to become a slave you have to study”. In a context of open borders within the EU, many young high-skilled workers are leaving the country instead, because working as a waiter in London is considered a better option than working as an engineer on the minimum wage in Lisbon.

If the goal of this internal devaluation strategy is to make these countries export champions just like Germany, it is difficult to see which kind of goods they could export, drawing on this flexibility-without-security arrangement. It is striking to note that the United Kingdom, a country with both low employment protection and low unemployment replacement rates, has even lower productivity levels than Spain or Italy (and France or Germany), and also runs a chronic trade deficit.

The “flexibility without security” strategy does not seem very hospitable to boosting export competitiveness. Solar energy has sometimes been evoked as a low-end source of growth, but the Spanish government has recently scrapped its plan because it failed to yield quick returns. Building whole economies on low-end tourism does not sound very promising either. It is difficult to see what kind of products these countries could export for a cheaper price than eastern Europe or China. In a recent report, the European Trade Union Institute talked about these countries as the “New China”, as their minimum wages would be lower than the Shenzen coastal region within a period of five years. Even if this comparison may cause outrage, pushing these countries below Chinese wages to make them competitive on price alone seems to be a scarily possible outcome if the current “flexibility without security” reform path continues.

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