Employment Theory and Policy

By Caravale, Giovanni A. | Atlantic Economic Journal, September 1990 | Go to article overview

Employment Theory and Policy


Caravale, Giovanni A., Atlantic Economic Journal


Employment Theory and Policy

I. Introduction

The purpose of this paper is to offer some reflections on the prospects of employment policy in Europe after 1992. This shall be accomplished by briefly discussing two quite different groups of elements. First, the abundant work which has been carried out under the auspices of official European institutions and elsewhere, in order to envisage what will happen after the 300 measures embodied in the 1985 European Commission White Paper will have been enacted by the end of 1992. Second, the picture that emerges in the field of macroeconomic theory, which should constitute the logical basis for the definition of the lines of economic policy, with special reference to the problem of employment.

The conclusion towards which this paper points is that while unemployment will continue to be a major problem for European economies after 1992, the help governments and institutions will be able to draw from macroeconomic theory is, unfortunately, going to be very limited, in consequence of what has been recently termed [Milgate, 1988, p. 65] "the collapse of theoretical consensus."

The upshot of the argument is the emphasis on the responsibility which lies upon the shoulders of everone in the profession to overcome the impasse in which economists risk appearing like blacksmiths at the end of the era of horse transport -- a state of affairs which is strikingly similar to that described by John Maynard Keynes in December 1935, in his Preface to the General Theory [Keynes, 1973, p. XXI]:

"... the deep divergences of opinion between fellow

economists have for the time being almost destroyed

the practical influence of economic theory, and will,

until they are resolved, continue to do so."

II. Employment after 1992: The Cecchini and Bakhoven Reports.

Let me come to the first point -- the prospects for employment after 1992.

The standard reference work for the analyses concerning Europe after 1992 is what is commonly called the Cecchini Report [Cecchini 1988]. Technically speaking, this is not a forecast of what will happen in 1992 with the elimination of non-tariff barriers, but rather an attempt to set out what is the cost of technical, fiscal and physical barriers now in existence (border controls, restrictions on public procurement, differences in the conditions at which financial services are available, lack of standardization, heterogeneous fiscal treatment and so forth).

The logic of the Cecchini Report is equally well known. The evaluation of the benefits of a single European market is made indirectly, through the observation of the discrepancy of prices now existing in the Community. The idea behind this is that in a single market the differences will be eliminated and the system -- except for very special situations -- will spontaneously tend towards the lowest price in the range.

According to the Report, the removal of non-tariff barriers will bring about a cost reduction which, on the whole, will produce higher price-over-cost margins, and lower prices. The decrease in prices will stimulate demand and, therefore, lead to an increase in the production of goods and services. This, in turn, will allow exploitation of comparative advantages and economies of scale. The removal of barriers, on the other hand, will favor new entries in the market and increase the level of competitive pressure, thus stimulating a restructuring of industries through innovations and technical progress.

The benefits will not be limited to the microeconomic level, that is to "the companies and consumers who buy and sell [in the market]"; they [Cecchini 1988, p. XIX] "will [instead] ripple out into the economy at large." "Public deficits will be eased, under the dual impact of open public procurement and the economy's regeneration. Inflation ... will be cooled down by the drop in prices provoked by open markets". …

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