Academic journal article Contemporary Economic Policy

Implications of Liberalized European Labor Markets

Academic journal article Contemporary Economic Policy

Implications of Liberalized European Labor Markets

Article excerpt


The recent collapse of the European Exchange Rate mechanism has led to great uncertainty regarding the future shape of European union. If and when the process of integration resumes, the structure and conduits of labour markets will become increasingly important - in particular regarding the harmonisation of inflation, which is the necessary prerequisite before national currencies are irrevocably locked through monetary union. With a single currency, member states will be forgoing two of the major instruments of macroeconomic control, namely exchange rate flexibility and monetary policy. Indeed, these policies previously gave governments flexibility, albeit at the expense of inflation. The requisite coordination implied by European union will result in regional labour cost surges impacting far more rapidly on unemployment than before, with benefits accruing to those regions best able to ensure low inflation and high productivity growth. European labour markets thus face the dual problem of controlling nominal wage growth while ensuring sufficient productivity growth to permit some real wage growth and above average pay settlements. In tackling these, a number of policy options have been aired. Dichotomising the policy advocates into two broad camps helps to clarify the various issues. Such characterisations are a useful expositional device although, in reality, they fit only the actors at the policy extremes.

On the one hand, a Euro-liberalist camp argues for deregulated labour markets with unilateral employer decision making the norm. On the other hand, Euro-regulators advocate a Pan-European system of labour market regulation focusing on developing co-operation and consensus.

This paper reviews the alternative camps and concludes in favour of the latter as the preferred method of convergence, with the proviso that it is a Pan-European system of labour market objectives, rather than institutions, that is "regulated."


Labour market regulation has been a recurrent theme in the move towards European integration. The Treaty of Rome (1957) itself emphasised the improvement of living and working conditions within member states. The early years of the European Community (EC) witnessed several tentative steps towards implementing these provisions in areas such as workers' freedom of movement, eliminating racial and sexual discrimination, and setting safety and hygiene standards. Nevertheless, by the end of the 1960s, social consideration remained a relatively minor influence on EC policymaking.

Mounting criticism of the EC's laissezfaire approach to social issues led in 1974 to adoption of the first "Social Action Programme" (SAP), which was intended to raise employment and improve EC workers' living/working conditions. To these ends employee participation at company level and employer/employee participation at EC policymaking level were encouraged.

Despite further advances over the ensuing years, many critics believed that the pace of reform on the social front remained woefully slow and that labour market implications of the move towards a single market deserved far more attention.

The apparent indifference of the ECs legislators to the social aspects of European integration was largely remedied in December 1989 when the EC countries' heads of state (with the exception of the United Kingdom's) gave a non-statutory "solemn declaration" of support to a set of principles that the EC had approved at the preceding Maastricht agreement (May 1989). These principles, known as the "Community Charter of the Fundamental Rights of Workers" or more briefly as the "Social Charter" (SC), reflected the prevailing EC view that the success of European integration would depend crucially on constituent firms' and workers' support.

The SC was intended to provide the framework for the leveling employment conditions across the community, reflecting the widespread concern that disparities in social security and labour protection would distort competition and lead to excessive "social dumping" with companies being tempted to shift to lower cost regions. …

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