Academic journal article The European Journal of Comparative Economics

Flexible Labour, Flexible Production and Innovation-by-Agreement: International Comparisons Contesting the Lindbeck-Snower Insider-Outsider Thesis and 'Structural Reforms' in the European Union

Academic journal article The European Journal of Comparative Economics

Flexible Labour, Flexible Production and Innovation-by-Agreement: International Comparisons Contesting the Lindbeck-Snower Insider-Outsider Thesis and 'Structural Reforms' in the European Union

Article excerpt

Introduction

Since the onset of the financial crisis of 2007-08, 'structural reforms' to achieve more flexible labour markets have been demanded by the 'Troikas' of the IMF, the European Central Bank and the European Commission of weaker and mainly peripheral EU member states. This paper submits that the case for them is unfounded. It does so first by citing rethinking by the IMF in a study that finds no link between employment protection and inefficiency. Also a questioning of structural reforms by Benoit Creure, a member of the executive board of the ECB.

It then critiques the insider-outsider theory forwarded by former Nobel economics committee member Assar Lindbeck and the British economist Denis Snower on the grounds that their flexible labour market case, though influencing claims for structural reforms, was entirely theoretical, with no supporting evidence. It contrasts this with the flexible production model in Japan, where failures in flexible labour markets in the early 20th century gave rise to lifetime employment for core workers, and illustrates how this enabled the kaizen of continuous improvement and achievement of some of the most competitive companies in the world. It relates this to western theories of psychological contract and social contract and. demonstrates that recommendation of this flexible production model, with the principle of work-life balance, was made to and endorsed by the European Council in the Lisbon Agenda 2000. It also summarises some implications in relation to feasible policies to recover employment in Europe.

1. Deflation, Flexible Labour Markets and Structural Reforms,

Flexibilisation of labour markets has been integral to the case for 'structural reforms' which have been demanded of several EU member states since the onset of the financial crisis of 2007-08. Such reforms assume that increased economic efficiency, and innovation, depend on a reduction of social protection of labour. If business did not need to engage employees on the basis of long-term contracts, or any contracts, and could fire them easily, then new and innovative firms would be able to attract the new workers they need to expand their business (Janssen, 2015).

Yet recent research by the IMF has found there is no evidence that deregulation of labour markets increases economic efficiency. This is highlit in a text box in the IMF's World Economic Outlook of April 2015 recognising that productivity in terms of output per worker can be increased by using more highly skilled labour and information and communications technology, and by investing more in research and development. But, in a survey of OECD countries, does not find any statistically significant negative effects on productivity, and thus economic efficiency that result from defence of employee rights through protective labour market legislation (IMF, 2015a).

In addition, in November 2015, an IMF Staff Discussion Note published findings that 'beggar-thy-neighbour' wages policy through 'structural reforms' was not a condition for recovery through increased competitiveness but was deflationary (IMF, 2015b). Unlike the 'crowding out' hypothesis of Milton Friedman, the IMF also has found that there is no evidence that public spending drains rather than sustains the private sector (Abiad, Furceri and Topalova, 2015). In effect, EU 'structural reforms' are not working at a macroeconomic level. Rather they are imposing massive social and political costs in terms of high levels of unemployment which is encouraging political extremism (Holland, 2015b).

In parallel, in statements in 2014 and 2015, Benoit Creure, French Member of the Executive Committee of the ECB, questioned the case for structural reforms and the obsession with competitiveness at the cost of demand. As he put it

'I want to stress that we need to enhance our understanding of the supply side so we can better appreciate its interactions with demand. …

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