Christopher Pissarides Presentation - Estoril Conferences 2013

C A Pissarides - London School of Economics 2013

A Growth and Employment

Agenda for Europe

Christopher A Pissarides

London School of Economics

Estoril Conferences

Cascais, April 30 – May 3, 2013

1


Europe and the debt crisis

2


Single market and beyond

• The single market in Europe has been good for jobs and

growth

• Trade expanded, the poorer countries caught up and

internal migration removed bottlenecks

• It is essential to complete the single market in services

because this is where Europe’s future lies

3


Deindustrialisation

• Employment is declining in industry, even in Germany

• Barriers have to be removed in services and output

markets to increase competitiveness and job creation

• The future of growth is in a few hi-tech sectors driving

the rest of the economy up

• The future is also in large numbers of job creation in

labour-intensive services to spread the benefits from

growth

4


The debt crisis

• The single currency was a great idea as the next step in

European integration

• But it back-fired. It is holding back growth and job creation

• Present situation very unsatisfactory: it should either be

dismantled or the leading countries should do the necessary

as fast as possible to make it growth- and employment-

friendly

• Monetary and fiscal union!

5


Eurozone and the crisis

• Continuing as at present, plodding along with haphazard decision making, inconsistent debt-relief policies, policy pronouncements pushed forward only to be withdrawn when markets don’t like it, and fiscal austerity to cap it all up will get us nowhere

• The rest of the world is coming out of crisis and taking on new challenges

• Europe is looking backwards and watching powerless the rising unemployment

6


Unemployment in advanced

countries, 2012

(Eurozone in red)

0

5

10

15

20

25

30

NO

RK

OR

SW

IA

UT

JA

PLU

XN

ET

ME

XA

US

GE

RIC

EC

HI

CZ

EN

EZ

ISR

BE

LC

AN

SW

EF

IND

EN

TU

RU

KU

SA

SLV

FR

AP

OL

EU

ITA

ES

TE

UR

OH

UN

SLK

IRE

PO

RC

YP

GR

ES

PA

7


Coming out of crisis

• As the European Union is coming out of the debt crisis it

needs to prepare for a job-rich growth that will increase

productivity and bring back the unemployed into jobs

• To satisfy the Europe 2020 objectives it needs to

increase at the same time the job opportunities for those

outside the labour force.

8


Infrastructure

• After years of austerity and structural reform Europe

needs new infrastructure programmes

• These should be coordinated at EU level, and be outside

the recurrent budget

• It needs to set up institutions to monitor competitiveness

and evaluate infrastructure needs to achieve it

• The needs are different in each country – tourist

projects, transport, telecommunications?

9


New institutions

• A Fiscal Policy Council is needed to monitor the fiscal

budgets in the Eurozone

• A Growth and Competitiveness Council is needed to

evaluate the reforms needed to increase growth and

competitiveness

• Approve spending that is outside the budget balance

10


Labour market flexibility

• The labour market needs to be more flexible, especially in the southern countries

• Flexibility means more freedom of employers to run their business without too much regulation

• Minimum wages that are at the appropriate level to encourage labour supply but not discourage job creation

• Best job security is provided by a labour market that creates and destroys many jobs to take advantage of new opportunities, supporting large labour turnover rates

11


Income security

• Income security for those between jobs is supported by

the government

• It runs programmes that take over from passive support

after 6-12 months

12


Structural reform

• Many countries, especially in the south, still lack a flexible labour market

• Recent reforms associated with the debt reduction programmes are in the right direction but they are taking time to have a positive impact and they need the cooperation of all social partners.

• Structural reform takes at least 3 years to have an impact, even with full cooperation

• Thatcher’s Britain, Schroeder’s Germany, Netherlands in the 1990s, Spain and Greece currently

13


Austerity and reform

• Austerity has an immediate impact on the economy

• Its large negative effects undermine the reform

programme and make it more difficult to reach the

longer-term objectives

• Timing of austerity and reform is not conducive to quick

recovery and growth

14


What kind of labour market?

15


A dynamic labour market

A well-functioning dynamic labour market needs to deal

with three challenges

– Create conditions for fast productivity growth

– Adapt to structural change with new types of jobs

– Mitigate the impact of recession on (un)employment

16


Productivity growth

• The conditions for fast productivity growth and

adaptation to structural change often coincide

• A lot of productivity growth comes from the creation of

new jobs in new sectors of economic activity, like ICT

• The Lisbon and Europe 2020 strategies emphasise this

aspect

17


Recession and productivity

• Achieving the third objective (reducing the impact of

recession on employment) often entails a fall in

productivity

• But this fall is temporary; reducing the impact of

recession on employment is usually good for future

productivity growth because of negative factors

associated with long-term unemployment

• A lot of emphasis on this in Towards a Job Rich

Recovery

18


Jobless and job rich recoveries

• With jobless recoveries the response of employment to GDP rise is delayed. The initial gains in GDP are due to productivity gains

• With job-rich growth GDP expands through employment gains and productivity initially falls

• Need to be careful not to rely too much on job-rich recoveries for sustained output growth; good only as an anti-recession policy

• Contrast Germany and the United States

19


Germany and United States:

contrast jobless and job rich recovery

GDP (index)

92

94

96

98

100

102

104

2007 2008 2009 2010 2011

Germany USA

Employment rate

63

64

65

66

67

68

69

70

71

72

73

2007 2008 2009 2010 2011

Germany USA

20


Germany and United States

Worker productivity

92

94

96

98

100

102

104

106

108

2007 2008 2009 2010 2011

Germany USA

Hourly productivity

92

94

96

98

100

102

104

106

108

2007 2008 2009 2010 2011

Germany USA

21


Evidence that flexibility helps in job

rich recovery

• A lot that is good in German labour markets in this recession can be attributed to the reforms of 2002-05 which created a more employer-friendly environment

• The British labour market is coping better in this recession than in the 1979-81 one, because it is now more flexible

• Spain is badly off because its labour market is rigid (at least, was rigid when it entered recession).

• US is not doing as well this time because of new supply-side rigidities; extension of passive support measures and fall in labour mobility

22


Is flexibility enough?

• In addition, labour markets need policy support: the

depth and duration of current recession will lead to long-

term unemployment

• Experience with the recession of the 1980s and long-

term unemployment shows that some work in recession

is better than no work, even if productivity suffers

• Without additional support Europe will miss out in

productivity gains associated with structural change and

competitiveness will fall

23


Supply or demand policies?

• Both help but once flexibility is achieved, demand

policies (addressed to job creation incentives) help more

in recession

• Subsidies for: job creation, especially for disadvantaged

groups; wages; short time; start-ups by unemployed

• Fiscal cost is very small if budgeting is done over 2-3

years and not year by year

• One effect of subsidisation of short time follows:

24


Split of labour input between hours

and persons

-8

-6

-4

-2

0

2

4

United States Britain Germany

Percentage changes, 2007-09

employment hours per worker

25


% change in employment and

hours 2007-09: European Union

-12

-10

-8

-6

-4

-2

0

2

4

6

IRE

SP

A

ES

T

US

A

HU

N

FIN

PO

R

ITA

UK

DE

N

FR

A

GR

E

CZ

E

BE

L

SLV

SLK

NO

R

SW

E

SW

I

AU

T

NE

T

GE

R

PO

L

%change in hours per worker % change in employment

26


Supply policies?

• Supply policies also help, the usual run discussed by

OECD and applied in many countries (job search

assistance, temporary replacement jobs etc.)

• Key to changing global conditions is skill guidance and

lifelong learning – must be done at school before

employment or arranged by firms

• Better cooperation between local employers and

secondary schools about curriculum essential

27


Enhancing Towards a Job Rich

Growth

28


I. Job creation in different

flexicurity systems

• Anglo-Saxon system of high flexibility and low security gives high employment and fast adaptation to new conditions at the cost of wage inequality and insecurity

• Nordic system of flexibility and high security also leads to high employment, mainly in state-supported jobs, at the cost of high taxation; a lot of state-provided security

• Southern European system of low flexibility and moderate security through transfers least favourable to employment and adaptation to new structural conditions

• To achieve flexicurity southern countries need to increase flexibility and pass more protection from family and employer to the state

29


II. What type of jobs?

• Commission emphasis on green jobs, ICT and health

welcome, but each for different reasons

• In contrast to health, green jobs and ICT will not increase

net job creation by much. ICT too small and green jobs

will destroy “dirty” jobs

• Both are important for productivity growth,

competitiveness and the environment

30


European jobs shortfalls

• Most job shortfalls in Europe are in jobs that provide

specialised services to companies, and services to the

public that can be done within the family (to some extent)

• The main shortfalls in sectors serving the public are

– Health

– Education

– Retail trade

– Hotels, restaurants, catering

– Car sales, maintenance etc.

31


Gap in annual hours, US-EZ,

2000-07

01020304050607080

32


How do we help job creation in

these sectors?

• Better employer incentives could create jobs in retailing,

horeca, and motor services, which could employ a lot of

young people and women

• Low or zero taxation in low wage jobs, no employment

protection beyond bear minimum, on-the-job training

subsidised by the government

• Minimum wages desirable to encourage supply of labour

but at appropriate level, e.g., not above 50% of median

33


III. EU-wide migration?

• Well-known that Europeans do not like moving

• No need to try and encourage it – remove barriers but leave it up to the individual

• Better to encourage cross-border investments, by creating business-friendly environments and allowing firms to take advantage of wage differentials

• E.g., encouraging foreign (EU) investment in Greece currently much more preferable to encouraging Greeks to move elsewhere in the EU

34


Conclusions

• Current Eurozone policies not conducive to growth – or

to a healthy future for the single currency

• Need for coordinated investment policies to enrich

infrastructure, e.g., through the creation of Growth and

Competitiveness Council

• Austerity and structural reform need to be better

coordinated

35


Conclusions cont.

• Flexicurity helps create conditions for job-rich growth in a

dynamic economy

• Employment growth is not a substitutive for productivity

growth except for brief periods coming out of recession

• Other policies also needed to restore employment fast

• Emphasise job creation in other services too, not only

health (although health is most important)

36


Thank you for your attention!

37

Documents

Christopher Pissarides Presentation - Estoril Conferences 2013