Is Belgium Working?

From Diagnosis to Therapy

prof. dr. Marc De VosGhent University

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20 September 2005 prof. dr. Marc De Vos 2

Diagnosis and Challenge

The Lazy Man of Europe

Reform is necessary and urgent

My purpose: indicate areas in dire need for reform

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Variety of Structural Reasons Main problem: sluggish economic growth

and labour unfriendly economic growth Variety of reasons:

Entrepreneurial culture & investment climate Tax burden Government expenditure as a share of GDP Welfare state & incentives Labour market regulation …

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20 September 2005 prof. dr. Marc De Vos 4

Labour Market Diseases

Ideology Consensus model Lump of labour fallacy Labour cost Share of public sector employment

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Legislation Steeped in Ideology “Labour is not a commodity” – the

labour market is not a market Labour exploitation – paternalistic

reaction Result:

Working time and (in)flexibility A-typical work: part-time, student,

residential, on call, temporary work, secondment…

Costly redundancy rules Costly administration

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Consensus Model: Now a Handicap A union’s nirvana Domination of labour regulation and

the welfare state Structural representation in companies Result:

Wage premium + “indexation” Centralisation and collectivism v. flexibility Insider / outsider conservatism Unions lack incentives to modernize

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Lump of Labour Fallacy Fall out of the first oil shock Early retirement, subsidized non-

activity and prohibition of activity Jungle of employment plans for

specific segments of the population Result:

Wrong incentives for economic activity Low employment rate Administration cost & discrimination

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Direct Labour Cost

Result: Unemployment Wage drift and

disincentive to work Shadow economy Labour is too

expensive a production factor

Competitive disadvantage within EU15

Total cost 310

Social S contribution

110

Income Tax (at 50%)

100

Net income 100

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Share of Public Sector Employment

Approximately 1 public sector employee for every 3 in the private sector

Growth in employment in the last 30 years: only in quaternary sector

Result: Lower productivity & more inflexibility No growth incentive Tax consumption/redistribution v. tax

production

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20 September 2005 prof. dr. Marc De Vos 10

Conclusion

Labour market is a growing factor of international competitiveness

State of urgency in Belgium Enormous and structural resistance

to change Likely scenario: limited changes –

gradual decline – point of no return somewhere around 2015

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