The Community will need both sustained economic growth and a more employment intensive pattern of growth if it is to meet its employment and unemployment objectives.
This will require changes in economic and social policies and changes in the employment environment as expressed in the structure of labour market, taxation and social security incentives. This implies new relationships and new methods of participation between all those effecting, and affected by, the changes that are required.
Producing more jobs from whatever rates of economic growth the Community can achieve requires a new solidarity - between those with work and those without, as well as between those who earn their income from work and those who earn their income from investments.
At the same time, the Community needs to improve its long-run competitiveness and avoid over-reacting to short-term changes in price competitiveness resulting from the vagaries of exchange rate movements. It means both investing in people and developing an active policy of encouraging new economic activity and employment growth in domestic and internationally-competitive sectors.
This chapter recognises the need for more efficient labour market and associated policies. It also recognises that the market alone cannot solve the employment, unemployment and associated social problems faced by the Community. There is a need to take full account of the real costs of unemployment for both societies and economies in developing fiscal as well as labour market and social policies.
This means significant changes, but it does not simply mean a deregulation of Europe's labour markets. Rather, it implies an updated, rational and simplified system of regulation and incentives which will promote employment creation, without putting the burden of change on those already in a weak position in the labour market.
All Member States are suffering serious short-term unemployment problems. The scale of these problems should not divert the Community from the longer-term tasks, however. An end to recession will not bring an end to employment difficulties. Short-term concerns should be balanced against the longer -term imperatives of expanding employment opportunities and of ensuring that economic and social progress march in step.
The approach and proposals outlined in this chapter support the medium-term strategy of "moving towards the 21st century". In order to achieve these objectives, and pursue the appropriate mix in terms of policy and delivery, it will be essential to engage the active participation of the widest possible range of economic and social actors at all levels. 'Bottom-up' initiatives need to be encouraged as much as possible. The Social Partners especially have a substantial responsibility and opportunity to work together in new ways to find new solutions, including at European level, through the machinery set up under the terms of the Social Protocol.
All the Member States agree in their contributions - albeit with certain nuances - on why unemployment is so high in the Community, their diagnosis being that unemployment and the inadequate level of job creation are due principally to structural factors, exacerbated by the effects of the current recession.
There is unanimous agreement on the fact that labour markets do not work efficiently, with a lack of flexibility - more particularly in terms of the organisation of working time, pay and mobility - and an inadequate match of labour supply to the needs of the market, especially as regards workforce skills and qualifications. This rigidity is the root cause of what are relatively high labour costs, which have risen at a much greater rate in the Community than among our principal trading partners. As a result, firms are liable to make any necessary business adjustments by manipulating the labour factor, the tendency being for human labour to be substituted by more capital-intensive factors.
Social protection schemes have - in part at least - had a negative impact on employment in that they have, in the main, tended to protect people already in work, making their situation more secure and consolidating certain advantages. They have in effect proved to be an obstacle to the recruitment of jobseekers or of new entrants to the labour market. A number of Member States make reference here to a dual standard of treatment working to the detriment of the jobless.
Mention is also made of other factors which militate against jobs, such as the high level of non-wage costs, particularly in the form of statutory levies and charges, and insufficient motivation to work due to inappropriate social protection systems and employment services. Certain Member States also cite competition from low-wage countries as a contributory factor to the loss of jobs, particularly in labour-intensive or unskilled sectors.
Together with the broad agreement among the Member States on their diagnosis of the situation, there is also a wide measure of agreement on what remedies should be adopted. There can certainly be no miracle cure, but there is a need for a thoroughgoing reform of the labour market, with the introduction of greater flexibility in the organisation of work and the distribution of working time, reduced labour costs, a higher level of skills, and pro-active labour policies. There is also a good degree of convergence on the need to maintain social protection systems. Finally, reference is also made to giving priority to combating unemployment among young people and long-term unemployment, as well as social exclusion.
The introduction of more flexibility should centre on the way work is organised, e.g. by removing obstacles which make it more difficult or costly to employ part-time workers or workers on a fixed-duration contract, and gearing careers more closely to the individual, or facilitating forms of progressive retirement. As regards the distribution of working time, there are suggestions on calculating working time on an annual basis and on reducing working hours in a period of recession. Obstacles to mobility (whether sectoral, geographical or in-house) should also be eliminated. This increased flexibility should be reflected in collective bargaining rules and systems, to make them more appropriate to the specific situation of local markets and undertakings.
As regards ways of reducing labour costs, suggestions are made for gearing levels of pay to company performance and productivity as a way of encouraging the recruitment of young people, and as an alternative to laying people off in a period of recession. A number of Member States make a plea for pay restraint to reflect economic circumstances at a local, sectoral or more general level, as a means of enhancing competitiveness and containing inflation, and to boost jobs. However, some Member States caution that pay restraint should not result in demand contracting over-much.
Most of the Member States make reference to this subject in their contributions, suggesting various means of cutting social welfare contributions, more particularly by concentrating such cuts on unskilled jobs. Among the suggestions made for compensating for this loss of income, there are proposals for taxing polluting activities or products, energy or scarce natural resources, or encouraging private insurance schemes. The idea of introducing a "green tax" receives a varied response, with some of the Member States having reservations about the effect of such taxes on international competitiveness.
To create more jobs for young people, there is a suggestion to introduce greater flexibility with regard to the minimum wage, reduced social welfare contributions or other contract terms, e.g. by introducing flexible forms of apprenticeship, training or practices.
The ideas put forward on pro-active labour policies centre on three main aspects. Some of the ideas concern the employment services, e.g. enhancing and refining the role of employment agencies and creating a better match between labour market supply and demand, by way of closer liaison with undertakings and with local markets, or by the establishment of private employment agencies. Most of the Member States believe that substantial employment prospects could be opened up by developing labour-intensive service activities (for instance, by introducing a greater degree of liberalisation), and by introducing new activities, e.g. in the social and cultural fields, and in terms of health, the environment and the quality of life in general. Finally, many of the Member States call for an examination of social protection systems to ensure that they actually encourage people to work, for benefits to be more closely geared to the specific market situation, and for expenditure to be targeted more accurately to concentrate the effort on those in real need.
Many of the Member States suggest the introduction of a form of cost/benefit analysis for Community legislative proposals in the social field.
Finally, as regards the instruments needed to implement these major reforms, the Member States stress the need for social consensus and for a cooperative attitude on the part of all the parties concerned, with some of them proposing a search for consensus at Community level.
(a) High recorded and hidden unemployment
Over the past 3 years, recorded unemployment in the Community has risen sharply. It now stands at almost 16 million people or around 10.5% of the registered workforce. All Member States have been affected although levels of unemployment vary considerably between them.
It follows a period when unemployment had been falling with increased and stable economic growth. However, even after 4-5 years of steady economic growth at the end of the 1980s, when unemployment reached its lowest level for a decade, it was still at 12 million or over 8% of the labour force, and with only 60% of people of working age in employment. One consequence was that, of the 10 million extra jobs created in this period, only 3 million were taken by the registered unemployed with the remainder taken by new entrants to the labour market.
(b) Low rate of employment
Europe's employment rate - the proportion of its population of working age that is in work - is the lowest of any industrialised part of the world. Moreover, it has fallen over the past two decades - from somewhat above 60% to somewhat below. In contrast, the employment rates in Japan and Scandinavia have remained consistently above 70%, and that of the United States - which started in 1970 at a similar level to the Community - has grown throughout two decades to reach its present level of 70%.
Divergences in employment creation performance between the Community and other developed economies, and between Member States, are much greater than would be implied by differences in economic performance. Between 1970 and 1992, the US economy grew in real terms by 70% - somewhat less than Community growth of 81%. Yet employment in the US rose by 49%, compared to only 9% in the EC. In Japan, where the economy grew by 173% from its 1970 level, employment grew by 25%.
In most European countries the proceeds of economic growth have mainly been absorbed by those who remained in employment, and there is a large pool of unemployed who have been excluded.
The Spanish economy is the most striking example. Between 1970 and 1992, the Spanish economy grew by 103%. But in 1992, employment was actually 0.3% less than it had been in 1970. Other EC economies also show relatively low employment growth compared with output. Over the 1970-1992 period, the total growth in output and employment was, respectively: Germany, 70% and 11%; France, 77% and 6%; Italy, 85% and 18%; UK 51% and 3%.
While employment rates in the Community are broadly related to levels of development - with Southern States having rates of employment of around 50-55% - there is nevertheless a great deal of variation between economies at similar levels of economic development. Thus the Netherlands has a much higher rate of employment than Belgium, and Portugal a much higher rate than comparable Southern economies.
(c) Changes in hours of work
When examining changes in working hours, and considering the potential of job creation in the Community, it is important to draw a distinction between the volume of work and the number of people in employment. A number of Member States have, to date, succeeded better than others in translating a given volume of work into jobs, both by reducing normal working hours by a variety of means, and by increasing the number of part-time jobs.
The Netherlands has gone much further in this direction than other countries. In 1991, those in employment worked an average of only 33 hours a week as compared with 39 hours a week in the Community as a whole. In Denmark, the figure was similarly low at under 35 hours a week. In both cases, these figures reflect the relatively high proportion of people working part-time instead of full-time - 33% in the Netherlands, 23% in Denmark, higher than anywhere else in the Community.
Between 1983 and 1991, the longest period for which comparable data are available, the average hours worked per person per week declined by only 3% in the Community as a whole - by just over one hour. In the Netherlands, by contrast, the reduction was 13% - equivalent to each person working an average of five hours a week less in 1991 than only 8 years earlier.
The reduction in hours worked in the Community over the 1980s is not substantial in most countries apart from the Netherlands. However, it seems that in Northern Member States, except for the UK, it had an effect on the labour market over this period. The volume of work undertaken, in terms of the total number of hours worked, went up by only around 2% in Denmark and Belgium but, because of the reduction in average hours worked, the number of people in employment increased by 8%. In Germany, the volume of work rose by 7%, the number of people employed by 12%. In the Netherlands, more than half of the rise in employment of 30% seems to be attributable to the fall in average working time.
The experience of the recent past is very relevant for the debate on distribution of work and income. In a real sense, such re-distribution occurred over the 1980s in many Member States, though only in the Netherlands and perhaps Denmark was it a deliberate part of job labour market policy (see graph 1 for details). However, the issue is complex and job creation potential is dependent on a number of social, fiscal and regulatory factors. Also, not all countries are well placed to do so, especially when their levels of income per head are lower - and therefore the income available to be shared along with work is correspondingly less.
(d) Difficulties facing particular groups
The unemployment rates of young people (those under 25) are double those of adults. They range, however, from less than 10% in Germany and Luxembourg to 20-30% in much of the South of the Community and in France and Ireland.
The incidence of unemployment among women in the labour force in the Community is significantly higher than among men. In May 1993, the unemployment rate for women averaged over 12% whereas for men it was around 9%.
Long-term unemployment has become endemic in the Community. Over half the unemployed have been unemployed for more than one year. It is a particular problem for young people in the South - where they account for 50% of the long-term unemployed. In the North, for men in particular, it is often more concentrated among unskilled middle-aged workers, who have lost their jobs through firm closures. In these areas, youth unemployment accounts for only 15-25% of the total.
The economic and social costs of this unemployment are enormous. They include not only the direct expenditure on providing social security support for the unemployed, but also: the loss of tax revenue which the unemployed would pay out of income if they were working; the increased burden on social services; rising poverty, crime and ill-health; and increasing levels of educational under-achievement.
Graph 2 illustrates the direct costs of unemployment in each of the Member States. These costs comprise the amounts paid out in unemployment benefits and the income lost i.e. the amounts that would be received from taxes and social contributions were those unemployed people in employment.
In Germany, for example, the figures suggest that unemployment will cost the government ECU 40 billion in 1993 - 19 billion from benefit payments and 21 billion from forgone income. The estimates suggest that unemployment throughout the Community will cost governments in excess of ECU 200 billion in 1993, which equates to the GDP of Belgium. These costs, it should be noted, do not take account of the wider social costs mentioned above.
Part of the present unemployment in the Community is a legacy of the depressed rate of economic growth and rigidities in the labour market.
Slow growth has not only meant low rates of employment creation, however. It has also inhibited the process of structural economic adjustment. Before 1973, the creation of new jobs in growth sectors was large enough to absorb those losing their jobs in agriculture and declining industries, and unemployment for the most part remained below 2-3%.
Since 1973, job creation in growth sectors has been much slower. The shift in employment has been much more painful due to the shortage of alternative employment opportunities, the limited possibilities for companies to shift labour from declining to expanding activities and the significant impact of new technologies in replacing labour, particularly in terms of manual and low-skill occupations.
Even if manufacturing employment began to increase again during the period of fast growth at the end of the 1980s, the secular tendency has been for employment in goods-producing industries, including agriculture, to decline. Employment in service-producing industries has increased, thereby partially offsetting losses elsewhere in the economy. There are signs that growth in service industries will no longer be possible on the levels previously achieved. To begin with, services now represent such a large share in all developed economies that income arising from productivity gains in goods-producing industries will not be sufficiently large to finance employment gains elsewhere in the economy. Further income gains will now largely have to come from productivity gains within the service sector itself. Such gains are indeed possible and are likely to arise from a combination of the successful application of information technologies and new organisation methods and from competitive pressures on those service industries subject to international competition or those which represent a significant input to other firms.
A corollary to substantial restructuring in the service sector is that unemployment is also likely to affect those with a higher level of educational attainment and not just the poorly qualified, unskilled part of the labour force. In turn, this will create further challenges to containing unemployment.
At the same time, Member State economies and labour markets have been slow to cope with other structural changes. These have included the effects of the continued industrialisation of the less developed parts of the world with the eventual relocation of activities. They also include the effects of Community integration with, on the one hand, the completion of the Internal Market leading to rationalisation, restructuring and relocation and, on the other hand, the progressive convergence of richer and poorer Member States.
The inflexibility of the regulatory framework is also one important factor. The labour markets do not provide the necessary flexibility to ensure the best use of human resources. Labour markets are inhibited by restrictions affecting the organization of working time and part-time work, and barriers to geographical, sectoral or intra-company mobility.
Social and employee protection systems and regulations have protected mainly those who were already active, sometimes rendering the access to jobs by new entrants more difficult. A dual labour market has thus developed, reflected in particularly high levels of long-term unemployment; the duality exists also as regards temporary versus permanent work and part-time as compared to full time work.
Social and demographic changes have also been significant:
The overall effect of these various economic and social factors has been to:
In the face of persistently high levels of unemployment in the Community, and clear evidence of its growing structural dimensions, some observers have advocated wholesale labour market de-regulation - especially of employment protection legislation and wage determination - as the only way of bringing its labour markets into equilibrium.
Most Member States have gone somewhat in this direction - with an emphasis on encouraging wage moderation, increasing external labour market flexibility, and reducing the growth of social security expenditure. Many enterprises have followed the same route - with the emphasis on increasing internal flexibility and reducing fixed labour costs.
At the same time, Government actions have reflected wider concerns - such as the need to maintain social and industrial peace, and to avoid creating further poverty among those groups already in the weakest position on the labour market.
The arguments are not just social or political. Evidence that income distributions have worsened in certain Member States provide grounds for caution in pursuing further income squeezes. The Community cannot hope to address the consequences of the international relocation of many jobs through wage-price competition. Many problems of price competitiveness are due more to the vagaries of exchange rate movements. This argues for long-term, strategic responses rather than short-term ones.
However, where most of the Member States' responses have converged is that actions have generally been aimed more at reducing unemployment than at increasing employment. This has been reflected in the large numbers of employment and training schemes created for the unemployed, and in specific incentives to encourage the recruitment of target groups. Unfortunately, little has been done to adapt the wider legal and financial environment and regimes - which provide the main incentives in the labour market - to the new economic and social realities, or to modify the institutional structures which surround them.
In broad terms, the way in which taxes - and social contributions - are raised seems to take little or no account of their potential effects on the level of employment, still less of the potential effects they may have in, for example, discouraging firms from offering jobs to less skilled and lower paid workers.
Also, many national fiscal systems are poorly adapted to present and developing employment needs, and disincentives and administrative obstacles to flexible or variable patterns of work abound.
Attempts to reduce levels of job protection in order to introduce more flexibility into labour markets have often led to the growth of two-tier labour markets - those with secure permanent jobs, and those with insecure temporary jobs.
Pressure to increase labour market flexibility without countervailing actions has, moreover, often reduced rather than increased the incentives for firms and individuals to invest in much needed training and retraining, as has the lack of taxation encouragement to training.
And the range of special measures and incentives which help re-integrate the long-term unemployed, young people, women heads of household and returners, the handicapped or disadvantaged groups in the labour market have become so numerous and complex that they over-complicate the recruitment decisions of firms.
Failure to address these fundamental issues in developing responses is at the heart of the Community's labour market difficulties. It is important to find a better balance between combating unemployment and job creation, and to ensure we do not only rely on market forces to resolve the highly complex problems of achieving higher economic and employment performance. It is also important that we acknowledge that all of these factors together with ineffective gearing of, and interaction between, labour market and other policies have inhibited the growth of more effective labour markets.
While the Commission considers that some further reform of labour market regulation is called for this is seen to be subsidiary to the other tasks, namely to:
That a higher rate of employment can be achieved for a given level of economic activity is amply demonstrated not only by examples from outside the Community - United States, Japan, Scandinavia -but also by those within. Denmark has among the highest rates in the world.
The diversity of results demonstrates that there are multiple routes to follow. The challenge for the Community is to achieve high employment results in ways which are compatible with its general economic and social goals and criteria.
Fundamental economic and social changes are required, however, if income and employment opportunities are to be distributed more widely among those who wish or need to work. This is not based on a static vision of job and wealth creation. The objective must be continually to increase the stock of jobs and wealth by increasing competitiveness and value-added. However, the manner in which this process gets translated into new and additional employment opportunities is not pre-ordained. Different societies can and do make political and social choices which give different results. If Europe is to set itself a goal of reducing unemployment, which in turn requires maximising employment opportunities - due to the presence of hidden unemployment - then it will require a general reform of the systems of incentives which affect employment in the labour market. Indeed, there is no real alternative if a continued disenfranchisement of a significant minority of its citizens is to avoided.
There will have to be four interdependent targets:
(a) Labour costs and job creation
There is evidence that there may be a mismatch between productivity and wage costs in the low-skill past of the labour market. Existing collective bargaining and related taxation and labour cost arrangements have the effect of causing gains from economic growth to be absorbed mainly by those already in employment, rather than creating more jobs. To change this would mean seeking political and Social Partner agreement on:
- keeping hourly wage increases below the growth of productivity;
- accompanying measures to ensure, by a variety of different instruments, that economic growth is better translated into new jobs and a reduction of unemployment.
(b) Flexibility and job creation
Member States should seek to remove obstacles to already changing trends, preferences and demands of employees and employers regarding patterns and hours of working, which will increase the number of jobs for given levels of output. This cannot be pursued by a top-down, mandatory approach seeking to legislate for a shorter working week. It should, rather be pursued by a range of appropriate means which could include:
Member States should seek to address the present disincentives to employing less skilled workers by a range of possible measures, including:
(d) SMEs, new activities and job creation
Member States should address existing barriers to maximising the job creation potential of SMEs and areas of new employment growth and activity by a range of measures aimed at anticipating and accelerating SME and new jobs growth.
(e) Raising the stock of human capital
The inadequacy of present education and training systems in meeting the challenge of long-run competitiveness should be addressed by developing a range of measures, in the context of national structures, to:
(f) Targeting specific groups
Member States have to ensure that additional jobs are most effectively made available to those in a disadvantaged position in the labour market. This was not achieved in the employment growth period of the second half of the 1980s, and the Community now faces the danger of not only a dual labour market but also a dual society. In order to address this threat to social cohesion, Member States are asked, firstly, to have regard to the reintegration potential of the proposals outlined earlier, in terms of the job creation potential of changes in labour costs, flexibility, taxation and incentives, and, secondly, to consider improving specific integration and reintegration measures in ways which could include:
Within all the above efforts aimed at disadvantaged groups, it is important to strengthen and focus the role of employment services. Public employment services should be encouraged to sharpen the guidance and placement services offered to the unemployed, targeting more effectively the individuals concerned at local level. The provision of these services should be dovetailed with related but often separate vocational guidance units and monitored on a regular basis.
They should also be encouraged to establish coordinated jobs needs audits at local level, distilling the potential range of employment opportunities which exist but are unmet and making available such information in more imaginative ways. The results of these audits could be disseminated widely through appropriate national machinery as well as via EURES at European level.
There is also a need to encourage good practice in temporary job agency activity. Empirical evidence suggests that temporary work, as actively operated in a number of Member States, can lead to permanent job creation, by helping to accumulate work experience and training or serve as a kind of probationary period. Also, many people wish to work under such arrangements. It is, however, essential that such instruments offer a path towards permanent jobs rather than replacing them.
Reducing unemployment necessarily requires increased employment opportunities on an unprecedented scale. Pro-active labour market policies will be central to such a strategy and will require a radical new look at the whole range of available instruments which can influence the employment environment, whether these be regulatory, fiscal or social security incentives. The vast bulk of these measures will be for individual Member States to decide upon in responding to their diverse national situations.
However, the Community can and must play an important supporting role by:
The overall objective should be to encourage the development of national labour markets towards a Community labour market. This could produce a more skilled, flexible, mobile, linguistically able workforce, able to exploit Europe's inherited advantages in the developing world markets.