Thu Oct 11th, 2012 at 11:02:59 AM EST
ECB Sees Need For Major Labour Market Reforms In Eurozone | MNI
BERLIN (MNI) - The European Central Bank on Monday stressed the need for major labour market reforms in order to win back competitiveness of Eurozone member states.
In its report "Euro Area Labour Markets And The Crisis" the central bank noted that downward wage rigidities are an impediment to restoring competitiveness particularly in those Eurozone countries that had accumulated external imbalances before the crisis.
"In the presence of high unemployment, a flexible response of wages to labour market conditions should be a key priority, so as to facilitate the necessary sectoral reallocation underpinning employment creation and reductions in unemployment," the report stated.
In this respect, short-time working schemes - although successful in mitigating employment losses in some Eurozone countries in the current crisis - might hinder the reallocation of the labour force from declining sectors towards growing ones if they are maintained for too long, the ECB reasoned.
"Also, in a context of growing mismatch in the labour market, higher wage differentiation across different types of workers and jobs is needed to contribute to a proper matching between labour supply and demand and would particularly benefit some of the groups hardest hit by the crisis," the central bank said.
"Major labour market reforms in euro area countries are essential to foster job creation, bring down unemployment and restore competitiveness, while also lowering the risks of a permanent decrease in potential output growth," the ECB stressed.
You see, in Free Market Fairyland, severe demand restriction quickly brings wages tumbling down. As a result of market forces, of course. Then the economy starts up again on a healthy footing and growth happens (whether this growth compensates for the preceding slump, it doesn't say in the manual they gave me). This is how austerity brings about competitiveness and growth, according to the doxa.
But the darn thing doesn't seem to be working, and culprits must be found. As outlined above, the ECB (Euro Area Labour Markets And The Crisis (pdf)) has some candidates.
First, the wages variable isn't sinking fast enough.
Before the crisis, unemployment was rather decreasing (the x-axis is percentage change), and wages were not going down. With the crisis and increased unemployment, wages should be expected to drop, but they only do so moderately (across the whole Eurozone), not as much as the theory would like them to:
Why is this, wonders the ECB (this is an official paper, not a simple working paper)?
First, "relative to the fall in activity, a more muted impact on the labour market was observed on average in the euro area in comparison with previous recession episodes". Pesky employers don't lay everybody off at the firsts sign of rain. They hang on to the people they've got because they foresee they might have a job recruiting competent employees when the downturn ends. This sensible, prudential behaviour is called "labour hoarding". It doesn't mean there is no unemployment (especially among young people seeking to enter the job market), but it means, er, there isn't enough to produce a downward shock effect on wages.
Next, there are "rigidities". These concern unions and collective bargaining, of course:
Wage bargaining institutions have been singled out as a major source of wage rigidity by the WDN. (...) The first element to be considered in relation to wage setting institutions refers to the degree of collectivisation. This captures the extent to which wage bargaining between employers’ associations and trade unions determines overall wage outcomes. Union density refers to the percentage of employees that belong to trade unions. However, the most relevant indicator to assess the effects of such bargaining processes is wage bargaining coverage, as this can in many cases extend to non-members as well. Across the euro area, extension mechanisms are often applied which result in high trade union coverage rates, of over 75%, for most euro area countries.
This, obviously, is an obstacle to the normal functioning of the economy.
Finally, the labour market is not so much made inflexible by lack of geographic mobility (says the report), but by across-the-board skills mismatch. Here there's at least an admission that there has in fact, in some parts of the Euro Area, been "intense job destruction" concentrated "in certain branches of activity". The concern is that the unemployed don't have the skill sets needed by the new, dynamic, growth-producing sectors (that would be finance?).
in some countries in the euro area it is likely that the existing human capital/skills of the newly unemployed workers may be of limited value for nascent jobs in expanding economic sectors (...) such mismatches between labour demand and labour supply can hinder the reallocation of the labour force and therefore hold back potential growth
What should be done about this?
...the evidence of strong labour market mismatches highlights the need for additional structural reforms at the country level.
There you have it. 126 pages of data and maths (don't look at the moon, look at my finger), to conclude that there is no change in the theology brought to us by the Serious People™.