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"A Growth and Employment. Agenda for Europe." - Presentation of Christopher Pissarides - Nobel Prize for Economics at 2011 - Speaker at Estoril Conferences 2013
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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
C A Pissarides - London School of Economics 2013
Europe and the debt crisis
2
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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with haphazard decision making, inconsistent debt-relief policies, policy pronouncements pushed forward only to be withdrawn when markets don’t like it, and fiscal austerity to cap it all up will get us nowhere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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
What kind of labour market?
15
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
% 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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
Enhancing Towards a Job Rich
Growth
28
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
Gap in annual hours, US-EZ,
2000-07
01020304050607080
32
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
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
C A Pissarides - London School of Economics 2013
Thank you for your attention!
37