In my post of October 21st, I argued that labour market reforms have been the weakest link in the process of European economic reform and that, regardless of the Lisbon strategy, national governemnts have mostly followed the route of convenience leading to proliferation of low-wage jobs and lower labour productivity. Government labour market policies have obviously been driven, inter alia, by equity concerns. But they also have reflected demands of politically decisive labour market participants, that is, core labour market insiders and, often implicitly, groups of employers.
It largely is because of its redistributive, heavily politicised nature that the domestic political economy of labour market reform may little, if at all, be positively influenced by procedural or procedure-based changes in the Lisbon processes of policy coordination. Hence, national ownership of the re-launched Lisbon strategy, allegedly increased by appointing political persons in charge of coordinating national reform programmes, may barely have a serious impact. And the same would have equally applied to the ‘naming and shaming’ process, had that process been fully adopted. One may readily presume that labour market insiders would not have felt shameful for the proliferation of low-wage and, most likely, precarious jobs.
On the other hand, social anxieties and genuine concerns for fairness and equity may not be addressed via improving – of course in a normatively unimportant fashion – the status of social policy coordination processes. That would only add bureaucratic noise to policy coordination and would, literally, turn the re-launched Lisbon strategy on its head, though not at an unbearable cost. Besides, the 2005 re-launch of the Lisbon agenda has really not provided for a meaningful revision of the original approach. A meaningful revision of the Lisbon agenda would have probably required a clear prioritisation of labour market reforms, along with some real strengthening of the strategic dimension of the Lisbon policy coordination process, especially in regard to the European employment strategy.
The main reason, or, to put it precisely, one of the main reasons behind hesitant and/or convenient, yet sub-optimal labour market reforms has been the socially intolerable and politically unacceptable distribution of the gains and losses from reforms, over time and interpersonally. Though macroeconomic policy is, in principle, capable to offer some remedy, European macroeconomic policy, in particular, may be of little help, the principal reason being that divergence in national labour market equilibria imply divergent, yet largely unavailable responses – be they fiscal discretion or monetary easing – on the part of macroeconomic policy.
Thus, it appears that labour market reform has been entrapped into a system of governance that falls short of producing adequate incentives for that purpose, certainly carrots, because sticks have institutionally – and indeed wisely – been precluded, at least so far as the EU level of policy-making is concerned. That should, at least partly, be addressed by a vibrant Lisbon strategy, in other words a strategy worth its name, which might favourably impinge on the domestic political economy of labour market reform.
That might come through a system of financial incentives, in effect transfers of EU funds aiming at rewarding successful reform initiatives, whilst alleviating domestic political economic constraints. EU financial assistance might, therefore, back government policies and national budgets in order to improve the distribution of gains and losses from reform, including compensation of those bearing most of the burden. EU funds might, in principle, support institutional reforms aiming at removing distortions, increasing effective labour supply and upgrading the search and matching process in the labour market. But they might equally support policies which take care of and solve for asymmetric information in the labour market and credit market failures, though at a lower cost than would have arisen had the reforms not taken place. However, EU funds might not support policies perpetuating segmentation of labour markets.
Thus, in short, EU financial support might be granted to policies and institutional reforms that move the economy and its labour market towards ‘efficient redistribution’ and away from economically burdensome and, perhaps, morally questionable inefficiency. For example, EU financial support might be granted to reforms aiming at substituting higher unemployment insurance for strict employment protection legislation, or reforms aiming at making work pay. In practice, EU transfers might supplement national budgetary resources spent on improving the distribution of gains and losses over time and amongst labour market participants.
While drawing on the experience of the Globalisation Adjustment Fund, the scheme herein discussed is very different in character – for example it is concerned with prevention instead of insurance – and even gets into the highly sensitive are of interpersonal redistribution, certainly subject to very strict conditions. As a matter of fact, that scheme might take both the place and the resources of the Globalisation Adjustment Fund, which may hardly be thought of as a successful policy. In any case, the funding of that scheme may be part of the debate on the future of the Community budget.
Yet, the strategic dimension of the Lisbon agenda might thus be considerably strengthened and its national ownership be advanced, whilst delegitimising, unjustified and much unproductive scapegoating of EU might be discouraged. Furthermore, expectations for reforms and better economic performance might be raised and, also, social anxieties and equity concerns be addressed. So, isn’t it time we changed course – not merely gear?
(This is the second post on the Lisbon strategy, which is broadly based on a paper prepared for the project “An EU ‘fit for purpose’ in the Global Age: An interdisciplinary, cross party investigation of policy options for the EU post-2009”, organised by Policy Network in association with the European Institute of the London School of Economics and ELIAMEP. The paper entitled ’Ambitious, but not (very) much needed and poorly equipped: The Lisbon strategy reconsidered’ will later appear in a special volume.)
