Helsinki (09.04.2001 - Juhani Artto) In Finland, as elsewhere in the industrialised world, there is much lobbying for greater flexibility in the labour market. Business leaders, right-wing and even mainstream politicians and many economists believe that the low unemployment rate of the USA is largely due to labour market flexibility. They offer the conclusion that the EU Member States must deregulate their labour markets if they want their relatively high unemployment rates to fall to a respectable level.

The demand for greater flexibility has been repeated so often and so vigorously that to many people these conclusions may have begun to sound self-evident. One of the institutions strongly advocating a policy of greater flexibility has been the Organisation for Economic Cooperation and Development - OECD, especially in its 1994 Jobs Study. The OECD showed more caution in its 1996 and 1997 Employment Outlook studies.

In March 2001 two Finnish economists, Peter Boldt and Pekka Laine, published a new study seeking to assess the credibility of the demand for greater flexibility* as a condition of improved employment. The study includes both theoretical discussion and empirical analysis of the OECD countries.

What have these economists concluded? The empirical analysis speaks so unambiguously against the claims made for flexibility that even the researchers admit their surprise.

Empirical material from 20 OECD countries shows no dependency between the rate of unemployment and the size of unemployment benefits. This picture changes slightly when relating the unemployment rate to the duration of eligibility for benefits. Long eligibility periods are loosely connected with high unemployment rates. "Probable reason for this is that prolonged unemployment has forced the politicians to prolong the eligibility period, not that its long duration would create higher unemployment", Boldt explains.

With respect to job security, or the employer's right to dismiss an employee, the authors of the study found no unambiguous relationship with the employment figures. Of the six countries where job security is strongest, five have below average unemployment rates. The exception is Spain.

No connection was established between organising and unemployment rates. The authors draw the same conclusion concerning the relationship between the unemployment rate and the coverage rate of the collective agreements.

One factor of interest is the degree of centralisation of industrial relations. The authors conclude that with a non-centralised bargaining round the impact on unemployment largely depends on how well the trade unions co-ordinate their negotiations. The empirical material demonstrates that more effective inter-union co-ordination results in lower unemployment rates. A similar correlation can be seen in the degree of centralisation of employers.

The authors also studied the impact of pay distribution on unemployment. The flexibility camp claims that existing jobs can be protected and new ones created by allowing a downward drift of the lowest wages and salaries. Boldt and Laine admit that this may work in practice, but they criticise the approach for its blindness to prospects of improving the quality of the work force through education. When this strategic factor is overlooked the growing qualitative demands on working life are not satisfied.

"Broadly-based enhancement of labour force training opportunities allows for both the requirements of economic livelihood and the changing demands imposed by enterprises on labour force quality", the authors write.

Those who advocate labour market deregulation often refer to the demands of the economic globalisation. Boldt and Laine beg to differ. "Observations do not support the claim that success in international trade demands deregulation of the labour market. The contrary outcome holds: the OECD countries that are best integrated in international trade have the most regulated labour markets."

More important factors are price margins,
macroeconomic policy and property ownership

Boldt and Laine do not limit their discussion and analysis of the reasons for the high unemployment rate in Europe to flexibility issues. They identify serious problems in the macroeconomic policies pursued in the past by the major European countries. Deflationary monetary policies combined with fiscal policies that failed to counteract and indeed reinforced cyclical changes explain the growth of the unemployment, the researchers conclude. "By contrast macroeconomic policy in the USA has supported favourable progress in employment."

The authors remind us that serious shortcomings in macroeconomic policy may have fatal, long term consequences for employment, as this is not a symmetrical phenomenon: "Unemployment rises readily, but falls slowly".

In their opinion the European Central Bank also seems to have overemphasised the fear of inflation.

One factor affecting employment is price margin. The authors refer to a 1996 study by Scarpetta and Pilat. In a statistical analysis these writers discovered that over the period from 1980 to 1992, out of 14 OECD countries Britain had the smallest price margin in 12 industries and the USA in 8 industries. The remaining 12 countries occupied the top position in only 16 industries altogether. "This result is interesting because the USA and Britain are commonly presented as the pioneers in making the labour market structures more flexible", Boldt and Laine write.

As for the price margin in Finland, this was comparatively low in the 1970s, while it was among the highest in the 1980s. In a 1996 study Finland had the highest pricing margin in 10 of the 36 industries studied.

Finally, Boldt and Laine refer to a study by the British economist Andrew Oswald. "After measuring the correlation between several macroeconomic factors and the unemployment rate, Oswald concludes in a quite surprising manner. The only factor that correlates with the unemployment rate from country to country is the rate of residential property ownership. It seems that those countries in which residential property ownership has become more common in the last few decades suffer in particular from high unemployment."

*Boldt and Laine define labour market flexibility and rigidity as follows: "By labour market rigidity we understand rules and factors that define and confine agreements between the employer and individual employee on all central aspects of the employment relationship (wages, working hours, duration of employment, job security etc.). By labour market flexibility we mean, for example, the ability to adjust wages according to economic cycles and enterprise profitability and the freedom to dismiss employees rapidly and smoothly".

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