From the TUC

Flexible labour market orthodoxy could be another victim of the recession

22 Jan 2010, by in Economics, Labour market

There is a very interesting piece in today’s FT about how labour markets have reacted to the recession. The neo-liberal orthodoxy of recent years has always been that easy hire and fire allows for the most efficient allocation of labour and therefore benefits the wider economy – a price worth paying for the insecurity suffered by individual employees. In a recession companies that found it easier to get rid of staff would survive and then prosper again as they could also easily take people on in the recovery phase knowing they could easily sack them again.

Some of us have never bought this idea, and it has not been the experience of this recession. As the FT says:

Something weird is happening to labour markets in the rich world. The link between depth of recession and rise in unemployment is broken. And for the first time in a generation, Europeans can bask in the knowledge that their unemployment would have to rise in order to approach US levels.

In some countries – the US stands out – the decline in output has not been so terrible but the employment shake-out has been brutal. Many more American jobs have been lost than in other countries – and many more than in the past.

The main criticism of the orthodoxy has always been that people cannot be treated simply as factors of production in the same way as raw materials. Work is a social process. Employers depend on the experience, knowledge, organisational memory and teamwork of their staff. These are easily lost when staff are sacked, but very hard to rebuild.

This is why the short-term job subsidies common in the rest of Europe, and advocated here by the TUC – though rejected by the Government – make sense.

And while you would expect the TUC to say this, the OECD – normally home to a reliably pro-labour market flexibility view of the world – is, the FT reports:

…modifying its view. “We have been promoting flexibility, not for the sake of it, but for economic performance and for workers to get into new jobs,” says Stefano Scarpetta, the OECD’s head of employment analysis.

This motivation is allowing a change of view. “Judging from the outcomes so far, short-time working schemes seem to have been rather successful in containing the job haemorrhage,” he says, adding that even his organisation is “a little bit more positive on public works programmes: we argue that as part of a labour market approach, they might be worthwhile”.

While this is not a wholesale repudiation of the OECD’s former views, it reflects the fact that, according to the organisation’s own analysis, the gains in employment flexibility of recent years have failed to protect employees from the economic crisis. “There do not appear to be any clear grounds for concluding that workers, generally, are any better or worse prepared to weather a period of weak labour markets than was the case for the past several recessions,” the OECD concluded in its latest Employment Outlook.

As ever, Harvard’s Richard Freeman (who has advised the TUC) is on the ball:

Microeconomists and policymakers spent much too much time fiddling with the work incentives of poor people. “If the unemployed person or the welfare mother . . doesn’t do quite as much work as we would like them to do, or as they should, that’s a very small cost to society; when a big banker takes excessive risks, it can bring the whole system to a disaster . . so we took the eyes off the ball of the really risky part of capitalism.”

6 Responses to Flexible labour market orthodoxy could be another victim of the recession

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    Jan 22nd 2010, 11:22 am

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  2. Neil Carberry
    Jan 22nd 2010, 1:31 pm

    Hi Nigel,

    As you would expect, I’m hardly convinced. No one has ever denied that uber-flexible labour markets like the US have big spikes in unemployment during recessions, as is happening now, but the they do regenerate quickly and create employment far faster than rigid ones after its over. Europeans are a bit better off now if they have a job, but finding work is routinely easier in the US normally. That’s why unemployment is usually quite a it higher in Europe than the US. The challenge for policy makers – and this is what the OECD seem to be getting at rather than rejecting flexibility as you claim – is establishing the policy framework that allows flexibility without leaving people to their own devices when teh cold winds blow. In the UK we do okay on this – employment preservation through wage moderation and short hours has been remarkable over the last year, and we have lots of money going into JobCentrePlus. Of course we could do more, but I would argue that that the nexus of flexibility and a good safety net/active labour market policy is the reason why unemployment is half a million lower than we all expected. Woe betide us if we let this experience drag us down the road of subsidising or forcing firms to keep jobs that don’t really exist based on the businesses market.

  3. Adam Lent

    Adam Lent
    Jan 22nd 2010, 2:11 pm

    Neil,

    If you compare the depth of each European economy’s recession with its rise in unemployment, it is clear that the UK has performed slightly better than the average. But the really striking thing about the resulting data is how the supposedly more rigid labour markets of Germany and the Netherlands have seen only very small rises in unemployment despite facing comparable drops in output to the UK. Both have also seen a steeper reduction in hours than the UK.

    This is important because, as we all know, recessions can scar economies and workers for very long periods of time. Germany’s better performance in this recession means it may well be far fitter than the UK for some time to come. It certainly will not face the drag on the public finances that long term unemployment will now cause in the UK.

    There are lessons for us all to learn here about what really makes for a flexible labour market in tough times.

    The notion also that in flexible labour markets it is easier to find work and that employment rates are higher needs to be investigated more closely. This may be the case but if there is a larger pool of jobs with bad pay and terrible conditions as a result of flexibility that simply leaves many cycling in and out of work, on and off benefits, it is hardly something to maintain into the future.

  4. Nigel Stanley

    Nigel Stanley
    Jan 22nd 2010, 3:02 pm

    And just to briefly add to Adam’s point, flexibility is one of those weasel words that means completely different things to different people.

    My target was the neo-liberal view that holds the strong performance of, say, the Scandinavian countries impossible.

    The concept of flexicurity – where employees are extremely flexible but in the context of active labour market policies that provide high and stable levels of quality employment – clearly works in much of Europe.

    And while I might prefer The Wire to Wallender on TV, I think I know which is a better place to live if you’re not at the top end of the labour market.

  5. Peter HJ
    Jan 23rd 2010, 10:33 pm

    Thanks for another great post Nigel. We’re cross-posting quite a few of them to our New Unionism newswire; hope that’s okay. So good to see union policy folk becoming such effective communicators!

  6. dogstarscribe
    Jan 27th 2010, 9:49 am

    Key to labour market flexibility is some kind of reciprocity. If 25% of your wages go on housing costs (e.g. a mortgage) and you only have 5% of your income to spend on discretionary items, then a 10% pay cut from short time working means your household is in deficit. Continue down that road for six months and something has to give. Workers know that, so they resist short time working.
    If workers who’ve accepted short time working were given protection against their creditors you’d have some kind of reciprocity, but the reality is that as soon as you can’t pay all of your debts you are cast into a kind of social netherworld of insecurity. That lack of a safety net is a key factor in preventing workers from ’embracing’ flexibility; it’s too much of a one way street.