Foundation Forum 2009 - Reflections on the recession

Quo vadis Europe: perspectives on employment

Europe is moving into ‘terra incognita’ as deep economic crisis causes structural and institutional change. To navigate its way through the next 10 to 15 years, Europe needs to draw a map based on the principles of social partnership which will signal the way forward on a coherent journey. Global recession has had a significant impact on three strands of the fabric of the European model: labour market policies, the sustainability of public services and social security and welfare policies. Economic constraints will impact on active labour market policies; are they sustainable in the current labour market? Public services are also under pressure. In the carers sector, support systems are inadequate but could new thinking could provide needed jobs? Given the extent of the crisis, does Europe need to restructure its welfare and social security policies along with redistribution and active anti-poverty measures?

Investing in human capital rather that restricting spending should be the way forward through the current crisis. European welfare systems could be transformed to see costs not as consumption but as social investment, which can make a reasonable rate of return to the economy and society. Income inequality has been shown to constrain economic growth. Linking per capita spending on active labour market policies with rising unemployment levels has been demonstrated to be very effective in the some countries. Investing in infrastructure for caring for the elderly could provide careers for the young as well as much needed support for the aged, the ill and the disabled and their families.

A full blown social crisis

The starting point of any discussion on labour market policy is that the current recession cannot be allowed to turn into a full blown social crisis, according to Paul Swaim, Head of Employment Outlook at OECD. The issues that need to be addressed to meet that challenge are twofold: support for current labour demand and job creation, on one hand, and, on the other, providing appropriate assistance to the jobless.

Those goals may be self-evident, but deciding how to achieve them is considerably more problematic. It appears that there may be more scope than previously thought in the past by saving jobs through work-sharing schemes. Schemes can be activated by the social partners at the different levels, by shortening work time in exchange for agreement on compensation or training. There could be wider application through government financial support of such schemes.

Are the unemployed being left in the cold?

There is a danger that this approach might increase labour market segmentation, as workers who have more stable careers are more likely to benefit from such schemes and the jobless could be left in a more precarious employment position. Recovery in labour markets may be slow but when it does come, with improved business conditions, companies which have employed these policies won’t need to hire. They will simply increase working time to current employees, further excluding the unemployed from an opportunity to work.

In terms of measures to help unemployed people back into work, data from previous recessions shows that spending on active programmes for the unemployed did not increase alongside rising unemployment figures. As it became more difficult for people to get employment, less on a per capita basis was spent to help them. That premises the question as to whether and to what extent do governments need to substantially increase spending.

The sustainability of active labour market policy

The OECD is committed to the idea that social benefit schemes need to be actively managed. As unemployment continues to rise, it becomes increasingly difficult to maintain the notion of ‘getting back to work’. Is the activation approach still good policy if unemployment rates go from 5% to 10%?

Swaim highlights the most striking feature of labour market policy over the last year as how effective is has been in several countries (Denmark, Switzerland and Australia). These countries increased their funding for job search assistance, training and other measures. The pressing question is whether this works. To what extent do governments need to substantially increase their funding for job search assistance, training and hiring subsidies? These measures are very expensive and therefore are they sustainable and can capacity increase to cope with demand?

The aftershocks of the crisis

Economic crisis is a driver of deep institutional change so what does the future hold for social security and welfare reform in Europe? Anton Hemerijck, Dean, Faculty of Sciences, Free University of Amsterdam says that we are in ‘terra incognita’. Even as Europe slowly moves into recovery, it will experience aftershocks of the crisis due to unemployment, the pensions situation, the ageing European population and systemic debt in our economies. In this context, will the ‘hyperactive state’ be able to deliver results? The old model of the cosy welfare state has run its course. Despite the uncertainty, however, it will survive the changes as will economic internationalisation. The question is whether Europe will embrace ‘embedded globalisation’ – a new approach to the welfare state.

Changing priorities – invest in the young

Currently in Europe, social spending on the elderly is greater that on children. If relative poverty levels among children and the elderly are compared, the elderly fare much better – leaving children falling behind. A comprehensive child investment strategy is needed.

Countries that have the highest growth rates and the highest employment rates have the lowest inequality and have the most flexible human capital and are more gender equal. Inequality lowers life chances and opportunities of the young and results in loss of productivity which in turn leads to more passive income support costs.

Europe needs to transform its welfare state by taking social investment out of public finances, where it is defined as consumption, and target it as social investment with a reasonable rate of return to the economy and society. Income inequality has been shown to constrain economic growth. It also worsens life chances and opportunities, resulting in lost productivity and more passive income support costs.

Redistribution should be a core function of the welfare state. This implies a strong focus, in the current crisis, on minimum income protection. An activated anti-poverty strategy is needed but has not been developed.

Drawing a map for Europe

The crisis has fundamentally altered the global architecture, the nature of power and Europe’s position in the global economy. It has challenged many of our assumptions about the European economy. Europe needs to develop a map which is capable of generating a feeling that there is a coherent journey on which we can collectively embark. In thinking about social policy, and the ways that we can respond to the current crisis, we need to hold on to two contradictory ideas in our head: the necessity for a map and the impossibility of an accurate map, according to Fintan O’Toole, Irish writer and broadcaster.

Partnership as a driver

At the centre of the creation of that map is partnership – the engagement and the democratic involvement by a wide range of social actors. Partnership will be the driver of European comparative economic advantage over the next 10-15 years; it will provide the flexibility, innovation and imagination to meet the challenges of the changing global architecture. The underlying principles of partnership should engage around three key tenets: security, sustainability and sufficiency.

Security, as a principle of solidarity matters, not simply as part of the welfare state, for those who are insecure, but also for those who are in employment. Job security matters more than wage increases. The opposite of security is fear which is fundamentally corrosive of the enlightenment of democracy. Sustainability as an economic and social concept should be the basis of social partnership which creates a common self-interest. Added to these should be the principle of sufficiency; articulating the idea for civil society the notion of ‘enough’, of not living beyond one’s means.