Several countries across Europe have experienced persistent problems with unemployment since the start of the financial crisis. Alexandre Afonso writes that southern European countries are faced with a choice between adopting either Anglo-Saxon style market liberalisation or Nordic style welfare spending as part of their response to the problem. Seeing neither as a feasible option, he proposes an alternative strategy – a ‘third way’ based on enabling part-time work, offering greater vocational training, and increasing labour market participation among key groups

Afonso, Alexandre

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12/12/2013Southern Europe should consider an economic ‘third way’to tackle unemployment and inequalityblogs.lse.ac.uk /europpblog/2013/12/12/southern-europe-should-consider-an-economic-third-way-to-tackle-unemployment-and-inequality/Several countries across Europe have experienced persistent problems with unemployment since the startof the financial crisis. Alexandre Afonso writes that southern European countries are faced with achoice between adopting either Anglo-Saxon style market liberalisation or Nordic style welfarespending as part of their response to the problem. Seeing neither as a feasible option, he proposesan alternative strategy – a ‘third way’ based on enabling part-time work, offering greater vocationaltraining, and increasing labour market participation among key groups.Mass unemployment is probably one of the most worrying features of the Eurozone crisis. As youthunemployment is hitting record levels (one in four people under 25 in Europe and more than one intwo in Spain are officially out of work), many observers are warning of the prospect of a “lost generation”, especiallyin southern Europe. The European Central Bank and the international financial institutions may have developed anobsession for deficit and debt reduction, but mass unemployment can be considered a much more worrying problemin the long term for both workers and governments.For workers, their skills deteriorate when they are out of work and, as technology moves forward, their likelihood offinding a job tends to decrease with the duration of unemployment. For governments, each period of massunemployment tends to increase the incompressible threshold of structural unemployment. When the numbers ofunemployed increase en masse, it is very difficult to come back to the initial level, even in the case of an economicupturn. Many workers driven out of work for too long are never able to come back into employment. The problem iseven more serious when unemployment primarily concerns young people at the beginning of their career, whocannot even start climbing the employment ladder in the first place.In this context, what can governments do, and how do different types of reform impact public deficits and inequality?In the late 1990s, political economists argued that service-based economies, where economic and productivitygrowth tend to be much lower than in the past, entail a “trilemma” between high employment, low inequality andbudgetary restraint. Following this idea, governments in service economies have to choose two out of these threeobjectives, as all three of them cannot be reconciled.Continental European approachFor many Continental European countries with the so-called “Bismarckian” welfare state, such as France, Germany,Italy or Spain, the common wisdom is that employment has often been sacrificed to reduce inequality and – oftenunsuccessfully – contain taxation at the same time. Redistribution is funded through payroll contributions levied onwages rather than by general taxes, which tends to price out low-skilled workers. The amount of contributionsemployers have to pay even on low salaries can make them too expensive, and earnings-related benefits andminimum wages possibly prevent the entry of low-skilled workers.In Mediterranean countries, like Spain, Italy, Greece or Portugal, the problem which is often emphasised is therigidity of labour laws, which tend to protect the “insiders” – people who have entered the labour market in the periodof growth between the 1960s and 1990s, making it harder for new entrants to get in. The result is that young peopleare much more affected by unemployment, in spite of the fact that they are typically much more qualified than theirparents.On top of this, poor childcare inherited from a strong “male breadwinner” bias, combined with the loosening of familystructures, typically hampers female employment in southern Europe. In 2012, only 54 per cent of Spanish women1/5and 50.5 per cent of Italian women between 20 and 64 were in employment (64 per cent and 71 per cent of menrespectively). The corresponding figure for Denmark was 72.2 per cent of women and 78.8 per cent of men. Evenconsidering lower employment rates in general, the gender gap in employment is typically greater in the South.Figure 1: European employment rates for people aged 20-64 by gender (2012)Source: EurostatAnglo-Saxon approachThe first strategy governments can pursue to increase employment while keeping a lid on public expenditure is theAnglo-Saxon way – namely, mass deregulation to price in workers again at the bottom of the labour market. It is alsothe one that is being pushed by European institutions, Germany and the current Spanish government. This involvescutting down payroll contributions and benefits in an attempt to see the expansion of the labour market downwards,through low-wage jobs. It is understandable that Germany is pushing for this kind of solution because it is thestrategy that it itself has pursued since the early 2000s, with the rise of mini-jobs, the Hartz reforms and a deliberatestrategy of wage compression by German trade unions.The obvious direct consequences of this strategy are the higher income inequalities typical of Anglo-Saxoneconomies. Income inequalities in Germany also seem to have increased considerably in recent years in spite of the“jobs miracle”. It is unclear, however, whether deregulation can really increase employment across a wider set ofcountries. Moreover, the internal devaluation strategy pursued by Germany to boost exports and run a positive tradebalance can only work if other countries run a trade deficit: we cannot all be Germans at the same time.2/5Scandinavian approachThe second strategy is the Scandinavian way. It consists of the massive expansion of the public sector to provide awide variety of social services funded by high levels of taxes. Countries like Denmark, Norway or Sweden tend tohave higher employment levels at least in part because the state provides or subsidises a large variety of high-quality social services such as childcare, which not only employ a large workforce, but also tend to facilitate femaleemployment. Affordable childcare allows both members of a household to be employed, while its absence oftenforces a member of southern European households – typically the woman – to choose to stay at home.Moreover, these countries invest massively in active labour market policies. Obviously, the price to pay for thisstrategy is very high levels of taxation to fund the state, or alternatively, an increase in borrowing. In the context offiscal austerity that pervades almost all European countries, this is politically very difficult, or even impossible.Countries like France, however, still have large programmes of publicly subsidised employment for young people. In2013, a quarter of jobs held by people below 25 were partly subsidised by the state.Liberal-corporatist approachIf deregulation creates inequality and is not guaranteed to work, while public sector expansion is very expensive,what is left? In a forthcoming book chapter, Jelle Visser and I argue that there may be a third “liberal-corporatist”way, based on the experience of countries such as Switzerland and the Netherlands, where employmentparticipation is high, inequality is low to moderate, and the public sector is nowhere near the size of Scandinaviancountries.This model relies on the widespread use of part-time employment and strong systems of occupational skills, liftingwages in the bottom of the labour market. The Netherlands and Switzerland have the highest incidence of part-timeemployment in the OECD, and Switzerland has one of the lowest income inequality levels in the OECD, in spite ofthe fact that it redistributes as little as the United States. In a context where public sector expansion and extensiveScandinavian style subsidised childcare are politically difficult to put in place, the increase of part-time employmenthas been a private response allowing women in particular to reconcile childcare with labour market participation.Interestingly, the places where the Dutch and Swiss social models perform particularly well are those in whichsouthern European countries are lacking – notably for female, elderly, and youth employment. The latter is largelydue to strong systems of vocational training which ensure a better transition from school to work, so that thealternative is not simply between dropping out of school with low skills or going to university – a system which alsotends to foster income inequalities. In all these respects, they can represent a politically viable way to escape thetrilemma outlined above, at a lower cost in terms of public finances and inequality.Figure 2: Frequency of part-time employment in global economies (2011)3/5Source: EurostatOf course, any supply-side reform agenda is constrained by the availability of demand, which is a massive problemin southern Europe. Governments are cutting spending at a time when households are reducing their consumption.Supply-side reforms can have little effect if nobody at home or abroad is buying anything. In Switzerland and theNetherlands as well, high employment has been underpinned by some form of demand-stimulating factor whosesustainability is uncertain. In the Netherlands, tax exemptions on mortgages have encouraged ever-inflating houseprices and the highest levels of mortgage debt in Europe. At the moment, the country is in recession, and thegovernment has cut spending at a time when households are seeking to reduce their debt level.In short, while the Dutch government has been a harsh advocate of austerity in southern Europe, it finds itselftrapped in the same kind of “balance-sheet recession” that Spain is facing. In Switzerland, domestic demand hasbeen maintained by very high levels of immigration since the mid-2000s, compensating for declining exports due tothe appreciation of the Swiss franc (as a consequence of the depreciation of the euro) and anaemic demand in theEurozone. The sustainability of this strategy can be questioned as well, as population growth cannot be pursuedindefinitely.Please read our comments policy before commenting .Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, norof the London School of Economics.Shortened URL for this post: http://bit.ly/1h0IeEg _________________________________About the author4/5Alexandre Afonso  –King’s College LondonAlexandre Afonso is a Lecturer in the Department of Political Economy at King’s College London.His research interests are comparative politics, labour mobility, industrial relations and welfare statereforms. His book Social Concertation in Times of Austerity was published by Amsterdam UniversityPress in 2013. He tweets @alexandreafonso5/5

Southern Europe should consider an economic ‘third way’ to tackle unemployment and inequality

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