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Small countries, big success
Europe's employment revival:
How smaller countries create jobs
Can smaller countries teach employment creation to bigger countries? Apparently so, says a new ILO study 1 prepared for a high-level meeting 2 held recently in Geneva. Austria, Denmark, Ireland and the Netherlands have shown that "employment success is also feasible in Europe's welfare states". Factors explaining this success - social dialogue, macroeconomic policy and labour market policy - may provide new solutions to unemployment problems which have afflicted Europe over the past two decades.
GENEVA - Contrary to some of the bigger European countries, which still suffer from depressed labour markets with sometimes very high levels of unemployment, including youth and long-term unemployment, Austria, Denmark, Ireland and The Netherlands have been experiencing a remarkable labour market recovery or have maintained low unemployment over the long term.
In addition, some of the countries have recently seen a rapid increase in employment and in employment rates. In most cases, gender gaps have been reduced, but remain large, the ILO study says. Youth unemployment has also continued to decline, as did long-term unemployment. The countries under review are small and account for around 10 per cent of European Union GDP and 7 per cent of its total labour force.
In November 1998, both Denmark (4.6 per cent) and the Netherlands (3.6 per cent) are, together with Austria (4.4 per cent), among the EU countries with the lowest unemployment rates. This is all the more remarkable, the ILO study says, as unemployment had reached 10 per cent in Denmark as late as 1993 and peaked at 12 per cent in the Netherlands in 1982. Denmark has also by far the highest employment rates (both in gross and in full-time equivalent rates). It is also the country with the smallest gender gap in employment rates.
To the contrary, the Netherlands has comparatively low employment rates in full-time equivalents, because of the importance of part-time work. This is also the reason for high gender gaps in full-time equivalent rates, as women work overwhelmingly part-time.
Even if Dutch unemployment levels come close to the traditional definition of full employment (3 per cent), none of the countries has yet reached full employment if qualitative criteria are also included, the study points out.
There is some way to go before one can speak of absolute and not relative success. However, while this employment success has been accompanied by a change in the structure of employment from permanent full-time jobs to a more heterogeneous pattern of jobs (such as part-time and temporary jobs), it seems not to have been at the price of a general fall in real wages and a sharp rise in inequalities.
While unemployment in Ireland has declined rapidly from its very high level (17 per cent in 1985), it is still relatively high (7.3 per cent) compared with the three other countries. However, it has now fallen significantly below the EU average of 9.8 per cent. Ireland is also experiencing a fast decline in youth and long-term unemployment; however, also from a high level. Austria, which has maintained low levels of unemployment over a long period, but had lately seen a small increase, has most recently succeeded in a small decrease. In addition it has both low youth and long-term unemployment. Austria is also one of the few countries which always had unemployment rates amounting to less than half the rate for the European Union.
The study concludes that "at least three of the countries, which belong to the northern and central European socio-economic model, produce less inequalities than those which are based on a free-market approach." This results from collective bargaining between the social partners within systems of "corporatist governance", but is also due to the efficiency of the social transfer system in poverty reduction. The latter is itself an outcome of the system of corporatist governance.
Country-specific factors of success
in the labour market
Austria: Strong and stable corporatist governance, coordinated macroeconomic policy, traditionally strong role of the government sector, temporary fiscal expansion along with a general background of fiscal consolidation, wage moderation, tax reforms, high LM flexibility, labour supply reduction policies, layoff system, (apprenticeship) training.
Denmark: Renewed corporatist governance, coordinated macroeconomic policy, strong role of the government sector, temporary fiscal expansion along with background of fiscal consolidation, tax reforms, wage moderation, labour market policy (leave schemes, activation, early retirement) and a layoff system, labour market reform, (continuous) training, labour supply reduction.
Ireland: Increasing corporatist governance and macroeconomic coordination, fiscal consolidation, wage moderation, tax reforms, foreign direct investment, European structural fund, active labour market policy, (university) training.
Netherlands: Renewed corporatist governance, coordinated macroeconomic policy and fiscal consolidation, welfare reform, tax reforms, working time, labour market reforms, labour supply reduction.
The study shows that the relative labour market success of the four countries is mainly due to appropriate policies in three fields: social dialogue, macroeconomic policy and labour market policy.
Corporatist governance and social dialogue, combining mutual information and discussions of issues at national levels with the ability to implement reforms on sectoral and enterprise levels, facilitating wage moderation and reconciling diverging interests of specific groups with the interests of society and the economy as a whole.
Three of the countries have strengthened the social dialogue, after experiencing economic hardship and high unemployment rates in the beginning of the 1980s, while Austria has maintained the dialogue throughout the post-war period. The dialogue has contributed to installing a climate of confidence between the partners and the moderate wage policy has been part of a stabilization-oriented macroeconomic policy. The social partners have also been engaged in reforms of social security, labour market policy and labour market institutions.
These reforms have not always been easy to accept by the social partners. For example, trade unions agreed to changes which have not always been in the short-term interests of their members. That these changes (e.g., in social security administration and social transfer benefit levels), which were combined with moderate wage increases, have not been accompanied by social unrest, is certainly one of the achievements of social dialogue.
The ILO study finds that institutions which permit communication at high levels, are of particular importance for conducting the dialogue, while it is also imperative to have a dialogue at lower levels and this not only between interest groups, but also within them. In its absence, it is less likely that the rank and file members will cooperate to implement top level agreements.
Macroeconomic policy oriented towards price, interest and exchange rate stability, which also - in a limited but sometimes significant manner - provides fiscal stimuli to the economy against a general background of fiscal consolidation. The study estimates that countries which have reduced their deficits are recovering their ability to intervene anti-cyclically in the economy.
Unlike in the 1970s, when such public spending tended to go out of control, today governments seem to be able to use the beneficial short-term effects of fiscal expansion, but then revert to fiscal consolidation in the next round. In all four countries, but in particular in Austria and Denmark, government expenditure has been important for growth and employment, even though expenditure declined as a share of GDP. The question is, however, whether a government spends money efficiently, and if lower spending leading to lower taxes would have been even more beneficial for the economy. Arguments in favour of a "crowding out" of private by public spending have been put forward, but the ILO study has not found evidence to support this.
The study considers government spending and private activities to be mutually supportive, and, while fiscal consolidation is to be pursued, it rejects claims that "lean" government is the answer to all problems in the labour market of the European welfare economies. Fiscal expansion within some margins is important, when the economy is entering a recession, and fiscal consolidation should be required to re-establish the possibility of governments to intervene anti-cyclically in the economy, in line with the criteria established for the European Monetary Union.
Active and passive labour market policy and labour market reforms have had an impact on the recovery of the Austrian, Danish, Dutch and Irish labour markets. The study sees labour market policy in the context of labour market regulations. Both "passive" income replacement schemes, and active labour market policy measures such as labour market training, are instruments which provide security for workers and adjustment flexibility for firms. Without such a buffer, firms would have to bear the brunt of the costs and the social consequences of adjustment, and workers would face high insecurity.
The ILO study clearly shows, that labour market policy is one of the pillars of the European welfare states. While this does not preclude the necessity of further reforms - for example, to activate measures along the lines of the European Employment Strategy in order to prevent the rise of long-term unemployment - policy makers should be aware of the basic function of labour market policy and its interrelation with employment protection and the general functioning of labour markets.
Reforms in the delivery of labour market policies (e.g., through employment services) have contributed to the success of the countries, by making those policies more responsive to local and enterprise needs.
The three factors of labour market success, a sound macroeconomic environment and policy, social dialogue, and labour market policy, might produce their effects also in larger countries, but there are distinct advantages of being small. First, these countries are open economies, well integrated into the world economy partly because of the small size of their domestic markets. At least for these countries economic openness and "globalization" seems to be paying off. Second, the small size of the countries under review may be an additional factor of success because of the smaller "power elite" circles. Their informality and closer personal relationships are an important condition for successful bargaining and consensus.
The efficient combination of policies and institutions
More than from isolated policy actions, labour market success seems to result from an efficient combination of factors. The ILO study offers some indications of how such interactions might work.
Different across countries, effective combinations of the three factors - social dialogue, macroeconomic policy and labour market policies - have shown a positive impact. At the macroeconomic level, stability-oriented monetary policy, fiscal consolidation and wage-moderation policies seem to have accommodated each other. Austria is a good example of how to introduce long-term stability by such a coordination of policies, without reducing labour market flexibility supported also by (passive) labour market policy. More specifically, in the labour markets of Denmark and Austria, weak dismissal protection (on the regulation side in Denmark and de facto in Austria) has been compensated for by relatively encompassing (income) protection. A significant part of workforce adjustment is thus shifted from the company to the societal level.
In the two countries, where small and medium-sized firms prevail, social protection systems seem to support the economy and the labour market, and add to flexibility, resulting in low shares of long-term unemployment and high employment rates.
The ILO study cites other examples of successful policy combinations such as the temporary demand injection in the economy combined with a training-based job rotation scheme in Denmark, or the combination of part-time work, a basic pension scheme and placement activities of temporary work agencies in the Netherlands.
The study acknowledges that the specific advantages of the small sizes of the four countries, as well as their different institutions, traditions and culture, make it difficult to transfer policies from one country to another. In particular, it might be difficult to adapt "democratic corporatism" to countries with a liberal, pluralist tradition. However, the ILO report notes that smaller countries can teach at least two lessons to larger ones.
While "democratic corporatism" per se is not the answer to all labour market problems, it seems to be a form of governance which is as efficient in running the economy as liberal pluralist (market-led) forms of governance. "Especially if equity issues are taken into account, corporatist governance shows clearly superior performance", as can be seen by more equal distribution of income and lower poverty rates, the study points out. Up to now, the problem of corporatist governance countries was up to now their poor employment performance. With this problem solved, the countries seem to have developed into successful socio-economic models.
The second lesson is that economic openness pays off and that there seem to be no longer-term negative effects of globalization on the labour markets of the four countries, or at least no such problems which remain unsolved. Besides these two major elements (form of governance and degree of economic openness), there are many other examples of policy elements from the four "success" cases, which might help some of the larger (European) countries to overcome their labour market problems.
The study sees no reason why larger countries should not be able to introduce job-rotation schemes along the Danish lines or part-time regulations like the Dutch. A job rotation system (adapted from the Danish model) was, for example, recently introduced in Austria, which has institutions rather similar to Germany's.
It is almost certain that such convergence of policies and regulations will be stimulated by the European Monetary Union, which will inevitably lead to more adjustment in various policy fields, the study concludes.
1 The study "Europe's Employment Revival: Four small European countries compared" is a follow-up of Commitment Three of the 1995 World Summit on Social Development, in Copenhagen and presents the results of ILO country employment reviews in Austria, Denmark, Ireland and the Netherlands. The four country studies have been reviewed and commented on by the social partners and the Ministries of Labour in the four countries.
2 Social Dialogue and employment success, an ILO Symposium, Geneva 2-3 March 1999.