Job Security: Lessons from Europe

As growth in the EU stalled in the mid-1990s, it was a popular view that policies designed to provide security to workers would lead to slower economic growth. In other words, that there was a tradeoff between achieving workforce security and achieving income growth. Things are becoming a bit more complicated now, especially because EU growth is approaching U.S. levels making it harder to justify conventional wisdom.

Recently, European countries have begun rearranging their mix of labor policies to allow for more flexibility in their systems, while at the same time offering substantial aid to workers whose jobs are lost as a result of greater flexibility. For example, France, Germany, and Denmark have all eased worker protections in some areas of their economy, giving employers more leeway to hire and fire workers. This moves them in the direction in the U.S. system and should be good for growth as it will make it easier for workers in failing industry and companies to be released, and soaked up by faster growing ones. However, flexibility comes with costs to workers and their families who must deal with the often difficult transitions that accompany layoffs. This fact has not been lost on the poster child of worker security, Denmark.

Louis Uchitelle in today's NY Times online edition:

"Employers in Denmark are relatively free to lay off workers, but the state then steps in with benefits that replace 70 percent of the lost income for four years. Government also finances retraining and education, pressuring the unemployed to participate and then insisting that they accept reasonable job offers or risk cuts in their benefits.

THE Danish government devotes 3 percent of the nation’s gross domestic product to retraining, compared with less than 1 percent in the United States. And, of course, everywhere in Europe, the state pays for health insurance and for pensions that often encourage early retirement by replacing big percentages of preretirement income."

Thanks to The Economist's View for bringing Uchitelle's article to my attention.