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Still, the absolute level of the minimum wage seems to be
far more important that its level relative to the average
or median wage. Hungary's unemployment went down, from 9%
to 6%, while its minimum wage went up (in real terms) by
72% in 1998-2001. During the same four year period, its
economy grew by an enviable 5% a year, real wages
skyrocketed (by 17%), and its inflation dropped to 7% (from
16%).
IIe. Structural Unemployment
Most unemployment in Europe is structural (as high as 8.9%
in Germany, according to a 1999 IMF study). It is the
ossified result of decades of centralized wage bargaining,
strict job protection laws, and over-generous employment
benefits. The IMF puts structural unemployment in Europe at
9%. This is compared to the USA's 5% and the UK's 6% (down
from 9%). The remedies, though well known, are politically
unpalatable: flexible wages, mobile labour, the right
fiscal policy, labour market deregulation, and limiting
jobless benefits.
Some hesitant steps have been taken by the governments of
Germany and France (cut jobless benefits and turned a blind
eye to temporary and part-time work), by Italy (decoupled
benefits from inflation), and by Belgium, Spain and France
(reduced the minimum wage payable to young people).
But piecemeal reform is worse than no reform at all. In an
IMF Staff Paper, Coe and Snower describe the Spanish
attempt to introduce fixed term labour contracts. It
established two de facto classes of workers - the temporary
vs. the permanently employed - and, thus, reduced labour
market flexibility by granting increased bargaining power
to the latter. France introduced a truncated, 35-hours,
working week. Other countries imposed a freeze on hiring
with the aim of workforce attrition through retirement.
Yet, these "remedies" also led to an increase in the
bargaining power of the remaining workers and to
commensurate increases in real wages.
IIf. Unemployment and Inflation
Another common misperception is that there is some trade
off between unemployment and inflation. Both Friedman and
Phelps attacked this simplistic notion. Unemployment seems
to have a "natural" (equilibrium) rate, which is determined
by the structure and operation of the labour market and is
consistent with stable inflation (NAIRU – Non Accelerating
Inflation Rate of Unemployment).
NAIRU is not cast in stone. Employment subsidies, for
instance, make low skilled workers employable and lower
NAIRU. So do unilateral transfers which raise incomes.
According to Phelps, big drops in unemployment need not
greatly increase permanent inflation. Stiglitz calculated
that America's NAIRU may have dropped by 1.5% due to
increased competition in the markets for jobs and goods.
These findings are supported by other prominent economists.
Stiglitz concluded that NAIRU, in itself, is meaningless.
It is the gap between the estimated NAIRU and the actual
rate of unemployment that is a good predictor of inflation.
IIg. The Rhineland Model, the Poldermodel, and Other
European Ideas
The Anglo-Saxon variant of capitalism is intended to
maximize value for shareholders (often at the expense of
all other stakeholders).
The Rhineland model likes to think of itself as "capitalism
with a human face". It calls for an economy of consensus
among stakeholders (shareholders, management, workers,
government, banks, other creditors, suppliers, etc.)
Netherlands, too, has an advisory Social and Economic
Council. Another institution, the Labour Foundation is a
social partnership between employees and employers. Both
are relics of a corporatist past.
But the Netherlands saw its unemployment rate decline from
17% to less than 2% while ignoring both models and
inventing the "Poldermodel", a Third Way. Wim Duisenberg,
the Dutch Banker (currently Governor of the European
Central Bank), quoted in an extensive analysis of the
Poldermodel prepared for "The Economist" by Frits Bolkstein
(a former Dutch minister for foreign trade), attributed
this success to four elements:
1. Improving state finances
2. Pruning social security and other benefits and
transfers
3. Flexible labour markets
4. A Stable exchange rate
According to Thomas Mayer and Laurent Grillet-Aubert ("The
New Dutch Model"), the "Dutch Miracle" traces its
beginnings to 1982 and the Wassenaar Agreement in which
employers' organizations and trade unions settled on wage
moderation and job creation, mainly through
decentralization of wage bargaining. The government
contributed tax cuts to the deal (these served to
compensate for forgone wage increases). These cuts
generated a fiscal stimulus and prevented a contraction in
demand as a result of wage moderation. Additionally, both
social security payments and the minimum wage were
restricted. Wage increases were no longer matched by
corresponding increases in minimum social benefits. Working
hours, hiring, firing and collective bargaining were all
incorporated in a deregulated labour market.
Small and medium size businesses costly regulation was
relaxed. Generous social security and unemployment benefits
(a disincentive to find work) were scaled back. Sickness
benefits, vacation periods, maternal leave and unemployment
benefits were substantially adjusted.
The Netherlands did not shy from initiating public works
projects, though on a much smaller scale than France, for
instance. The latter financed these projects by raising
taxes and by increasing its budget deficit. The Dutch
preferred to rely on the free market.
Long term (more than 12 months) unemployment in Europe
constitutes 30% of the total. About half the entire
workforce under the age of 24 is unemployed in Spain - and
about one quarter in France and in Italy. Germany, Austria
and Denmark escaped this fate only by instituting
compulsory apprenticeship. But the young unemployed form
the tough and immutable kernel of long-term unemployment.
This is because a tug of war, a basic conflict of interest,
exists between the "haves" and "have-nots". The employed
wish to defend their monopoly and form "labour cartels".
This is especially true in dirigiste Europe.
While, in the USA, according to McKinsey, 85% of all
service jobs created between 1990-5 paid more than the
average salary – this was not the case in Europe. Add to
this European labour immobility - and a stable geographical
distribution of unemployment emerges.
The Dutch model sought to counter all these rigidities. In
a report about "The Politics of Unemployment" dated April
1997, "The Economist" admiringly enumerated these steps:
* The Dutch reduced social security contributions from
20% (1989) to 7.9% and they halved the income tax rate
to 7% (1994).
* They allowed part time workers to be paid less than
full timers, doing the same job.
* They abandoned sectoral central bargaining in favor of
decentralized national bargaining.
* They cut sickness benefits, unemployment insurance
(benefits) and disability insurance payments (by 10%
in 1991 alone – from 80% to 70%).
* They made it harder to qualify for unemployment (from
1995 no benefits were paid to those who chose to
remain unemployed).
* The burden of supporting the sick was shifted to the
employer / firm. In 1996, the employer was responsible
to pay for the first year of sickness benefits.
Even the Dutch model is not an unmitigated success, though.
More than 13% of the population are on disability benefits.
Only 74% of the economically active population is in the
workforce - one third of them in part time jobs.
But compare the Dutch experience to France's, for instance.
The Loi Robien exempted companies from some social security
contributions for 7 years, if they agree to put workers on
part time work instead of laying them off. Firms promptly
abused the law and restructured themselves at the
government's expense.
The next initiative was to reduce the working week to 35
hours. This was based on the "Lump of Labour Fallacy" – the
idea that there is a fixed quantity of work and that
reducing the working week from 39 to 35 hours will create
more jobs.
In Spain, hiring workers is unattractive because firing
them is cost-prohibitive. The government – faced with more
than 22% unemployment in the mid-90's – let more than 25%
of all workers go on part time contracts with less job
protection, by 2001.
Still, no one knows to authoritatively answer the following
substantial questions, despite the emergence of almost
universally applied UN-sponsored Standard National Job
Classifications:
How many are employed and not reported or registered? How
many are registered as unemployed but really have a job or
are self-employed? How many are part time workers – as
opposed to full time workers? How many are officially
employed – but de facto unemployed or underemployed? How
many are on "indefinite" vacations, on leave without pay,
on reduced pay, etc.?
Many countries have a vested interest to obscure the real
landscape of their destitution - either in order to prevent
social unrest, or in order to extract disproportionate
international aid. In a few countries, limited amnesties
were offered by the state for employers' violations of
worker registration. Firms were given a few, penalty-free,
weeks to register all their workers. Afterwards, labour
inspectors were supposed to embark on sampling raids and
penalize the non-compliers, if need be by closing down the
offending business. The results were dismal.
In most countries, the unemployed must register with the
Employment Bureau once a month, whether they receive their
benefits, or not. Non-compliance automatically triggers the
loss of benefits. In other countries, household surveys
were carried out - in addition to claimant counts and
labour force surveys, which deal with the structure of the
workforce, its geographical distribution, the pay
structure, and employment time probabilities.
Yet, none of these measures proved successful as long as
government policies - the core problem - remained the same.
Faced with this trenchant and socially corroding scourge -
governments have lately been experimenting with a variety
of options.
III. The Solutions
IIIa. Tweaking Unemployment Benefits
Unemployment benefits provide a strong disincentive to work
and, if too generous, may become self-perpetuating.
Ideally, unemployment benefits should be means tested and
limited in time, should decrease gradually and should be
withheld from school dropouts, those who never held a job,
and, arguably, as is the case in some countries, women
after childbearing. In the USA, unemployment benefits are
not available to farm workers, domestic servants, the
briefly employed, government workers and the self-
employed.
Copious research demonstrates that, to be effective,
unemployment benefits should not exceed short-term sickness
benefits (as they do in Canada, Denmark, and the
Netherlands). Optimally, they should be lower (as they are
in Greece, Germany and Hungary). Where sickness benefits
are earnings-related, unemployment benefits should be flat
(as is the case in Bulgaria and Italy). In Australia and
New Zealand, both sickness benefits and unemployment
benefits are means tested. Unemployment benefits should not
be higher than 40% of one's net average monthly wage (the
"replacement rate").
Most unemployment benefits are limited in time. In
Bulgaria, to 13 weeks, in Israel, Hungary, Italy and the
Netherlands to 6 months and in France, Germany, Luxemburg
and the United Kingdom – to 12 months. Only Belgium offered
time-unlimited unemployment benefits. In most countries,
once unemployment benefits end - social welfare payments
commence, though they are much lower (to encourage people
to find work).
In many countries in transition (e.g., in Macedonia), the
unemployed are eligible to receive health and pension
benefits upon registration. This - besides being an
enormous drain of state finances - encourages people to
register as unemployed even if they are not and distorts
the true picture.
Some countries, mainly in Central Europe, attempt to
provide lump sum block grants to municipalities and to
allow them to determine eligibility, to run their own
employment-enhancement programs, and to establish job
training and child care centers. Workers made redundant can
choose to either receive a lump sum or be eligible for
unemployment benefits.
A third approach involves the formation of private
unemployment, disability, and life, or health insurance and
savings plans to supplement or even replace the benefits
offered by the relevant state agencies.
An intriguing solution is the municipal "voucher
communities" of unemployed workers, who trade goods and
services among themselves (in the UK, in Australia, and in
Canada). They use a form of "internal money" – a voucher.
Thus, an unemployed electrician exchanges his services with
an unemployed teacher who, in return tutors the
electrician's off-spring. The unemployed are allowed to use
voucher money to pay for certain public goods and services
(such as health and education). Voucher money cannot be
redeemed or converted to real money – so it has no
inflationary or fiscal effects, though it does increase the
purchasing power of the unemployed.
IIIb. Enhancing Employability
In most such schemes, the state participates in the wage
costs of newly hired formerly unemployed workers – more
with every year the person remains employed. Employers
usually undertake to continue to employ the worker after
the state subsidy is over. Another ploy is linking the size
of investment incentives (including tax holidays) to the
potential increase in employment deriving from an
investment project. Using these methods, Israel succeeded
to absorb more than 400,000 working age immigrants from
Russia in the space of 5 years (1989-1994) - while reducing
its unemployment rate.
IIIc. Encouraging Labour Mobility
Workers are encouraged to respond promptly and positively
to employment signals, even if it means relocating. In many
countries, a worker is obliged to accept any job on offer
in a radius of 100 km from the worker's place of residence
on pain of losing his or her unemployment benefits. Many
governments (e.g., Israel, Yugoslavia, Russia, Canada,
Australia) offer the relocating worker financial and
logistical assistance as well as monetary and non-monetary
incentives.
The EU is considering to introduce standard fixed term
labour contracts. They would reduce the insupportable costs
and simplify the red tape now involved in hiring and
firing. The only country to buck the trend is Germany. It
is looking to equate the rights of part time workers and
full time ones. Similar ideas are debated in Britain. In
France and most countries in Central and Eastern Europe, to
dismiss a worker, the employer has to show that it has
restricted hiring, applied workforce attrition, and reduced
overall overtime. The EU's "social chapters" - now on of
every member's law books - provides sacked employees with
recourse to domestic and European courts against their
employers. In other parts of the world, the two parties are
subject to conciliation, mediation, or arbitration.
IIId. Reforming the Minimum Wage
Minimum wage hinders the formation of new workplaces - and
yet almost all countries have it. Both the USA and the UK
have just increased it. Many are considering a scaled
minimum wage, age-related, means tested, and skills-
dependent.
IIIe. Administrative Measures: Early Retirement
A favorite of post-communist countries in transition, early
retirement was liberally applied in order to get rid of
"technologically-redundant" workers and thus trim under-
employment.
Romania, for instance, offered its workers a handsome up-
front payment combined with unemployment benefits. A
special Early Retirement Fund was created by setting aside
receipts from the privatization of state assets and from
dividends received by the state from its various
shareholdings.
IIIf. Administrative Measures: Reduction of Working Hours
France has recently implemented the second phase of its
transition to a 35 hours working week, making it obligatory
for medium and small businesses. It is considered by many
economist to be a wasteful measure, based on the "lump of
labour" fallacy.
IIIg. Administrative Measures: Public Works
The Civilian Conservation Corps (CCC) was established in
the USA in 1932. It offered work for young and unmarried
men. They planted trees, erected flood barriers, put out
forest fires, and constructed forest roads and trails. They
lived in semi-military work camps, were provided with food
rations and a modest monthly cash allowance, medical care,
and other necessities.
At its apex, the CCC employed 500,000 people – and 3
million people throughout its existence. It was part of a
major "public works" drive known as "The New Deal". This
Keynesian tradition continues in many countries - from
deflationary Japan to racially imbalanced South Africa - to
this very day. Such workers are usually paid a salary equal
to their unemployment benefits (Workfare).
The Encyclopedia Britannica has this to say about public
works:
"The weakness in the proposal to use disguised unemployment
for the construction of social overhead capital projects
arises from inadequate consideration of the problem of
providing necessary subsistence funds to maintain the
workers during the long waiting period before the projects
yield consumable output. This can be managed somehow for
small-scale local community projects when workers are
maintained in situ by their relatives – but not when
workers move away. The only way to raise subsistence funds
is to encourage voluntary savings and expansion of
marketable surplus of food purchased with these savings."
Public works financed by grants or soft loans do serve as
an interim "unemployment sink" – a countercyclical buffer
against wild upswings in unemployment - but, for all we
know, they may simply be displacing existing employment at
great cost to the public purse.
IIIh. Administrative Measures: Public Education and
Dissemination of Information
Employment Bureaus throughout the world - spurred on by
stiff competition from the private sector - have
transformed themselves from mere registries to active (and
computerized) labour exchanges. Many also strive to educate
workers, retrain them, and enhance their employability
through the acquisition of new skills. The unemployed are
taught how to prepare a professional bio, a business plan,
a marketing plan, feasibility studies, credit applications
and interview skills.
Employment Bureaus now organize job clubs, labour exchanges
and employment fairs.
IIIi. National Employment Contract
Many countries - especially in Latin America and in Central
and Eastern Europe - have signed "National Employment
Contracts" between government, trade unions, employers
(represented by the Chamber of Commerce), and Central Bank.
In this neo-corporatist approach, employers usually
guarantee the formation of new work places against a freeze
on employee compensation, the exclusion of part time labour
from collective bargaining, and added flexibility on
minimum wages, job security, hiring and firing procedures,
social and unemployment benefits, indexation of wages and
benefits, the right to strike, and wage increases
(increasingly linked to productivity gains).
Trade unions, in return, are granted effective control of
the shop floor - issues like unemployment insurance,
employment protection, early retirement, working hours, old
age pensions, health insurance, housing, taxation, public
sector employment, vocational training, and regional aid
and subsidies to declining and infant industries.
In Sweden and Germany there is co-determination. Workers
are represented even in non-wage related matters (such as
the work organization).
Wages and unemployment benefits are perceived as
complementary economic stabilizers. Many countries
instituted an "Incomes Policy" intended to ensure that
employers, pressurized by unions, do not raise wages and
prices. In Sweden, for instance, both labour and management
organizations are responsible to maintain price stability.
The government can intervene in the negotiations and even
threaten a wage freeze, or wage AND price controls. In
Holland the courts can set wages.
Another possibility is a Guaranteed Wage Plan – Employers
assure minimum annual employment or minimum annual wages or
both to tenured employees. In return, firms and trade
unions forego seniority (LIFO, last in first out, firing
the newly hired first) and the employer is given a free
hand in hiring and firing employees, regardless of tenure.
IIIj. Labour Disputes Settlement
Most modern collective agreements require compulsory
dispute settlement through mediation and arbitration with
clear grievance procedures. Possibilities include
conciliation (a third party brings management and labour
together to try and solve the problems by themselves),
mediation (a third party makes nonbinding suggestions to
the parties), arbitration (a third party makes final,
binding decisions), or Peer Review Panels – where
management and labour rule together on grievances.
IIIk. Non-conventional Modes of Work
Work is no longer the straightforward affair it used to be.
In Denmark, a worker can take a special leave. He receives
80% of the maximum unemployment benefits as well as
uninterrupted continuity in his social security rights. But
he has to use the time for job training, a sabbatical,
further education, a parental leave, to take old people
(old parents or other relatives), or the terminally ill.
This is also the case in Belgium (though only for up to 2
months). These activities are thought of as substitutes for
social outlays.
In Britain, part time and full time workers are entitled to
the same benefits if wrongfully dismissed and in Holland,
the pension funds grant pensions to part time workers. In
many countries, night, shift and weekend workers are
granted special treatment by law and by collective contract
(for instance, exemption from social benefits
contributions).
Most OECD countries now encourage (or tolerate) part-time,
flextime, from home, seasonal, casual, and job sharing
work. Two people sharing the same job as well as shift
workers are allowed to choose to be treated, for tax
purposes and for the purposes of unemployment benefits,
either as one person or as two persons. In Bulgaria,
Macedonia, and a host of other post-communist countries, a
national part time employment program (called in Macedonia
the "Mladinska Zadruga") encourages employers to hire the
unemployed on a short term, part time basis
IIIl. Full Employment Budgets
The national accounts of many countries now produce a full
employment budget. It adjusts the budget deficit or surplus
in relation to effects of deviations from full or normal
unemployment. Thus, a simple balanced budget could be
actually contractionary. A simple deficit may, actually, be
a surplus on a full employment basis and government
policies can be contractionary despite positive borrowing.
IIIm. Apprenticeship, Training, Retraining and Re-
Qualification
In France, Germany, the UK, the USA, and many other
countries, sub-minimum wages are paid to participants in
apprenticeship and training programs. Most of the
unemployed can be retrained, regardless of age and level of
education. This surprising result has emerged from many
studies.
The massive retraining and re-qualification programs
required by the technological upheavals of the last few
decades are often undertaken in collaboration with the
private sector. The government trains, re-trains, or re-
qualifies the unemployed – and firms in the private sector
undertake to employ them for a minimal period of time
afterwards. It is a partnership, with the government acting
as educational sub-contractor for the business sector (with
emphasis on the needs of small to medium enterprises) and a
catalyst of skill acquisition. Such programs include
vocational training, entrepreneurship skills, management
skills, and even basic literacy and numeracy. Students are
often employed as instructors in return for college credits
and scholarships.
IIIn. Entrepreneurship and Small Businesses
Small businesses are the engine of growth and job creation
in all modern economies. Even the governments of rich
countries encourage innovative credit schemes (such as
micro-credits) and facilities (such as business
incubators), tax credits, and preference to small
businesses in government procurement.
The Labour Divide
II. Migration and Brain Drain
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
Human trafficking and people smuggling are multi-billion
dollar industries. At least 50% of the 150 million
immigrants the world over are illegal aliens. There are 80
million migrant workers found in virtually every country.
They flee war, urban terrorism, crippling poverty,
corruption, authoritarianism, nepotism, cronyism, and
unemployment. Their main destinations are the EU and the
USA - but many end up in lesser countries in Asia or
Africa.
The International Labour Organization (ILO) published the
following figures in 1997:
Africa had 20 Million migrant workers, North America - 17
million, Central and South America - 12 million, Asia - 7
million, the Middle East - 9 million, and Europe - 30
million.
Immigrants make up 15% of staid Switzerland's population,
9% of Germany's and Austria's, 7.5% of France's (though
less than 4% of multi-cultural Blairite Britain). There are
more than 15 million people born in Latin America living in
the States. According to the American Census Bureau,
foreign workers comprise 13% of the workforce (up from 9%
in 1990). A million have left Russia for Israel. In this
past century, the world has experienced its most sweeping
wave of both voluntary and forced immigration - and it does
not seem to have abated.
According to the United Nations Population Division, the EU
would need to import 1.6 million migrant workers annually
to maintain its current level of working age population.
But it would need almost 9 times as many to preserve a
stable workers to pensioners ratio.
The EU may cope with this shortage by simply increasing
labour force participation (74% in labour-short
Netherlands, for instance). Or it may coerce its unemployed
(and women) into low-paid and 3-d (dirty, dangerous, and
difficult) jobs. Or it may prolong working life by
postponing retirement.
These are not politically palatable decisions. Yet, a wave
of xenophobia that hurtled lately across a startled Europe
- from Austria to Denmark - won't allow the EU to adopt the
only other solution: mass (though controlled and skill-
selective) migration.
As a result, Europe has recently tightened its admission
(and asylum) policies even more than it has in the 1970's.
It bolted and shut its gates to primary (economic)
migration. Only family reunifications are permitted. Well
over 80% of all immigrants to Britain are women joining
their husbands, or children joining their father. Migrant
workers are often discriminated against and abused and many
are expelled intermittently.
Still, economic migrants - lured by European riches - keep
pouring in illegally (about half a million every year -to
believe The Centre for Migration Policy Development in
Vienna). Europe is the target of twice as many illegal
migrants as the USA. Many of them (known as "labour
tourists") shuttle across borders seasonally, or commute
between home and work - sometimes daily. Hence the EU's
apprehension at allowing free movement of labour from the
candidate countries and the "transition periods" (really
moratoria) it wishes to impose on them following their long
postponed accession.
According to the American Census Bureau's March 2002
"Current Population Survey", 20% of all US residents are of
"foreign stock" (one quarter of them Mexican). They earn
less than native-born Americans and are less likely to have
health insurance. They are (on average) less educated (only
67% of immigrants age 25 and older completed high school
compared to 87% of native-born Americans). Their median
income, at $36,000 is 10% lower and only 49% of them own a
home (compared to 67% of households headed by native-born
Americans). The averages mask huge disparities between
Asians and Hispanics, though. Still, these ostensibly
dismal figures constitute a vast improvement over
comparable data in the country of origin.
But these are the distant echoes of past patterns of
migration. Traditional immigration is becoming gradually
less attractive. Immigrants who came to Canada between
1985-1998 earn only 66% of the wages of their predecessors.
Labour force participation of immigrants fell to 68% (1996)
from 86% (1981).
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