Labor markets in Britain and Continental Europe.

Britton, Andrew

This note is based on the discussion which took place at a meeting of the Members Forum on Wednesday 20th July. The meeting was attended by business leaders representing the corporate members of the Institute as well as Institut governors and staff. It also draws on a number of projects which have been carried out by the Institute and a discussion with the Editorial Board. Responsibility for the views expressed rests, nevertheless, with the author alone.

The last fifteen years has been a period of radical reform in British labour markets. Regulations have been eased and the influence of trade unions has diminished, giving employers far more freedom to determine both pay and conditions of employment. At the same time there has been a continuation of trends towards self-employment, part-time employment and more frequent job changes. The dispersion of pay has widened markedly.

To the extent that these reforms are not home-grown, they follow an American rather than a European pattern. At the same time as the British economy has bee moving to closer integration with the rest of Europe through trade and investment, and seeking convergence of interest rates and inflation, there has been a marked divergence in respect of labour market institutions and behaviour Does this matter? Should we hope that differences will continue, reflecting different political priorities and legal traditions? Or should we hope for convergence, perhaps on something not too far different from the British model? Clearly we cannot be indifferent to the way in which labour markets develop in the economies of our Continental neighbours.

Comparing economic performance

Looking at the performance of European labour markets during the 1980s, using macroeconomic data on employment and pay, it is not clear that Britain is much different from the rest. The large European economies all experienced a substantial rise in unemployment combined with continued growth in real earnings. In this very important respect, Britain followed a European and not a American pattern. If anything it is Germany rather than Britain that stands out over that period as being able to sustain a relatively low level of unemploymen without accelerating inflation. Despite the very different policies being followed in Britain and in France very much the same aggregate relationships could describe employment and wages in the two countries up until a few years ago.

It is now claimed that the greater flexibility of the British labour market is just becoming evident, in the growth of productivity during the recession, in the unexpectedly low growth in earnings since sterling was driven out of the ER and in the sharp fall in unemployment over the past eighteen months.

All this can be contrasted with the continued stagnation of Continental Europe. One must be cautious however in making such comparisons. The timing of the economic cycle is flattering British performance at present. Moreover it is difficult to judge the significance of a fall in unemployment when there is not much evidence of an increase in jobs.

In a flexible labour market one would expect to see those who have lost their jobs making a relatively rapid transition back into employment, and for most of the population that would mean into full-time and 'permanent' employment rather than part-time or temporary. One would expect the average duration of unemployment to be correspondingly short. One would not expect to find large numbers of 'discouraged' workers dropping out of the labour force altogether because they give up hope of finding any suitable job at all. By these criteria the UK labour market is still not functioning as the textbooks say it should. I other respects, however, for example the slow growth of labour costs and the sustained improvement in competitiveness, the British performance looks very promising at the present time--and it is regarded with some admiration and envy by the rest of Europe.

There is now very widespread concern in Europe about the consequences for international competitiveness of labour market regulations and social welfare systems. Whilst there is nothing new about such anxieties, they have become mor intense with the prospects of continued rapid economic development in the Far East and the opening up of trade with Central and Eastern Europe. Pessimism, especially about the prospects for unemployment, is very widespread. Although the European Union is fully committed to free trade, public opinion in many member states inclines towards protection. The question being asked is whether labour market regulation and free trade can really be combined. If not then which way will Europe turn? The interpretation which the rest of Europe puts on the British experience is very important to that choice.

The contrast between Britain and the rest of Europe should not be exaggerated. In matters of employment conditions many British employers set themselves highe standards that the law requires, and of course the enforcement of law is not completely effective anywhere. There are some signs moreover that Continental labour markets may be moving in a British direction. One effect of regulation i to encourage the growth of 'atypical' forms of employment which are not so regulated. Firms are also finding their way round the regulations, for example by avoiding redundancies through the encouragement of early retirement or disability claims. However this method of labour force adjustment is itself dependent on a generous level of social security benefits, and that in turn has to be paid for by taxes or by insurance contributions.

The decline of trade union powers in Continental Europe is not as straightforward as in Britain. The level of trade union membership in France fo example is very low indeed, especially in the private sector. Yet trade union negotiations still play a very important part in setting pay and conditions of work. It is doubtful whether such a system is viable in the long term, but it i far from clear what new pattern will emerge. Again the interpretation of Britis experience is part of the debate. In fact the issue of employee representation needs further consideration by UK firms as well as by firms on the Continent. The European Court has ruled that there should be consultation in the case of redundancies whether a trade union is recognised or not--a ruling based on legislation dating back to the 1970s and quite unconnected with the Social Chapter of the Maastricht Treaty.

The Social Chapter

How best can British industry and the British Government use what influence the have on developments elsewhere in the European Union? Some would argue that we do best to stand aside from the debate until such time as our neighbours come t appreciate the benefits of our own way of doing things. The economic success of the British model will speak for itself. Others believe that a more effective British voice would help to ensure that the merits of our institutions are full appreciated--and admit that we may have something to learn as well. For the present the political capital invested in the 'opt-out' from the Social Chapter is such that the issue is hardly worth raising. However that leaves open the question of the direction in which we should be moving. The point of the 'opt-out' was not to exclude ourselves from the counsels of Europe and we shoul be seeking ways of minimizing that effect.

A fairly typical example of the kind of regulation from which Britain is excluded as a result of the 'opt-out' is the Young Workers Directive. Its main effect would have been on paid work done by school children, for example in delivering newspapers--not a matter of strategic importance for either economic or social policy (although a case could be made in favour of the directive on grounds of educational policy). However there is a widespread belief in this country that regulations of this kind might be the thin end of a very large wedge. In particular there is a fear that the ultimate aim of the Commission is to introduce a common European minimum wage, however much that may now be denied. Whilst agreeing that the attempt to introduce such a common minimum would indeed be a serious mistake, one may respond that the danger is remote. I would be even more remote if the British government were in a better position t block it.

There is also in this country a widespread impatience with the way in which the Commission has addressed some of the leading issues of labour market regulation in recent years. This is independent of the more fundamental political question about subsidiarity and the extent of 'closer union' which people in this countr really want to see. It is more like the familiar complaint, heard also in this country, that officials simply do not understand the business world. The impatience may be understandable and justified up to a point, but British interests will not be well served in Brussels unless someone is prepared patiently to express our point of view again and again. My own view is that eventually Britain both should and will 'opt in' to the social chapter, probabl in a modified form. If this is correct we need now to be considering what kind of social policy would be best for Europe, including ourselves.

The future direction of social policy in Europe

It is often said, rightly enough, that the history and traditions of individual member states vary greatly in matters of social policy and labour market regulation. But it is also true that no country can afford to be constrained by its own past. None of the various 'models' of labour market behaviour in Europe appears to be working very well at present, especially if the test is the ability to sustain full employment. We should be prepared to look at new 'models' as well as old ones.

Four general points can be made which are equally relevant to all member states The first is that social policy should be designed to benefit society as a whole. It should help the disadvantaged across the whole community, the non-employed as much as those in employment. There must be a balance for exampl between employee protection and job creation; and it should be concerned with the interests of consumers as well as producers.

The second point is that the workforce has an interest in the future of any enterprise which has to be recognised, formally or informally, if they are to co-operate fully with the policies of management. There is therefore a need for collective consultation in addition to the need to respect the rights of individual employees. But equally it is clear that good industrial relations practices cannot be forced on management by legislation or directives alone.

As another general point, it should be emphasised that any regulations that are agreed at a European level should be enforceable throughout the EU. Provision should be made for them to be enforced, where appropriate using the agencies of member states, but with oversight of the enforcement procedures by the Commission or some other body serving the EU as a whole. Where common standards cannot in practice be enforced then it would be better to have no regulation at the EU level at all.

As a final point we should note the ambiguity of 'flexibility' as an aim of social policy. In the short term flexibility is served by institutions which allow rapid adjustment in the size and composition of the workforce in a firm o an industry. In the long term however, continuity of employment may result in higher levels of training and experience which encourage high quality productio and technical innovation. In the long run innovation is what matters most to industrial success, not the ability to cut costs quickly.

The underlying issues facing social policy over the next ten years or so are likely to be much the same in many countries of Europe, for example Britain, France, Germany and the Benelux countries. There is likely to be some spontaneous convergence of practice whatever government or EC policy may be. This will be especially true of the practices of multinational firms, as these economies become more closely integrated. (The pressure on some large British firms to conform to a European norm is already considerable.) Rules will evolve in response to the economic environment, and models which work well in one country may spread to the rest. This is not a process from which one country ca 'opt out'. It will result from a multitude of small decisions taken by firms themselves.

There is also a good case for encouraging convergence of regulations in some areas. As European countries compete with one another there may in some cases b a tendency for the least regulated economies to gain market share. This will be reduced to the extent that relative wages move to keep unit labour costs in different countries in line with one another. But in practice some, perhaps most, of the costs of labour regulations fall on capital rather than labour, at least in the short run. The situation is therefore not unlike that faced by countries which have different rates of company tax combined with free mobility of capital. When that happens the countries concerned have a strong incentive t harmonize tax rates, rather than allow competition between tax regimes to reduc or even eliminate the tax base. Pressure of this kind will probably make some increased harmonization of social provision within Europe unavoidable.

A judgment has to be made as to what kinds of regulation really do affect international competition to a significant degree and which do not. The deliver of newspapers by schoolchildren for example does not raise issues which call fo regulation at a European level. Health and safety regulation on the other hand may well do so, and so may maternity pay. The British insistence on the principle of subsidiarity is well founded. If the scope of European social regulation is limited to areas where the need for it can be demonstrated, then it is likely to command wider support, in this country and also in Europe as a whole.