Labour market reforms and the euro area
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1 Labour market reforms and the euro area Robert Anderton Adviser, EU Countries Division, European Central Bank* De Nederlandsche Bank Conference 26 September 2013 * The views expressed are those of the presenter and not necessarily those of the ECB.
2 Main messages on the crisis and structural features of EA labour markets Beveridge Curve analysis points to an outward shift in the EA Beveridge Curve during the crisis, especially in those EA countries with a higher increase in long-term unemployment and the permanent downsizing of some sectors (ES). By contrast, DE Beveridge Curve shows inward shift (Hartz reforms). Shift outwards in Beveridge Curve indicative of labour market mismatch. Consistent with estimated measures of mismatch which show a significant increase in the skill disparity of labour demand and supply. Also consistent with recent developments in structural unemployment which show a marked upward trend in EA countries with an increasing degree of dispersion across EA countries. See Euro area labour markets and the crisis (2012), ECB Occasional Paper number
3 Rise in structural unemployment during crisis show critical need for structural reforms Decomposition of the change in the unemployment rate between 2007 and 2013 Increase in the unemployment rates since the outbreak of the crisis, not only cyclical but large part structural. The increase in structural unemployment amounts for around half of the rise in the EA unemployment rate Between 2007 and 2013 Rise of 4.6 pp in actual unemployment rate: from 7.6% to 12.2% Rise of 2.4 pp in the NAIRU: from 8.5% to 10.9% (extremely high structural unemployment in EA even before the crisis!!). Source: European Commission. AMECO Database 3
4 Extremely high levels of structural unemployment show even more critical need for structural reforms Structural Unemployment (2013) Source: European Commission According to 2013 EC Forecasts: in the EA, the structural unemployment would be at 10.9% only AT would have a structural unemployment below 5% 8 countries would have a structural unemployment below 10% 3 countries would have a structural unemployment above 15% (PT, GR and ES) Some longer-term forecasts period show structural unemployment in ES remaining around 20% for a long time. 4
5 Some factors behind the rise in structural unemployment in the euro area Long-term unemployment rate by the duration of unemployment, euro area (% of labour force) Unemployment rates according to the level of education attained, euro area (% of total unemployed) 6,0 5,0 4,0 3,0 2,0 1,0 0, months months months 48- months Source: Eurostat Source: Eurostat Note: Low skill level refers to those unemployed with basic secondary education; medium to those with advanced secondary education and high to those with first and second stage of tertiary education. 10
6 WAGES: Limited wage adjustment in euro area during crisis Although cross-country differences are relatively high, given the intensity of the crisis, a reduced wage responsiveness has been observed during crisis for the EA (Source: 2012 SIR) Public sector wages moderated in several EA countries mainly as a result of the policy response to the debt crisis and large fiscal deficits. Lower wage responsiveness to unemployment during downturns (including the crisis) confirmed by other analysis which suggests downward wage rigidities in EA - see next slide (results robust to different wage specifications). 6
7 Wage adjustment : EA wage equations confirm downward wage rigidity for euro area VARIABLES Real EA panel results Nominal UR [0.0000] [0.0000] Δprod (hours) [0.0000] [0.0000] ΔCPI [0.0000] UR*down [0.0008] [0.0025] Constant [0.0000] [0.0000] Compensation per hour negatively related to unemployment Lower wage responsiveness to unemployment during downturns (including the crisis) confirms downward wage rigidities in EA (results are robust to different wage specifications) Observations R-squared SER Adj-R-sq Number of countries Period 1995Q1-2013Q1 P-value in brackets Source: 2012 SIR (OP no. 138) 7
8 2. Key elements for a set of reforms from EMU perspective 8
9 Labour market and wage flexibility can stimulate employment rates, participation, and reduce mismatch Labour market rigidities that reduce wage differentiation and flexibility can hinder the hiring of workers (e.g., the less skilled). Labour supply (and potential output) would increase if reforms in income tax and benefit systems help to increase incentives to work (e.g., remove disincentives of high marginal tax rates and high unemployment benefits). Flexible forms of work, such as part-time and temporary arrangements, help certain segments into labour market (e.g., young, females: but not excessive as in dual labour markets) and increase labour supply. But also need cross-border labour mobility by, for example, widening scope of European job portal and improved portability of some pensions/benefits. Wage rigidities and non-optimal wage setting can exacerbate unemployment and labour market mismatch. 9
10 Monetary Union needs wage and labour market flexibility In a monetary union such as the euro area, with a single currency and a single monetary policy, a key channel to reduce imbalances and to restore equilibrium is the competitiveness channel via flexible wages and prices [particularly important for countries which have lost competitiveness]. The working of the competitiveness channel is inhibited by the existence of nominal and real rigidities. In the euro area, the existence of structural rigidities in labour and product markets means that this key equilibrating mechanism requires a relatively long period to work through. Crucial role of wage flexibility what are key elements hindering wage flexibility? 15
11 Key elements hindering wage and labour market flexibility A lack of flexibility in labour markets is linked to certain institutional factors, such as: 1. Wage indexation, or more generally rigidities in the wage setting, do not allow wages to appropriately respond to productivity, competitiveness and labour market developments. 2. Wage setting rigidities cover collective bargaining institutions themselves (minimum wages), as well as tax and benefit schemes, which can push up wage pressure or set effectively a floor on wages. Wages should respond flexibly and appropriately to unemployment as well as losses in competitiveness. Avoid upward wage setting bias due to dualist representation (e.g., EPL for permanent workers) or sectoral leadership in wage negotiations. 3. Public sector wage setting should not contribute to strong labour cost growth, and should not provide wrong signals for wage bargaining in other sectors (latter should be based on local labour productivity and labour market conditions and profitability of firms). A prudent fiscal stance is particularly important. 16
12 Simulations of impacts of a wage reduction Wage competitiveness scenario: temporary reduction in the wage mark-up (nominal wages on average 1% lower over 5 years). [Source: Competitiveness and external imbalances within the euro area ESCB WGEM, Occasional Paper no. 139]. Four different models show that wage mark-up reduction rapidly results into higher GDP and employment. Main Transmission channels : The competitiveness channel: lower wage mark-ups are expected to reduce firms marginal costs and prices. Lower prices hence increase the competitiveness of domestic products and increase exports and decrease imports. Switch from capital to labour due to lower real wages which boosts employment. Adjustment speed depends on: level of competition in the goods market, the degree of nominal price and wage rigidities, price sensitivity of export demand, elasticity of substitution between domestic tradeable goods and imports. 12
13 Strong and rapid positive response of GDP and employment to a temporary wage mark-up reduction x-axis : quarters, y-axis: percentage of deviation Source: Competitiveness and external imbalances within the euro area ESCB WGEM, Occasional Paper no
14 Implementing labour reforms in crisis times What are the main challenges when implementing labour reform in crisis time? Political will for reforms can be difficult against frequent background of fiscal consolidation. Need national ownership of reforms and effective implementation of reforms. Some labour market reforms might have limited short-term negative impact although beneficial in medium- to longer-term. In order to be fully effective, labour market reforms also often need product market reforms to be implemented around the same time. Otherwise wage moderation, for example, is not transmitted to prices and/or may simply lead to a transfer of rents from labour to capital. 14
15 THANK YOU FOR YOUR ATTENTION! THANK YOU FOR YOUR ATTENTION! 15
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