Editor Pick – Strategies for Fighting Unemployment: European Experiences
Gilles Saint-Paul / GREMAQ/IDEI, University of Toulouse
In this paper the author reviews the merits of different strategies European countries have implemented to tackle three decades of high unemployment.
1. Big Bang (UK, Ireland): eliminate most labor market rigidities, low unemployment benefits.
Pros: close to full employment and low unemployment duration
Obstacles: Inequality, volatility, painful transition, political opposition
2. Liberalization at the Margin (Spain, Portugal, Italy): make new labor contracts more flexible while leaving old ones unchanged
Pros: political feasibility
Cons: two-tier society, increased wage pressures from protected insiders
3. Coordination of Wage-Setting (Scandinavia): Nationwide unions internalize potentially damaging asymmetric wage effects across sectors
Pros: Wage moderation, lower equilibrium rate of unemployment
Cons: active labor market policies needed to reallocate labor
4. Flexicurity (Denmark): less employment protection, more unemployment benefits
Pros: unproductive jobs are shed easily, allows workers to reallocate
Cons: potential abuses, monitoring costs
5. Payroll tax reductions
Pros: reduce the cost of labor, lower distortionary tax wedge
Cons: Offsetting tax increases elsewhere
6. Reforming goods markets instead of labor markets:
remove entry-barriers to encourage self-employment
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