Growth and Welfare: Shifts in Labour Market Policies

This chapter focuses on labour market policies in the European Union in the aftermath of the Great Recession. Labour market policies have two objectives: promoting growth and welfare, and enhancing the resilience to economic shocks. They are typically implemented through institutional arrangements like job protection legislation, unemployment insurance schemes, formal wage bargaining processes, and so on. Institutions are only slowly changed, and the same applies to the labour market’s. Pressures for changes are not new. They appeared with world globalisation and the development of knowledge-based economies. They gained strength however after 2010, three years after the start of the crisis. We explain the motivation for this shift and why it did not take place earlier in the crisis. Although this policy shift should be seen as a change of emphasis rather than a sudden change of paradigm, it may ultimately contribute to a complete overhaul of labour market institutions in the current context of world globalization.
The chapter is organised as follows. We first document the main consequences of the crisis on income and employment, and the rise of inequalities and of cross-country imbalances. We next discuss how (in-)effective market mechanisms have been in paving the way towards recovery. Against that background, we discuss the motivation and the relevance of the economic policies implemented in EU countries. We distinguish two sub-periods, before and after 2010. Until 2010, the focus was on the « European Economic Recovery Plan » and its national counterparts. With the onset of the sovereign debt crisis and the implementation of EU-wide fiscal consolidation policies, the focus shifted towards labour market policies and « competitiveness recovery » plans. We discuss the contents and motivation of such plans, and the difficulty to implement them successfully at a time of fiscal austerity. We conclude the chapter with a discussion about conflicting economic paradigms and their connection with ongoing economic changes.