Unemployment in the European union - labour
market reform?

Introduction

Reform is nearly always associated with the term deregulation but this does not have to
be the case. Indeed within the European Union there is widespread support for greater
regulation in some areas for example the boom in people working for agencies whose
employment protection is extremely weak.

Measures are also being developed for bringing into the formal economy the millions of
people who currently earn their income in the informal (shadow economy).

The major risk with wholesale labour market deregulation is that it will serve to widen
inequalities in the European economy, by pushing more people into relatively badly-paid
and precarious jobs in the informal sector, where there is a near total lack of
unemployment or social security (welfare) protection.

It is highly unlikely that the European economy will switch to the deregulated, flexible
labour market that has emerged in the United States. But some labour market reforms
can provide support to the aim of increasing total employment and reducing economic
inactivity.

Around 77 million working-age adults are estimated to be inactive in the EU; almost a
third of the working-age population. Even excluding the 15-19 year old age group, many
of whom are in education or training, this still leaves 53 million

Reforming the labour market

Reducing direct tax rates for low-wage households in a bid to increase incentives to look
for and then accept work

Reforms to welfare (benefit) systems so as to make work pay and encourage the job
search perhaps introducing tighter conditions for claiming benefits; reducing the
duration over which benefits can be claimed; expanding the availability of in-work
benefits, tax credits

Continued high levels of investment in education and training designed to raise the stock
of human capital and reduce occupational immobility the European economy suffers
from a training deficit which adversely affects productivity and competitiveness in the
long run.

Specific labour market policies aimed to raising employment among certain high-risk
groups - such as younger workers, single-parent households and females. This may
require fiscal incentives such as those provided within the UK Welfare to Work strategy
examples of which include employment subsidies for the long-term unemployed

Encouraging further decentralisation of wage bargaining within the European economy so
that wages are determined with more account taken of local economic conditions
affecting the demand for and supply of labour. A move towards decentralisation of pay
negotiations will indirectly cause a reduction in trade union influence since it is a move
away from nationally-determined collective pay bargaining

The onus is very much on individual countries to introduce the labour market reforms
they fell are appropriate to their own specific problems and priorities. In the UK, the
emphasis in recent years has been on raising employment among the long-term
unemployed and in improving work incentives for low-wage households through the
expansion of schemes such as the Working Families Tax Credit and the introduction of
the National Minimum Wage. The effectiveness and financial cost of such policies is often
questioned. For the UK, the labour market reforms of the last ten years have yet to be
fully tested by the effects of a full-blown recession.