In this chapter we address the policies of the EU member states leveraged by the EU in order to achieve a vibrant European economy with close to full employment (through more innovation), less income inequality and more greening in the period 2014–2020. We compare this with the status quo scenario, named “muddling through”. Muddling through does not include major policy changes. We focus here on the labor market without plunging into the financial or fiscal side. The inadequacy of the EU’s monetary and fiscal instruments has been a major reason for its slow recovery, compared to the US, in the post-crisis period (see Tables 1 and 2). These institutions are in the process of repair. In both of our scenarios it is assumed that the financial framework for the Eurozone and the EU as a whole is fixed, meaning that credit flows will resume to pre-crisis levels and that fiscal consolidation continues to take place.
The labor market for the muddling through scenario is mostly derived from a Cedefop study (2010). These are the only projections available. We consider these projections to be too optimistic with respect to (the resumption of) employment growth and the reduction of unemployment, as they do not appear to depart from fiscal consolidation. Fiscal consolidation in part implies a break away from public sector expansion (health, education and general government services), having substantial implications for employment, in particular for those with higher education. Fiscal consolidation has also been driven by increases in taxes, with their negative employment effects. Lastly, the reduction in transfer payments— included in fiscal consolidation— has reduced spending on consumption with its consequences for employment.
In contrast to muddling through, the vibrant scenario aims to reach full employment within the shortest possible timeframe and maintain it thereafter. Full employment is achieved and maintained through more innovation, greater labor mobility, flexicurity, work-related social security and less labor regulation embedded in policies which generate less income inequality (through restrictions on top wage incomes and focusing on social security). This approach can be argued as contributing to increased happiness, in terms of both level and distribution among the European population.
Labor market policy in the EU is the responsibility of each member state. At the same time, the EU has the responsibility to deliver country-specific recommendations (CSRs) regarding innovation and labor market policy as part of the semester approach. We shall discuss how member states could more quickly implement these CSRs. The major question is not whether such an alternative is possible. It is about governance: are EU politicians and politicians of the member states, who would agree with the “vibrant” goal of full employment, able to carry it out with the support of their constituencies?
The labor market 2010–2020
In the period 2008–2013, the EU has experienced a shaky economic development: EU growth rates plummeted and the EU-27 entered a recession (-4.3% growth in 2009) with a second dip in 2012 (-0.4%). Economies in other parts of the world are growing faster than in the EU, notably in countries that are catching up, like China, India, Brazil and Russia (the BRIC countries), Malaysia, Indonesia, South Korea and Turkey (the MIST countries) and also in the US.
The labor force will increase less than it did in the previous decade. The shift towards a better-trained labor force continues unabatedly. Yet economic growth remains sluggish while the level of innovation in Europe may be overtaken by countries outside of Europe: Singapore ranks second in the 2013 World Economic Forum innovation index and Hong Kong seventh (up two places from 2012); meanwhile relative indexes worsened for the Netherlands, ranking eighth in 2013 (from fifth in 2012), and the UK (from eighth to tenth, also in 2012 to 2013) (Cornell University, Insead and WIPO 2013).
The Cedefop (2010) predictions— which were computed before the major downturn in employment— show that gradually employment demand should again grow enough to absorb supply, so that unemployment by 2020 would not exceed 5–10%. And even then, compared to the non-crisis scenario, some 90 million job years would be lost.
However, as we said: the Cedefop projections may be (far) too optimistic, because they have not taken austerity measures into account. The first two years in the projections, 2012 and 2013, show mounting unemployment rather than a decrease. In September 2013, the youth unemployment rate in the Eurozone was over 25 percent and still increasing. It exceeded 30 percent in Italy, Portugal and Slovakia, while it was over 57 percent in Greece and Spain. Youth unemployment rates were also high and increasing in reasonably successful countries such as Belgium and Malta.
Unemployment continues to be unevenly spread across the EU. It also remains skewed across education levels. People with low qualifications will continue to find it difficult to obtain a job.
In summary, a continuation of present policies might gradually (in 2014 and thereafter) bring a reduction in EU unemployment. However the road to full employment will be long and is unlikely to be achieved by 2020.
A vibrant scenario
A vibrant European labor market with full employment would be first and foremost the result of individual EU member countries’ policies, once the stability pact and the Banking Union have been implemented and credit flows resume pre-crisis levels. These fiscal and monetary policies have been belatedly brought to the European level as necessary complements to introducing the euro. Yet for employment and social policy, the responsibilities largely remain with the EU countries’ national governments, albeit that the European Commission (2013) wants to strengthen the “social dimension” of the Economic and Monetary Union (EMU) by using employment and social indicators as part of the “European Semester” process for economic policy coordination.
At present, public debts and budget deficits attract the most attention in the Semester process, in which EU member states’ governments have to submit their budget proposals first to the EU, before presenting them to their national parliaments. The EU gives binding criteria applied to the levels of government deficits and sovereign debt as in the stability pact for the euro.
The European Parliament (2012) has called for strengthening the EMU with a “social pact”, to be included in the Van Rompuy (2012) report, which restricted itself to four pillars of the EU: financial integration, budgetary framework integration, economic policy integration and democratic legitimacy.
“Fiscal consolidation” is the EU member countries’ commitment to comply with the Maastricht criteria in terms of government budget deficits and sovereign debt levels. It is essential in order to avoid a substantial interest claim on government income, pushing out expenditures for education, health, social transfers and the like. Yet if it leads to economic policies in which countries with substantial trade surpluses are inducing wage reductions and slowing down public investment (in infrastructure or in public R&D), then the single-minded application of fiscal consolidation may not serve its purpose, as it smothers economic growth. Likewise “austerity” should not block needed reforms in the labor market structure, nor in other markets. Vibrancy would start with adopting the policy goal of full employment, as this may serve as a reference point for “smart austerity”.
Hence we suggest: Full employment should become an EU goal to be realized by 2020. The new European Parliament should demand an employment proposal from the Commission that would have the potential to regain lasting full employment relatively soon, as well as the implications for the Maastricht criteria and the Semester process. The new European Commission (which starts in December 2020) should have a mandate to engender full employment by 2020.
The goal of full employment translates into five policies: innovation (3.1), income (3.2), mobility (3.3), immigration (3.4) and greening (3.5).
Aside from an EU-wide agreement on full employment as a policy goal, a social scoreboard might be helpful. This would be done with agreed measurements and objectives and ensure that the EU leverages both economic and social goals in EU countries. Poverty levels and social goals would be recorded next to macroeconomic and employment indicators.
Automatic stabilizers at the EU level could also be a “leveraging” European approach to help individual EU countries reach their economic and social goals. Automatic stabilizers have been amply researched (Peichl et al. 2013), for example in the form a fiscal union or a European unemployment scheme, in which a minimum level of unemployment benefits would come from a European fund for a maximum duration of one year. However, this is a difficult proposition since it involves distributional consequences as well as moral hazards.
Social goals need to be narrowed down to a small set of basic needs with a clear view on full employment as the best social policy. Too much spending on social protection will undermine competitiveness. It is critical to maintain a link between wages and productivity, allowing room for collective bargaining. Keeping this link also means that high-productivity countries should allow wages to increase.
Economic growth and employment projections hinge on assumptions regarding innovation and competitiveness. There are few signs that the EU-27 takes the vibrancy challenge seriously (in contrast to the language used in the Lisbon declaration of 2000) as expressed for example by the outlays for research and development or the relative absence of “yollies” in Europe compared to the US. The increased outlays for public R&D and for the improvement of educational quality in BRIC, many MIST and in the oil-rich Arab countries, has little following in Europe, except for some “excellence initiatives” such as the one in Germany (see country reports in Hoareau et al. 2012). It is likely that, on average, European countries will find themselves falling on the Global Innovation Index; instead of six EU countries making the top-ten list in 2013, there may be no more than three or four in 2020.
The Horizon 2020 program (in the EU Framework Programme for Research and Innovation) foresees an EU outlay of some 70 billion euros for the period 2013–2017. The EU Commission (2012) feels that the EU should specialize, as well as compete globally, in green economy, healthcare and information and communications technology (ICT). This H2020 program is a major increase in the European public research effort, even though it constitutes less than 10% of the total EU budget. In parallel, the agricultural subsidies budget remains at around 50%, making the EU more about milk and wine, or butter and beef, rather than knowledge. At the same time, many member states have cut their R&D outlays (Hoareau et al. 2012).
A vibrant scenario
More public R&D, less entrepreneurial regulation, better quality education and more credit for startups can raise labor productivity in the longer run. However, R&D outcomes are not only about money; the organization of R&D plays a major role. It is clear that there are huge differences between EU states regarding the effectiveness of public R&D expenditures, whether measured in citations, patents, knowledge-based startups, or in “entrepreneurship”.
A new convergence in per capita incomes between EU member states could arise from stronger human capital and R&D positions in the poorer countries. In this respect, it is counterintuitive to notice that structural and cohesion funds—meant to bring about convergence—are hardly allocated toward universities or R&D, with the exception of Poland (see country reports in Hoareau et al. 2012).
Innovation cannot be enacted by law, nor be taught at school as to how it can be generated, even though entrepreneurship education could have a substantial impact on innovation. Policies should rather be designed to incentivize and enhance an environment for more private innovation. This is concerned with lessening bureaucracy, easing patenting, reducing costs and standardizing treatment of intellectual property rights. European education systems are typically very formal, which is arguably not the best pre-condition for future innovation, since this cannot be taught at school or university. It rather needs an education system that not only allows for but actually encourages creativity from the very beginning of (preschool) education while at the same time explicitly pays attention to entrepreneurship training.
Our following policy recommendations to stimulate innovation (as a means to generate employment) for the EU member states are then:
Provide more public R&D closely related to industry
Increase the ease of doing business (World Bank Doing Business report: ease of doing business index)
Give more attention to entrepreneurship education at all education levels
Implement dual education at all education levels (including higher education) after the age of 16
Provide more (pre)venture capital
At the EU level, several steps could be taken:
The most radical proposal for the EU to leverage individual member states is:
The implications of the labor market demand and supply forecasts all point in the direction of an increasing wage-income inequality under the muddling through scenario.
The increased wage inequality will translate to increases in income inequality. Income inequality will be further enhanced in Europe through the following processes:
Income inequality between European countries will decrease less than in the past as the “convergence machine” seems to have halted; the differences in growth rates between richer and poorer countries seem to be less (OECD 2012), implying that the gap remains between richer and poorer countries.
Income inequality also increases because of the continued increase in capital income that mainly serves higher incomes.
The room for more progressive taxation is not considered to be a serious alternative: governments seem to be moving in the direction of a “flat tax”.
The room for inequality reduction through social expenditures is under pressure as a result of the sovereign debt crisis.
As a result it is likely that we will see a worsening of the European Gini coefficient, even more than that of the first decade of the 21st century when it increased by about 5%.
A vibrant scenario
The vibrant scenario implies more innovation compared to the muddling through scenario. But this also means that the demand for well-trained workers is higher in this scenario, which if anything leads to more wage inequality as a result of the greater bargaining power of well-trained workers.
Wage inequality can be reduced by raising wages at the bottom through increased demand, like expanding the (lagging) demand for low-skilled work by developing the service sector or by creating public jobs for low-skilled workers. Currently large parts are hidden in Europe’s shadow economy, estimated to account for up to one‒sixth of GDP in Germany alone (Schneider 2003). The Belgian scheme of service checks has been helpful in creating additional demand for low-skilled workers.
Kolev and Saget (2010) address policies to mitigate earnings inequality. Regarding the low-end of the labor market, policies to reduce inequality should target the labor supply, such as providing workers with better skills and training; additionally policies also need to focus on labor demand measures, such as investment in job creation, as well as the support for institutions to ameliorate low paid workers’ salaries through paths like collective bargaining and minimum wages.
At the upper part of the wage distribution there is room for limiting the rising top earnings, along the lines of the adopted Swiss referendum (of March 2013). This referendum says: no more golden hellos, no more golden parachutes, no more bonuses linked to merging a company with another and a binding vote on executive pay by shareholders. Pension funds holding shares in a company would be obligated to take part in votes on compensation packages. Violations could result in fines equal to up to six years of salary and a prison sentence of up to three years.
A European-wide dialogue with the private sector on maximum wages (excluding the rewards of entrepreneurial work, i.e. risk taking with potential private losses) might bring about such caps on non-entrepreneurial income Europe-wide, avoiding the potential for escape by moving from one EU country to another.
The exodus of top talent by emigration to regions outside of Europe (to the US or Australia) of such a regulation is likely to be minimal, if one can generalize the findings for the US (Young and Varner 2012) for Europe. They conclude that top-income taxes in California do not lead to observable tax flight. They also studied the migration patterns of New Jersey’s millionaires before and after 2004, when the state imposed a “millionaire’s tax” that raised rates on those earning $500,000 or more to 8.97% from 6.37% and conclude that “millionaire flight” is a myth. However, Vedder (2003) finds a substantial impact of tax rate increases on out-migration from one US state to another.
Moreover, the vibrant scenario should also look for policies to combine smart growth with a return to a more redistributive tax and transfer policy (Atkinson 2013). Decreases in the bottom income tax rates, or the introduction of a luxury rate of VAT, can contribute to fiscal consolidation and help ensure that the burden of fiscal adjustment can be more fairly shared. The merits of an increase in the income tax top rate are debatable.
Perhaps the impact of a “millionaire’s tax” in Europe, if applied Europe-wide, would not lead to substantial emigration. The introduction of a millionaire tax in France in 2012 with a number of high-publicity flight cases will perhaps be a good case study, albeit that this was a tax only for residents in France thus evasion was easy by moving across the border to nearby European countries. Zoutman (2014) argues that top rates are already beyond revenue maximizing.
Limiting top incomes would have a strong impact on income inequality in the uppermost income bracket (top 1%). At the same time the possible increase in entrepreneurial income and capital income— as may be expected from a more vibrant scenario— may offset the income, reducing the impact of the top income limitation brought about by shareholder constraints.
The incentives to engage in regular work could be found in the workfare principle: there is no financial support without work or commitment to further education (Schneider and Zimmermann 2010). Rinne and Zimmermann (2012) argue that important factors that have recently contributed to the strong German employment resilience have stemmed from the 2003 Hartz market reforms, the extension of short-time work, the behavior of social partners and automatic stabilizers in social security expenditures. The impact of these reforms in Germany seems to have clearly reduced income inequality (Grabka et al. 2012).
Between country differences should be reduced by helping lower income countries to converge faster with higher income countries. This means de facto that they should quickly switch from imitation to innovation technologies. The policy described above, focusing on cohesion and structural funds for 50% for R&D and higher education, might be helpful for such a switch.
Therefore the following are policy recommendations for a vibrant scenario for EU member states:
Introduce or augment income support for the working poor based on family circumstances through tax credits. If minimum wages are politically necessary they should remain low to avoid the destruction of jobs which require little education.
Introduce wage subsidies where labor demand is failing and where there is a “social” demand for work which requires less education (e.g. the Belgian example of the service checks or concierges at school).
Uphold income-related prices for public services, with consideration of the poverty trap.
Engage in a European-wide dialogue with the private sector on maximum wages (excluding the rewards of entrepreneurial work, i.e. risk taking with potential private losses) to bring about Europe-wide caps on non-entrepreneurial income.
3.3 Mobility policy
It is unlikely that the muddling through scenario, even with increased innovation, could reach full employment by 2020 because of (too) low labor mobility within and between EU member states. Existing jobs disappear while new, different jobs appear as the half-life of jobs is decreasing in line with the half-life of products and production technologies. In the process, routine work in particular will continue to disappear due to robotization. If workers do not switch from jobs (in the sense of a given set of tasks) towards newly emerging jobs, either because they are immobile or have not upgraded their skills, then we could enter into a stage with substantial unemployment in combination with a substantial unfulfilled demand for labor. Full employment can only be realized if individual workers feel responsible for their own employability by being mobile and through upgrading their skills. In this respect, employment protection is a misnomer since it cannot protect the worker from non-employability.
A vibrant scenario
The vibrant scenario is defined as having increased labor mobility within and between EU countries with EU member states at the helm; this would be leveraged by the EU as a knowledge clearing house (on what works and what does not), with country specific recommendations and guidelines.
Increased labor mobility is needed because of the reduced half-life time of products, because of the creative destruction of jobs due to innovation, and because of unemployment differences between industries, regions and countries.
In the vibrant scenario the level of job protection for temporary contracts is increased while that for permanent contracts is reduced. Many different measures are needed. We distinguish between member state and EU policy.
The member states should focus on increasing mobility within their countries. The general notion is that unemployment should not occur if a job is lost, because workers anticipate the disappearance of the job and timely “hop” to another one. An incentive for anticipation is:
Other incentives are:
Paid leave during the notice period for the purpose of job seeking (e.g. 5–20 days)
Sponsorships enabling individuals to try out a new job to see if it suits both parties (trial periods)
Support while starting a new business (for example, low interest credit)
Regular training (general and firm-level) for employed individuals to maintain employability, in worker adaptability to both the knowledge economy and technological change; making this a legal right for all labor contracts would be an important counterbalance for less worker protection
Further improvement of employment service through the provision of information about labor market and training possibilities, training, personal guidance, advice and counseling (on education and career choices), coaching on job search processes, and personal development activities individually or in groups (starting at the moment of the dismissal notice)
For those who still experience unemployment, EU member states would have “flexicurity” (high benefits for a short search period), including well-functioning employment services
The EU’s role in coordination with the member states on mobility policy could be:
Engage in active policy towards the implementation of country-specific recommendations for the labor market in individual member states, perhaps by discussions on these recommendations between the European Parliament and national parliaments.
Ease fiscal and monetary constraints (Maastricht criteria) according to an agreed framework for member states that sign up for reform aimed at full employment.
Improve mobility across European member states by improving language skills (compulsory English as a second language starting at an early age).
Ensure full integration of intra-EU mobility through migrant language programs.
Recognize degrees and work experience of other EU countries.
Create EU-wide pension systems, as proposed by the EU for academics, which are not country-dependent.
3.4 Jump-starting youth employment
Muddling through with youth unemployment is an unhealthy option because of the scarring effects of youth unemployment which would still be visible some 20 to 30 years later (Boeri 2013). However, solutions for youth unemployment should be embedded into a long-run employment policy aimed at full employment. The youth employment guarantee of the EU bears serious political risks if there is no job at the end of the guarantee period (See Cahuc et al. 2013 for further discussions).
A vibrant scenario
As an additional measure, one could think to introduce a European social youth loan scheme, for example totaling 50 billion euro for the years 2014 and 2015. The notion would be that every young EU citizen between the age of 20 and 30 could take out a loan for a maximum of 40,000 euro at an interest rate of the government lending rate plus 2% (for default and administrative costs). It would be a personal loan that would have to be paid back according to social loan schemes. This would be similar to what some EU countries do for education loans. Basically it means one would never have to repay more than 10% of his or her income; additionally, at some point (after 20 or 25 years) if there is still a remainder of the loan, it would be written off.
The loan would have to be spent in the EU within two years following procurement (any unspent amount would be repaid immediately). It could not to be used to “play the stock market” or to save. At the same time the conditions should not be too strict in order to keep administrative costs as low as possible.
The loans should not lead to contraction of credit available for other purposes. Hence it is assumed that the European Central Bank would accommodate it in the money flow as a focused form of quantitative easing. In this way a monetary impulse is provided in spending while giving young Europeans a chance to start a business, to study, or to invest in his or her own human capital in other ways. The EU policy brief on youth entrepreneurship (2012) shows that 40% of young Europeans have an interest in starting a firm of their own. A loan scheme as proposed might help to realize this interest.
3.5 Vibrant immigration
Immigration is not a popular issue with the average European (Zimmermann 1995). Nonetheless, the EU needs to continue to view immigration from outside the EU for its potential to reduce the emerging shortages of well-trained people, in view of the development of European demographics (Zimmermann 2005). At the same time the EU needs to deal with the pressure for immigration into the EU which now mostly evolves through asylum seeking and refugee admission policy, aside from family reunion. Additionally, significant resources have been mobilized to fight human smuggling and trafficking networks in the EU.
Asylum seeking is one part of recent immigration. It is a highly contested and often a human drama. The great majority of the asylum requests are rejected, yet it is then often difficult for the rejected asylum seeker to return home without documents, which may be lost or nonexistent.
Active labor recruitment is still only a minor part of immigration (slightly higher than the number of those seeking asylum). EU policies encourage labor recruitment, while immigration policy is often focused on two areas: preventing both unauthorized migration as well as illegally employing migrants lacking work permits, and promoting the integration of immigrants into society.
The EU has begun with a new immigration policy by introducing the Blue Card in 2012, aimed at attracting well-educated workers by granting them the right to work and live in a specific EU country. Also it might be well advised to leave room for immigration into the EU for those who do not satisfy the Blue Card criteria; this can be achieved through a regulated quota system based on labor market needs as an alternative to the “asylum route”.
European immigration policy could learn from the Israeli and US experiences, where all immigration is in principle temporary and where permanent status is achieved only after a couple of years. At present, this differs between EU member states.
A more clear-cut and focused immigration policy is needed, while at the same time efforts should be enhanced towards integration, particularly for the second and third generation children at school.
It is equally important to develop a political base for a labor-market oriented immigration policy.
A first step would be to expand Blue Card access to the whole European labor market, not just within the arrival country.
A second step would be to expand the Blue Card to well-educated immigrants, even if they do not have a job offer.
As a third step, non-European students graduating with a Master’s degree or equivalent from (selected) European universities should be automatically eligible for a Blue Card.
Apply anti-discrimination regulations more strictly.
Asylum requests are only accepted when filed from outside of Europe (either in the first country after leaving the home country or at European borders).
Leave room for immigration into the EU for those who do not satisfy the Blue Card criteria, based on a regulated quota system for labor migrants.
Immigration is in principle temporary; the permanent status is achieved after a couple of years.
There is little leeway for enhanced greening policies in countries with considerable unemployment and faltering economic growth. In the period 2014–2020, no major greening initiatives can realistically be expected under the present growth and employment prospects, despite the obvious need for more greening as a “no-regret” scenario.
Even in countries that successfully overcame the crisis, like Germany, further greening policies are at risk. This is exemplified with the remarkable and daring Atomausstieg in Germany where the closure of their nuclear reactors by 2020 will imply a substantial rise in the price of energy. The decision followed earlier German greening initiatives like the feed-in tariff for locally produced “clean” energy, costing some 17 billion euros in 2010. Both the feed-in tariff and the Atomausstieg have resulted in substantial energy price increases, as well as political backlash.
A vibrant scenario
Greening (a smaller footprint) raises prices in such a way that goods and services with a larger footprint will have the largest price increase. In this way, a shift in consumption is encouraged away from “ungreen” goods and services. The end result is an average price increase for the total basket of consumption goods. Such a price increase would in part mitigate the increase in welfare of this “vibrant scenario” policy package measures, leading to more innovation and higher economic growth.
It is unclear how additional greening efforts could impact the composition of employment. If greening is aligned with innovation, the impact on employment is positive (as is the intention of Atomausstieg).
The increased prices of “ungreen” goods and services might impede European firms’ exports and thus impact its international competitiveness. However, this need not be the case if Europe (either by Kyoto-type agreements or WTO negotiations) can create a level playing field. WTO negotiations can help create this if the EU can levy import taxes on “ungreen” goods and services to a level which would adjust the import price to include the added costs the EU bore in order to make its production greener.
From the aforementioned points of the impact of income, its distribution and unemployment, it is obvious that Europe’s average level of happiness is likely to decrease in the years to come. This is primarily due to the impact of unemployment, both on the unemployed as well as on the employed. At the same time, the happiness distribution across EU member states will greatly vary. This was documented by the OECD (2013a, b) which showed that between 2007 and 2012, average life satisfaction declined by more than 20% in Greece, 12% in Spain and 10% in Italy.
A vibrant scenario
Some consideration could be given to happiness, which is a function of unemployment (negative relation), EPL (positive relation) and income, in a world with rapidly changing jobs. Overall it can be argued that the vibrant scenario is superior to muddling through as it comes closer to full employment, leads to more growth and less inequality and to more greening, while realizing that there are “happiness costs” involved in reducing employment protection and increasing labor mobility within and between EU countries.