IMPLICATIONS OF LIBERALISED EUROPEAN LABOUR MARKETS SARAH BROWN, KENNETH BUTTON, AND JOHN SESSIONS*

This paper reviews the alternative labour market scenarios open to European pol- icymakers in the current movement towards enhanced economic and political integra- tion. To clarfi the various issues, the paper dichotomises the policy alternatives into two camps: “euro-liberalists” and “euro-regulators. ” The paper concludes that the latter @?rs the best path towards convergence, with the proviso that the subject of regulation is a Pan-European system 4 labour market objectives rather than institu- tions.

I. INTRODUCTION

The recent collapse of the European Ex- change Rate mechanism has led to great uncertainty regarding the future shape of European union. If and when the process of integration resumes, the structure and conduits of labour markets will become increasingly important-in particular re- garding the harmonisation of inflation, which is the necessary prerequisite before national currencies are irrevocably locked through monetary union. With a single currency, member states will be forgoing two of the major instruments of macroeco- nomic control, namely exchange rate flex- ibility and monetary policy. Indeed, these policies previously gave governments flexibility, albeit at the expense of infla- tion. The requisite coordination implied by European union will result in regional labour cost surges impacting far more rap-

idly on unemployment than before, with benefits accruing to those regions best able to ensure low inflation and high produc- tivity growth. European labour markets thus face the dual problem of controlling nominal wage growth while ensuring suf- ficient productivity growth to permit some real wage growth and above average pay settlements. In tackling these, a num- ber of policy options have been aired. Dichotomising the policy advocates into two broad camps helps to clarify the var- ious issues. Such characterisations are a useful expositional device although, in re- ality, they fit only the actors at the policy extremes.

On the one hand, a Euro-liberalist camp argues for deregulated labour markets with unilateral employer decision making the norm. On the other hand, Euro-regu- lators advocate a Pan-European system of

*Brown and Sessions are Lecturers in Economics and Associate Members of the Centre for Research in European Economics and Finance, Loughborough University, UK. Button is Professor of Applied Eco- nomics and Transport and Director of the Centre for Research in European Economics and Finance, Loughborough University, UK and VSB Visiting Pro- fessor of Transport and the Environment, Enbergen Institute, Free University, Amsterdam. This is a revised version of a paper presented at the Western Economic Association 69th International Annual Conference, Vancouver, British Columbia, July 2, 1994 in a session organised by Kenneth Button. The authors thank an anonymous referee for helpful comments.

I ABBREVIATIONS

EC: European Community ECU: European Currency Unit EMS: European Monetary System ERM: Exchange Rate Mechanism ILM: Internal labour markets OLM: Occupational labour markets QLM: Qualification-based labour markets SAP: Social Action Programme SC: Social Charter

Contemporary Economic Policy

Vol. XIV, January 1996 (ISSN 1074-3529)

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@Western Economic Association International

BROWN, BLJTTON, & SESSIONS: LIBERALBED EUROPEAN LABOUR MARKETS 59

labour market regulation focusing on de- veloping co-operation and consensus.

This paper reviews the alternative camps and concludes in favour of the lat- ter as the preferred method of conver- gence, with the proviso that it is a Pan-Eu- ropean system of labour market objec- tives, rather than institutions, that is “reg- ulated.”

II. CURRENT EUROPEAN LABOUR MARKET POLICY: THE SOCIAL CHARTER

Labour market regulation has been a re- current theme in the move towards Euro- pean integration. The Treaty of Rome (1957) itself emphasised the improvement of living and working conditions within member states. The early years of the Eu- ropean Community (EC) witnessed sev- eral tentative steps towards implementing these provisions in areas such as workers’ freedom of movement, eliminating racial and sexual discrimination, and setting safety and hygiene standards. Neverthe- less, by the end of the 1960s, social consid- eration remained a relatively minor influ- ence on EC policymaking.

Mounting criticism of the EC’s luissez- fuive approach to social issues led in 1974 to adoption of the first “Social Action Pro- gramme” (SAP), which was intended to raise employment and improve EC workers’ living/working conditions. To these ends employee participation at com- pany level and employer/employee par- ticipation at EC policymaking level were encouraged.

Despite further advances over the ensu- ing years, many critics believed that the pace of reform on the social front re- mained woefully slow and that labour market implications of the move towards a single market deserved far more atten- tion.

The apparent indifference of the ECs legislators to the social aspects of Euro- pean integration was largely remedied in December 1989 when the EC countries’ heads of state (with the exception of the

United Kingdom’s) gave a non-statutory “solemn declaration” of support to a set of principles that the EC had approved at the preceding Maastricht agreement (May 1989). These principles, known as the “Community Charter of the Fundamental Rights of Workers” or more briefly as the “Social Charter” (SC), reflected the pre- vailing EC view that the success of Euro- pean integration would depend crucially on constituent firms’ and workers’ sup- port.

The SC was intended to provide the framework for the leveling employment conditions across the community, reflect- ing the widespread concern that dispari- ties in social security and labour protec- tion would distort competition and lead to excessive ”social dumping” with compa- nies being tempted to shift to lower cost regions. Accordingly, those items initially agreed upon were almost exclusively health and safety issues. More controver- sial were items restricting hours of work, establishing rights for part-time and sub- contracted workers, and creating informa- tion, consultation, and training rights.

For the majority of EC member govern- ments the SC was a belated effort to apply the logic of European integration to the labour market. However, some viewed the SC as an inefficient constraint on the op- eration of market forces that increased the unemployment costs associated with any necessary labour market adjustment.

This paper addresses the economic ra- tionale for EC-wide labour market regula- tion rather than the specific details of the SC. (On the origins of “Social Europe,” see, for example, Addison and Siebert, 1991).

111. REGULATION OR LIBERALISATION: PREVIOUS WORK

Two considerations drove the rejuvena- tion of EC employment policy: (i) the de- sire to reduce social inequality between those who have jobs and those who have not and (ii) high-wage member countries’

60 CONTEMPORARY ECONOMIC POLICY

concern that their low-wage counterparts represented unfair competition. This sec- ond consideration reflected a fear that in- dividual countries could distort their lab- our costs to gain a comparative advantage. Policymakers supposed that imposing minimum levels of social protection would prevent this form of competition.

Researchers have neglected the eco- nomic rationale for or against EC-wide labour market regulation despite the fierce policy debate over the issue. Researchers who have addressed these issues tend to assume, somewhat simplistically, that lab- our markets are either perfectly competi- tive or subject to market failure.

A. The Euro-Liberalist Approach Advocates of enhanced liberalisation

tend to view European labour markets as broadly competitive. Since workers have freedom of contract, they cannot be forced to acquiesce to undesirable conditions and, hence, laissez faire "employment at will" policies should be optimal. That is, the theory of compensating wage differen- tials implies that workers will choose the utility maximising combination of wages and working conditions. Thus, policies that seek, for example, to promote equal treatment for part-time workers could, by raising the costs of such workers, be counter productive (Addison and Siebert, 1992).

Taking the analysis a stage further, Ermisch (1991) considers the long-run consequences of a common regulatory framework for EC labour markets. Assum- ing that capital mobility equalised after- tax returns across the community and that regulations raising labour costs were equivalent to payroll taxes, Ermisch finds that labour mobility is crucial in determin- ing the consequences of any increase in such payroll taxes. Indeed, in the extreme case of zero worker/perfect capital mobil- ity, an increase in payroll taxes has no im- pact whatsoever upon the location of

firms. The fall in labour demand lowers the market clearing wage (an impact that migration towards higher wage econo- mies does not moderate) such that work- ers end up paying for the increased social protection in terms of a lower probability of finding permanent employment. Ennisch concludes against enhanced inte- gration, arguing that the optimal level of social protection is a matter for national decision making since spillover effects and unfair trading are minimal.

In contrast, Van Rompuy et al. (1991) argue that strategic labour cost policies may become more effective in gaining comparative advantage as enhanced EC competition makes labour demand more elastic. This is especially likely when im- perfect capital mobility exists and where labour market subsidies are concentrated upon imperfectly competitive sectors in which entry restrictions and/or econo- mies of scale prevent equalisations of rates of return across national boundaries. However, the social dumping argument is not impressive. Increased competitiveness should lead to a fall in wages and social protection only in the less-skilled, labour intensive industrial sectors of the rela- tively more developed member countries, since increased specialisation actually should enhance the premium earned by higher skilled workers in these economies. The study views centrally determined so- cial norms as undesirable since they dis- courage specialisation on the basis of com- parative advantage and impede adjust- ment to country specific shocks.

Addison and Siebert (1993) point to the intrinsic diversity of EC labour markets and offer a somewhat more persuasive ar- gument for liberalisation. In their view, the existing SC is ineffective because it at- tempts to impose uniformity on countries that have very different systems of labour market regulation, raising the obvious question as to whether the removal of competition between systems, as envis- aged by the SC, is beneficial. For example,

BROWN, BLJ'ITON, & SESSIONS: LIBERALISED EUROPEAN LABOUR MARKETS 61

observers commonly include the United Kingdom among the least regulated of member countries. It is no surprise that employer surveys consistently point to a greater flexibility in the United Kingdom. Indeed, in a recent survey of EC firms, only 11 percent of U.K. firms, compared to 25 percent for the EC as a whole, agreed that insufficient flexibility in hiring and shedding labour "was a very important obstacle" to their long run objectives (Commission of the European Communi- ties, 1991). By the same token, however, U.K. union power is among the strongest in Europe and to some extent compensates for this lack of regulation. The problem is the effect on U.K. labour market flexibility once, for example, German-style works councils combine with the power of U.K. unions.

Many commentators note differences in the structure of EC labour markets. Due et al. (1991) summarise some of the key find- ings, noting in particular the differences in the relative importance of primary sector employment between the northern and southern member countries. They also show that the proportion of part-time em- ployees in the work force is particularly high in the Netherlands (29 percent), Den- mark (26 percent) and the United King- dom (23 percent) and particularly low in Italy (5 percent). The proportion of part- time employees in the workforce is also around 5 percent for Spain, Greece, and Portugal. However, the relative impor- tance of tourism to these latter three coun- tries, allied with the peculiar nature of the indigenous unemployment insurance sys- tems, has created a situation in which tem- porary workers account for well over one in five of the work force (Symes, 1995). Average weekly working hours are more closely grouped, with shift working being more frequent in Spain and the United Kingdom (Employment in Europe, 1994). The same survey reports that while on av- erage 66 percent of EC workers may be classified as skilled, the proportion ranges

from 87 percent in Germany to 48 percent in the United Kingdom.

The structure of labour costs reflect such differences. In 1994, the average monthly cost of employing a male manual worker in manufacturing in the commu- nity varied from approximately 2,750 ECUs in Germany and just over 2,500 ECUs in Belgium to just under 1,000 ECUs in Greece and under 600 ECUs in Portugal (Employment in Europe, 1994). The ECU- measured difference in net earnings is somewhat lower since the rate of tax and social contributions tend to be less in the poorer, less productive countries. How- ever, this understates differences in living standards since, in the latter, workers have less-generous welfare benefits and less-de- veloped health services.

A further problem is that the diver- gence of labour markets over the 1980s was hidden by exchange rate flexibility. For example, over the period 1980-1987, labour costs doubled in local currencies terms in five out of the 12 member states and tripled in Greece and Portugal. How- ever, national exchange rate deprecations meant that the true scale of the increases was hidden-in ECU terms, the changes in unit labour costs ranged from +2.6 per- cent (Greece) to -12.4 percent (Portugal), with most members experiencing falls of around 5 to 7 percent. Moreover, even those countries within the EMS (the pre- cursor to the ERM) witnessed quite large exchange rate adjustments against the ECU. The French and Italian exchange rates fell by 15 percent and 20 percent re- spectively while those of Germany and the Netherlands rose by 22 percent and 18 per- cent. Eliminating national exchange rates therefore implies an environment radi- cally different to that of the 1980s and will demand equally radical changes in the behaviour of labour market agents.

Equally important and directly associ- ated with these differences in labour force structure and costs are the differences in the legal and industrial relations environ-

62 CONTEMPORARY ECONOMIC POLICY

ment. The United Kingdom, Denmark, and Ireland represent the voluntarist sys- tem. That is, the state largely adopts a lais- sez-faire approach to labour market behaviour, imposing a minimum of regu- latory constraints on employers. Most of the other member states follow the Roman-Germanic system in which the state guarantees fundamental worker rights and regulates to ensure minimum acceptable standards for remuneration, working conditions, and worker represen- tation.

Different levels at which collective bar- gaining has been conducted also reflect differences in the approach to labour mar- ket regulation. Negotiations in the United Kingdom and Ireland have become in- creasingly fragmented and based at the enterprise/plant level, whereas elsewhere in the EC bargaining predominantly takes place at occupation or industry level. Den- mark and Belgium have highly centralised and co-ordinated bargaining systems while Germany and the Netherlands fa- vour industry-wide agreements. Some argue that such an aggregated level of wage bargaining allows an element of economy-wide coordination, whereas the U.K.’s combination of local bargaining to- gether with limited job security and neg- ligible worker participation cause short- term perspectives to dominate the wage- bargaining process (Soskice, 1990).

The extent to which wage-bargaining is centralised has important implications for relative macroeconomic performance (Calmfors and Driffil, 1988). Rowthorn (1992) reviews the argument that decentralised economies perform well be- cause their wage flexibility generates high secondary sector employment growth while highly centralised economies per- form well because their wage inflexibility encourages more dynamic firms and in- dustries to expand rapidly without lower wage competition from their less dynamic counterparts. Although criticising the original Calmfors and Driffil “U-shaped”

relationship between centralisation and economic performance is too simplistic, Rowthorn argues that economies with moderately fragmented bargaining struc- tures may perform particularly badly when faced with negative shocks that gen- erate less co-operative behaviour.

The right to freedom of association and collective bargaining inevitably is linked with labour’s right to withhold its ser- vices. All EC governments accept this right. The constitutions of France and Italy explicitly include it. However, throughout the EC, a general feeling exists that the right is not unlimited and should be bal- anced, given the negative externalities as- sociated with strike activity-for example, lost tax revenues, lost output, and public inconvenience. These restrictions take a number of forms. In Germany and Den- mark, strikes taking place during the pe- riod of collective agreement are illegal. In the United Kingdom, employers may well initiate legal action if union members have not been balloted or if the strike has been called in sympathy with another group. In a number of other member states-for ex- ample, France, Germany and Greece- banning strikes in essential services is ei- ther in place or being reviewed.

An indication of the cost of member states’ adopting free collective bargaining is the number of working days lost per 1,000 employees due to strike activity. Re- cent estimates suggest an enormous vari- ation of this measure throughout the EC, with 1983-1992 annual averages ranging from 15 in the Netherlands to 680 in Greece (Employment Observatory Trends, 1994).

A final concern of the liberalists is the limitation of freedom of contract implied by the SC. An unregulated labour market offers workers a wide variety of working conditions, fringe benefits, and pay. Work- ers themselves are widely heterogeneous, differing markedly in terms of tastes, tal- ents, and individual circumstances. Those workers who place a lower value on a par-

BROWN, BIJ’ITON, & SESSIONS: LIBERALISED EUROPEAN LABOUR MARKETS 63

ticular job attribute, such as job security, will gravitate towards firms that offer less security but pay higher wages. And these firms will be precisely the ones that find providing job security too costly. Thus, voluntary trade and free markets implies efficient allocation.

One proviso here is the apparent exis- tence of a “wage-curve“ relating the pay level to the unemployment rate (Blanchflower and Oswald, 1995). Exten- sive research suggests that, contrary to the compensating differentials argument, the pay level falls in response to an increase in unemployment as the bargaining power and/or non-shirking wage fall.

Economists who address the desirabil- ity of common EC labour market regula- tions on economic grounds are hostile to centrally determined norms and regula- tions. At best they have been prepared to tolerate some relative labour cost norms and incremental adjustment of labour costs on the basis of relative national eco- nomic performance. This hostility appears to rest largely upon the assumption that the behaviour of the present labour mar- ket approximates to that of a competitive market.

B. The Euro-Regulation Argument The liberalist case for unregulated lab-

our markets and the freedom of contract is qualified in the presence of market fail- ure. The traditional case for labour market regulation rests upon the argument that in certain situations markets fail to deliver a Pareto optimal resource allocation. Per- haps the best known example of labour market failure occurs when a monopsony buyer is able to drive down wages to below marginal revenue product. The fact that over 70 percent of EC private sector employees work for small to medium sized firms suggests that such power is rare (Addison and Siebert, 1993). How- ever, a more subtle form of monopsony power might accrue to a firm as a result

of long tenured employees’ acquiring non- transferable human capital, which reduces their transfer earnings. But such workers actually seem to be paid more than their counterparts in smaller firms, implying that this type of exploitation also is rare (Addison and Siebert, 1992).

One therefore must seek the principal sources of market failure elsewhere. One possibility is asymmetric information. Chronic informational deficits in labour markets are no longer an issue because the preponderance of evidence suggests that worker compensation varies directly with the risk of job loss, accidents, and other adverse working conditions (Addison and Siebert, 1993). Accordingly, the imperfect information argument is cloaked in the somewhat more subtle adverse selection story.

Adverse selection and opportunistic behaviour provide some rationale for reg- ulatory polices. For example, a reasonable assumption is that when the market solu- tion is not first best, introducing particular mandatory benefits could achieve a Pareto improvement in welfare. However, this is by no means certain. Consider the dis- missals protection, for example. Research has not yet demonstrated that “tradi- tional” firms, which are supposed to fire at will, are in any sense more exploitative or less profitable than their more progres- sively minded counterparts offering de jure protection.

The problem here is that proponents of mandated benefits always can claim that the negative externalities imposed on “in- novative” firms prejudice outcomes. In- deed, this very argument recently has been used to support the case for extended worker participation, a long time favour- ite of the EC. “Participatory” firms are considered inherently more productive than traditional, non-participatory firms due to improved worker morale and dis- closure of information. Some argue that such firms require long-term job security and group cohesiveness because they mo-

64 CONTEMPORARY ECONOMIC POLICY

tivate through group rewards and em- ployee support rather than through the traditional threat of punishment. The for- mer depends on dismissals protection, which adverse selection may discourage. The latter often is associated with profit- sharing and a relatively compressed wage structure. A further argument is that par- ticipatory firms cannot offer such a wage structure at present because traditional firms then will bid away the participatory firms’ high-skill workers. The remedy is to force all firms towards participation and, perhaps, to compress wage differentials directly for all-for example, via a mini- mum wage (Levine and Tyson, 1991).

Levine and Tyson, (1991) offer a non- neo-classical perspective on this point. They argue that efficiency wage consider- ations may justify mandatory co-determi- nation measures. If productivity is endog- enous, then co-determination may im- prove worker motivation and, hence, in- crease effort and productivity. However, individual firms opting for enhanced worker participation will face greater screening and monitoring costs than will other firms, which collectively rely upon unemployment to prevent shirking. Such dominant policies produce social costs that are not internalised and therefore lead to a socially inefficient level of participa- tion, hence providing an argument for mandatory co-determination regulations.

Even if one accepts the simple adverse selection story, obvious difficulties of cost remain. For example, if all firms are obliged to offer a just cause dismissal pol- icy, then wages must fall to offset the extra cost of job security. However, little com- pass exists for certain wage levels (e.g. un- skilled) to fall since these tend to be close to unemployment benefit/minimum wage levels already. The consequences are likely to be long-term unemployment, irrespec- tive of adverse selection.

The argument for mandated benefits based on the notion of market failure is not persuasive. The list of cases where the

market fails to provide a good valued by the workers is too short, and even here the absence of an explicit market does not au- tomatically imply the absence of an im- plicit market: the lack of a private market for unemployment insurance should not hide the reality of sharply differentiated compensations for the risk of unemploy- ment. Moreover, government interference creates its own externalities, and rules once established may become entrenched very quickly due to classic free-rider prob- lems. More generally, uncritically accept- ing the case for market failure encourages uniformity. By attempting to correct what in fact may be minor market failures, one might impede market participants’ capac- ity to experiment towards the discovery of new resources and techniques.

Finally, even if the above rationale is reasonable, it has no specific European di- mension to it, and no reason exists why problems of asymmetric information and adverse selection should be exacerbated by European integration and/or solved at a Pan-European level. One therefore must find a rationale for Pan-European legisla- tion elsewhere.

111. AN ALTERNATIVE RATIONALE FOR A SOCIAL EUROPE

Perhaps a more persuasive argument for the Pan-European regulation of labour markets relates to the need to control in- flation and enhance productivity growth. A commonly accepted notion is that stable exchange rates and low inflation rates are more likely to provide a favourable envi- ronment for productivity and real wage growth than one with persistent and vari- able inflation. Moreover, pay increases in excess of productivity increases will more rapidly impact onto unemployment within the essentially fixed exchange rates environment of the single market than would be the case in a flexible exchange rate system. Similarly, the removal of trade barriers will increase the sensitivity of product markets to price and quality, as

BROWN, BUlTON, & SESSIONS: LIBERALISED EUROPEAN LABOUR MARKETS 65

consumers have increased sources of sup- ply, such that above (below) average pay (efficiency) increases will be more severely penalised than in the past. However, given the diversity of European labour markets, reform should focus on formulating a common set of objectives rather than on creating a common set of procedures. In particular, a Pan-European labour market policy should concentrate on: (i) weaken- ing the linkages in regional pay structures while altering the inflationary processes that have become embedded in the pat- terns of European collective bargaining and (ii) enhancing productivity growth by moving towards skill systems that are more adaptable to the changing economic environment and that will reduce the cap- ital loss that workers face when their jobs are reorganised.

A. l@ation Persistent inflation alters the behaviour

of labour market actors in ways that are unlikely to prove compatible with eco- nomic and monetary union. For example, inflationary expectations often become embodied in the rules negotiated between workers and unions. As a result, many wage contracts make explicit reference to some form of indexation-for example, the Italian “Scala Mobile,” which finally was abolished in 1992 after nearly a de- cade of attempts at reform. Even more per- vasive is the practice of implicit index- ation. Although France’s 1982 austerity measures prohibited explicit indexation, the state has established a custom of revis- ing the pay-scales of its four million public sector employees in the light of increases in living costs.

Similarly, workers have adapted to per- sistent inflation by altering their approach to wage bargaining so as to minimise any delay between the pay settlements of other groups of workers and their own. Such lags tended to slow the transmission of inflationary impulses throughout the

economy and thus acted as a stabilising influence on inflation. For example, in France, Germany, and the United King- dom, white collar settlements followed blue collar until the acceleration of infla- tion in the early 1970s. After some initial losses, pay-setting mechanisms appar- ently adapted such that white-collar and blue-collar pay was settled contemporane- ously. Indeed, some evidence exists that less qualified white-collar workers at this time were shifting their pay references points away from higher-qualified white- collar workers towards better organised and more combative blue-collar workers.

Another behavioural change brought about by persistent inflation, and one that also tended to intensify inflationary pres- sure itself, has been groups of workers’ increasing awareness of the changing dis- tribution of pay throughout the economy. Some argue that before inflation acceler- ated in the 1960s and before the wide- spread use of incomes policy, the norma- tive structure of pay adapted gradually to a slowly evolving actual wage structure. The laggard awareness of changes in wage differentials meant that the normative structure had time to adapt to changes in the actual structure. The combination of faster inflation and incomes policies re- sulted in information being diffused faster than the evolution of the normative pay structure. This situation led to the emer- gence of ”wage-wage” inflation (Clegg, 1971).

Persistent inflation also has affected the behaviour of firms and governments. The former have found it easier to concede to wage claims in an environment of persis- tent inflation and flexible exchange rates. The latter have found it easier to maintain competitiveness in the face of inflation by devaluing rather than by increasing pro- ductivity. This has led to an excessive pre- occupation with the short term, particu- larly regarding investment.

High and persistent inflation thus has conditioned the behaviour of labour mar-

66 CONTEMPORARY ECONOMIC POLICY

ket actors in such a way as to speed up the response to increases in prices and wages. The transition towards the single market will require pay-bargaining mechanisms that are more compatible with low infla- tion, particularly in those regions with a history of high inflation. A potential solu- tion may be for increased European-wide coordination and consultation in pay ne- gotiations. This would inject some percep- tion of the new macroeconomic environ- ment into lower level pay negotiations through a form a Euro-Corporatism.

However, this route leads to some prob- lems. The econometric relationship be- tween enhanced centralisation of wage bargaining structures and low inflation- unemployment outcomes is weakening. Indeed, existing corporatist economies are performing poorly and many EC countries are not sufficiently centralised at present. Therefore, these countries would find achieving the necessary institutional re- forms difficult.

An alternative way forward involves creating centralised, Pan-European guide- lines for lower level bargaining that en- courage, for example, the development of pay-rules that reduce the linkages within regional wage structures thereby slowing the spread of inflationary impulses. One option might be to promote pay flexibility at company level by encouraging the use of productivity and/or profit related pay. By increasing the variation of pay in re- sponse to performance of both firms and individuals, such measures would dimin- ish the influence of ”job-rates,” which fos- ter pay comparisons. Centralised discus- sion also might assist in providing some discipline for enterprise level bargaining, in particular by discouraging “leap-frogg- ing” and uncompetitive pay settlements that might threaten productivity deals. Such means might maintain the benefits of the consensual approach to industrial re- lations, which has characterised European labour markets over the past 30 to 40 years, while weakening the inflationary

tendencies that have developed since the 1960s.

B. Productivity Adapting pay-bargaining systems that

can take all of the strain to convergence is unlikely so policymakers should imple- ment measures designed to augment pro- ductivity. The realisation that demand- management policies and the provision of national subsidies to ailing sectors are not the miracle panaceas they were thought to be has led member states to look else- where for ways of enabling convergence. Of particular interest has been the role of national labour markets-and in particu- lar, the role of education and training.

One may classify the present structure of EC labour markets as either internal labour markets (ILMs) or occupational labour markets (OLMs) (see Marsden, 1990). Training in the former tends to focus on the requirements of the individ- ual enterprise and usually is enterprise based and non-transferable, with firms generally filling vacancies via internal promotions. Individuals in the latter tend to be endowed with generally vali- dated/readily transferable skills and qual- ifica tions.

OLMs offer good “numerical flexibil- ity,” however. That is, firms easily can alter the their workforce. Under OLM structures, workers’ skills are transferable, so the capital loss associated with job changes is smaller than changes within ILM structures.

Restructuring due to the spatial reloca- tion of economic activity following EMU likely will be less painful where OLMs dominate. Also, where firms find it advan- tageous to decentralise decision making and adopt a more fluid organisational structure, OLMs are preferred since firms will not need to adopt such long-term re- lationships. The decline of economies of scale in production in many engineering

BROWN, BUTTON, & SESSIONS LIBERALISED EUROPEAN LABOUR MARKEE 67

activities therefore could favour OLM structures (Sengenberger et al., 1990).

The key issue is whether these struc- tures can sustain the growing number of young people who receive training from their national education systems. Many member states now look upon the devel- opment of skills as a major element of competition within the single market. Jobs will go to the countries with the best edu- cated and most skilled labour force. Yet neither existing ILM or OLM structures adapt easily to increased off-the-job train- ing.

ILMs have proved remarkably resilient to the introduction of new vocational qualifications. For example, the French government expanded the supply of school-based vocational training over the last 20 years only to find that those who qualified initially had to accept jobs well below their skill levels. Typically, a young person with a CAP diploma must start in an unskilled position and wait between five and 10 years to be upgraded to skilled work, just as an unqualified high school graduate would have to do (Marsden and Germe, 1991). Thus, despite having a gen- eral skill, the qualified young person would have to submit to the logic of the ILM. In contrast, in Germany and the United Kingdom, young apprentice trained skilled workers would expect to enter directly at their level of skill.

OLMs also pose problems for integrat- ing new qualifications and new knowl- edge. In both Germany and the United Kingdom in the 1960s and 1970s, the ap- prenticeship system increased the level of theoretical training so that newly skilled workers would bring the advantage of up- to-date knowledge. However, this was ex- pensive and reduced employers’ willing- ness to provide such training, thereby con- tributing to the long-term decline of ap- prenticeships. Like the United Kingdom, Germany was slow to change because of the large number of different parties in- volved, but the resulting consensus

among employers and unions meant that the resulting system found great support. Both structures’ difficulty in adapting

to changing demands has favoured the growth of training in the further and higher education sectors. Nohara and Silvestre (1991) show that the ILMs in France have been more open for qualified white collar workers than for their blue collar counterparts. This likely also is true of other countries due to the greater pro- portion of skill that is developed within the educational system and the greater im- portance of general theoretical skills. To- gether with a lesser dependence upon the enterprise, such skills also are less depen- dent upon peer group recognition by fel- low workers or by employers. Their cur- rency arises from the national educational system.

Until recently, the need for work expe- rience has limited the value of educational qualifications in the labour market. Some countries, notably the United Kingdom, have moved toward a system that vali- dates work experience. Such a system, aligned with national education-based qualifications, could form an attractive al- ternative for labour market skills to exist- ing labour market structures. Indeed, in many occupations a dual progression path already has emerged, incorporating either long work experience and evening study for professional exams or university edu- cation followed by a shorter period of work experience. The widespread adop- tion of such a system could augur the growth of a new kind of labour market based on national qualifications plus cer- tified work experience, or “qualification- based labour markets” (QLMs) (Lam and Marsden, 1992). These may not challenge established labour market structures for intermediate level skills, but they might prove an influential alternative among the more weakly unionised white-collar skills whose employment share has been grow- ing strongly in recent years. Moreover, as the EC looks increasingly to education as

68 CONTEMPORARY ECONOMIC POLICY

a means of ensuring competitiveness within the single economic market, QLMs will offer an increasingly attractive alter- native to existing structures, particularly as the challenge from productivity and changing education structure grows.

The positive externalities associated with flexible skill systems likely will be considerable, and individual workers and firms will bear much of the cost of altering existing systems. Thus, encouraging a shift to a system more weighted toward national vocational qualifications where the educational system is a major provider would seem appropriate.

VII. FINAL REMARKS

Where then does the balance lie be- tween the forces working for a European system of labour market regulation and those working against it? Present labour market trends combined with the effects of market integration may work against the maintenance or creation of centralised systems of regulation or wage setting. The SC probably will not gain the political support necessary to establish a common set of norms. Nevertheless, the need to prevent a leveling of protective legislation and the desirability of long-term conver- gent economic development provide the best argument for a flexible Pan-European system of industrial relations.

There may be an alternative path per- taining to labour market convergence. This approach calls for member states to achieve the same economic outcomes for labour markets, but by the paths that are most appropriate to their own national in- stitutional arrangements. Such a course perhaps dangerously redirects labour markets away from the consensual pat- terns of industrial relations that have characterised post-war European labour markets toward a more unilateralist sys- tem of managerial relations. The change probably will speed up short-term deci- sion making hut likely will make imple-

menting decisions longer and more con- fron ta tional.

Policymakers should focus on setting common objectives in order to achieve a convergence of outcomes. Examples in- clude the weakening of linkages in pay structures and the reform of inflationary practices that have become embedded in European collective bargaining since the early 1970s. Moreover, the pressing need to maintain productivity growth will re- quire not only changes in working prac- tices but also a move towards the more flexible skill systems that are better equipped to deal with fast-changing eco- nomic circumstances and that minimise the capital loss workers incur through job re-organisation. An enhanced role for ed- ucational qualifications and certified on- the-job experience is one option for deal- ing with labour market convergence.

Finally, worth noting is that a conver- gence of procedures may well follow as member states seek to learn from each other's policies in achieving common ob- jectives. The institutions that survive and prosper will be those that best satisfy the demands of the workers and firms that they affect. Encouraging the growth of such institutions by engendering grass- roots support rather than by imposing de- crees, is likely the best path towards con- vergence.

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