Political Barriers to Helping the Jobless

Unemployment has been steadily rising in many European countries for now twenty years. It is universally deplored as a huge economic waste and a generator of social tensions. Especially worrying is the increase in long-term unemployment, which creates the risk of leaving a large underclass out of the social fabric. ''Exclusion'' has thus become a major policy concern for Europe. Many policies have been advocated ---often by economists--- as a cure for unemployment. For example, it has been suggested that one could reduce employer's social security contributions on low-wage employees, reduce unemployment benefits, subsidize the hiring of long-term unemployed, lower minimum wages and job protection provisions, etc. Roughly speaking, these policies fall into two types: deregulating the labor market (thus making it more ''flexible''), and encouraging the hiring of unemployed workers through subsidies or ''active labour market policies'' such as training programmes. These policies run into several problems. One is that there is still considerable uncertainty, among economists, with respect to the actual effectiveness of such policies. Another is that their practical design is not obvious if one wants to avoid introducing new distortions and avoiding cheating or subsidizing jobs that would have been created anyway. Here I want to concentrate on a different problem, namely the political difficulties of implementing such policies. Even in an economy where fifteen or twenty percent of the population is unemployed, it is still true that the majority of workers are employed; any policy which hurts those employed workers is therefore likely to be opposed by a majority of voters. It turns out that many of the policies that have been advocated do not pass this test. Consider some of the above mentioned examples. Reducing social security contributions by the poorest must show up either as lowered social protection for the same groups --- which will be opposed by those of them who are employed --- or shifting the costs to some other group, which will oppose the shift and is unlikely to be less numerous and less powerful than the, say, 10 \% poorer who will benefit from such a reform. Similarly, high unemployment benefits give the majority of the employed a strong bargaining position in wage negotiations and ensures their incomes in bad times. Remember that only about a third of the unemployed are long-term unemployed. These are the ones who are really hurt by generous unemployment benefits which exclude them from jobs. Therefore reducing unemployment benefits hurts the vast majority of the workforce and benefits only shareholders and a fraction of the unemployed. No wonder the last Swedish government lost the elections after reducing them from 90 % to 80 % of previous earnings. The same argument holds for firing costs and other job protection provisions. Those who already have jobs value them because they increase their income security and, like unemployment benefits, increase their bargaining power. Those who don't have jobs suffer from them because they deter new and expanding firms from hiring. But those who have jobs are much more numerous (and better organized) than those who don't. Hence it is politically very difficult, if not impossible, to reduce firing costs.

Both the policies that deregulate the labour market and those who directly help the unemployed run into such political problems because they implicitly or explicitly redistribute income from a majority to a minority. The only incentive for the majority to back such reforms is when the size of the unemployment problem makes them fear a social explosion. Are there solutions for this dilemma ? One possibility is the implementation of a two-tier system.(1) By a two tier system we mean an institutional change that only applies to new employees, not to existing ones. Thus, many European countries have reduced firing costs by allowing, along with traditional, permanent labour contracts, the use of ''determined duration'' or temporary contracts. The introduction of these contracts allows employers to hire workers with little job protection while not threatening the degree of protection of incumbent employees. They therefore lower the political opposition of incumbents workers to a reduction in firing costs. Indeed, incumbent workers may benefit from the reform: they realize that they will have better job prospects should they lose their jobs in the future, and because temporary workers will be the first to go in case of redundancies, their jobs are even better protected than previously. The political advantages of two-tier systems explain why it is mostly under such schemes that labor market reform has proceeded in Europe. One prominent example is Spain, where, following the liberalization of temporary contracts in 1984, there has been an employment boom. 95 % of new hires were under temporary contracts, and the proportion of total employment under temporary contracts quickly rose to 35 % in the early nineties. The Spanish experience, however, suggests that two-tier systems are not without drawbacks. First, from an economic point of view, employment is much more sensitive to recessions than under the old system: in a slump, employers simply fire temporary workers, generating a large mass of job destruction which amplifies the recession. Also, because workers under permanent contracts are even more protected, they have an incentive to make more aggressive wage demands. Second, from a political point of view, there is a growing mass of temporary workers whose interests differ from those of permanent workers. These workers threaten incumbent workers because they may support further reforms of the labor market in the future. For this reason unions have opposed temporary contracts when they were introduced and imposed severe limitations on their use. This is why in many European countries these do not exceed 10 % of employment. In Spain, where their use has been more liberal, they had to be converted into a permanent contract after being renewed three times. Nevertheless, the proportion of temporary contracts rose to such levels that there was real scope for the government to be able to pass further reforms in favour of flexibility. This generated considerable political uncertainty in 1994, when the government attempted another reform. The unions eventually managed to trade a partial removal of temporary contracts in exchange for further liberalization in other areas. Overall, it seem that flexibility has been reduced, but a different government with a different electoral agenda might well have been able to reach a different outcome. The overall message is that the political incentives to reduce unemployment may simply be non existent. Doing it is therefore a difficult undertaking, which involves careful design and timing of the reform. A good example of a partially successful reform is Spain. A more negative one, but equally illustrative of the power of incumbent employees, is France, where the combination of an election and some recovery prospects made all candidates promise generous wage increases in spite of vigorous pledges to fight ''exclusion'' and a 13 % unemployment rate.

(1) I have analysed these issues in greater detail in ''Some Political Aspects of Unemployment'', European Economic Review, 39, 3/4, April 1995, 575-82