De-regulated labour markets ‘much more dynamic’

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Europe does not need more highly regulated job markets but rather increased investment in human capital if it is to meet the dual challenge of achieving both economic efficiency and social justice, Wolfgang Merkel, the director of the Social Science Research Centre in Berlin, told EURACTIV Slovakia in an interview.

Wolfgang Merkel is the director of the research unit ‘Democracy: Structures, Performance, Challenges’ at the Social Science Research Centre in Berlin. As the author of numerous books and articles, his research focuses on political regimes, democracy and transformation, parties and party systems, comparative public policy, social justice and reform of the welfare state. 

To read a shortened version of this interview, please click here.

Does Europe have to decide between economic efficiency and social justice? 

Many issues of economic efficiency and social justice go hand in hand, but not all of them. And in that case we have to think about equal and just compromises. They clearly go hand in hand in terms of education, investment in children, in human capital. Because this means enhancing people’s chances, they will be more flexible in the global market. It is in line with social justice, but at the same time it is investment in productivity. 

Only through this path will Europe be able to develop a knowledge-based economy, with high-tech industries and high-skilled services. If it doesn’t, it will lose its competitiveness battle against the US, but also against two emerging economic powers, China and India. So here it goes hand in hand. 

But when we talk for example about the labour market, then de-regulation harms some people. They can lose their jobs more easily and you will not be able to create a labour market with Danish structures in each country overnight. So you have to find compromises between gradually lowering regulation and building security and training schemes. 

I would not claim everything goes hand in hand. However, the goals of the so-called Lisbon Strategy are compatible – my only reservation is that it is driven too much by market efficiency and not so much by social coherence. 

One characteristic feature of Nordic welfare systems is that they are based on high taxes. However, these countries are also under pressure to lower taxes – is the ‘Nordic welfare system’ sustainable? 

Lowering taxes – a tax race to the bottom – is the wrong strategy. We need huge investments in human capital. And Europe still does not have a culture in which private investors are willing to do this. 

Most countries take education as something automatically provided by the state. But there is a big need for investment in the healthcare sector and care for elderly people – which is a natural consequence of the ageing society. Therefore, it would be the wrong strategy to lower the taxes, de-finance the social services sector and have dissatisfied people, who will in turn not be willing to pay taxes. 

There is a lot of wealth in society and those who earn more shall contribute more. And I think even the EU did not do all of its homework. It did not push hard enough for the closure of the tax havens. To some extent it did not harmonise the tax system, as we still have egoistic member countries which are preventing this. But here I’m not so optimistic. Something that could not happen among 15 countries will not happen among 27, especially because the new members are more inclined toward liberal market strategies. 

Do we need to regulate free movement or capital, or create a harmonised tax policy, to create a truly common European economy? 

I don’t think we can limit capital movements effectively any more. This time is over and I don’t believe it will return. Even something like a Tobin Tax has no chance of being accepted. And the EU is not only living in the European world; it lives in the globalised world. It has to compete. Therefore I don’t think it is the right way to control the capital movement. It is not effective, and I do not see any majority in the European Union that would be in favour of this. 

And what about the European harmonised tax? 

This is something that I’m very much in favour of, but at the same time I’m sceptical. I would support harmonisation, not of income taxes, but of certain taxes on capital gains, for example. There were some attempts to do this in 1999-2000, but they were not successful. Again, we have to accept that a EU of 27 members will look for the common denominator on a quite low level. However, something needs to be done and I don’t think flat tax regimes bring us closer to that goal. 

One argument against increasing taxes is that increase would not in fact bring more revenues – partly because of the tax evasion. However, experiences from the Nordic countries show that high taxes can go hand-in-hand with relatively high tax discipline. Is that a purely cultural difference? 

No, it is not. It plays a certain role, but as the economists teach us, people are rational beings. They calculate. If social services are low quality, why should anybody pay taxes? If the schools and universities are bad, why should anybody pay for them? In such cases you have high tax evasion. If you improve the quality of certain social services, people are willing to pay taxes. 

Therefore, in the transition countries, one should think about good public services – not only social services, but also the judiciary and the police and security sectors, etc. That would help avoid the de-legitimisation of the state and in turn lower the tax evasion. 

The other point is that, following the argument of Max Weber, you need an effective state bureaucracy. But often tax collection is one of the most ineffective parts of the state bureaucracy. It is a problem in many European countries, but in new EU members it is particularly ineffective and understaffed. 

Taxes are only one part of the discussion on the reform of the social systems. Another important issue is labour market regulation. Do we need to have it harmonised at the European level? 

I do not believe too much in the harmonisation of the labour market. Regulations, traditions, expectations, etc. are too diverse. One has to say that the new member states have to look for the comparative advantages in the political economy. And one is wage levels. You have to attract capital, and in terms of labour you can offer low wages and a skilled workforce. 

German or Scandinavian workforces are in fact much more skilled than the workforces of all the Central and Eastern European or East European economies, therefore for the moment you can only compete with the western countries over the price of labour, that is to say by lower wages. That is your comparative advantage. And the second is the less rigid regulations, which would not be acceptable for example in France. 

This strategy is quite understandable for a less-developed economy. 

Isn’t it threatening the survival of the welfare state in the countries with higher wages and stricter regulations? 

No. I’m not a neo-classic or neo-liberal economist, but one has to confess that de-regulated labour markets are much more dynamic. They create jobs. And the best example is Spain. On one hand, a traditional, highly regulated labour market, where it is very expensive to hire and fire workers. This labour market did not see any growth during the last ten years. For political reasons it was not possible to de-regulate it. 

But they have opened a new labour market for younger people, which is completely de-regulated. It has, for example, time-limited contracts for one or two years. That does not sound very pleasant – however it is the most dynamic labour market in Europe, a true job-machine. 

And if you ask young Spanish graduates, they are in favour. They say: “We don’t like these time-limited contracts; on the other hand, they allow us to enter the labour market. And once we are in, it is easier to go forward than be unemployed for five years after leaving university.” 

Therefore I’m generally in favour of the de-regulation of labour markets. It creates jobs; jobs mean income, which increases purchasing power and taxes. I think the time of the highly regulated labour market is over. 

Do you think that the prevailing differences in the labour market, tax systems, etc. and the push for deeper harmonisation by some countries could lead to a multi-speed Europe? 

Yes I do. I think it was not a mistake to enlarge the European Union. In fact, there was no alternative – neither politically, nor economically. But the EU was neither institutionally nor politically prepared to have 27 member states. The decision-making is too complex, it is not transparent and it takes too much time. And the lowest common denominator is too low to solve some of the problems. 

You have 27 countries with 27 interests. It is no longer possible to co-ordinate them in the old fashioned way. But by implementing the euro, we have seen some kind of a multi-speed Europe working. And we will see more in the future. You can call it a Europe of concentric circles, core-periphery, multi-speed Europe; the fact is that there will be some countries that will go ahead in terms of integration. 

On the other hand, that will make the EU even less transparent in terms of the decision-making, it will create institutional problems, and so on. 

But if we do not want to get stuck, always waiting for the slowest one, we do not have an alternative with 27-plus members. In a sense, I’m in favour of the multi-speed Europe. It is a price we have to pay for not being the EU of six, twelve or fifteen members. It will be the future of Europe. 

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