Professor: ‘Stop paying benefits, start paying companies’

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This article is part of our special report SME’s Access to Finance.

States should transfer their social security payments for the unemployed to companies, so that they can employ the unemployed and maintain skills – even if this would breach trade laws – according to Ton Wilthagen, one of the pioneers in the 1990s of 'flexicurity', a concept that combines job flexibility with security.

Ton Wilthagen is professor of labour markets at Tilburg University in the Netherlands and directs ReflecT, a research institute for flexicurity. He was the rapporteur of the Commission’s expert group on flexicurity in 2007, and has advised numerous governments on the issue. He spoke to EURACTIV’s Jeremy Fleming at a flexicurity conference in Brussels on 14 November.

For a shorter news item associated with this interview, click here.

You are one of the fathers of the concept of flexicurity. Do you think that the [financial] crisis is demonstrating its limitations?

The crisis has shown that there are many facets to the notion of flexicurity. Many commentators believed that it was about flexible hiring and firing, and that is all, and many countries said we should not operate like that. But German, Austrian and Swiss schemes have combined social security payments with the reduction of working hours, and this is something different from ‘mobility’.

You have suggested that social security payments should be paid to companies so that they can hire unemployed workers. Who do you believe could pay for such social security in Greece?

It needs to be paid collectively. In the sense that we understand it at the moment it [such social security] cannot be paid by individual firms. One strategy would be to share costs across SMEs because these smaller companies are unwilling to pay for mobility and transition on their workforces – or taking on extra workers – individually, but such payments can be managed on a regional level. In many cases SMEs do not need a full-time employee, so if there was a central pooling system regionally, which enabled these firms to collect all their various needs together and combining them, then that would be a way of joining forces for the common good.

Do you think that the those countries suffering most from the sovereign debt crisis would be better off now if they had implemented such a system?

Yes, because it is clear that once you lose employment you are stuck, because the unemployed are denied access to the labour market which aggravates the whole situation. There have been reforms, but these have been have been very half-hearted. You cannot avoid financial bubbles, but labour markets – such as the Spanish construction sector – made 25% of their workforce redundant. The remaining workforce, however, still received a 3.9% wage increase by collective bargaining, which is an unfair situation affecting younger workers in those markets.

But if the Spanish state had intervened to pay the sector to maintain higher employment levels, would those state payments not have crippled the Spanish exchequer?

Spain still pays for unemployment benefits, but this is not paying for the prevention of unemployment. So transition security does not exist, the only option is to make people redundant, so social security payments will be overloaded onto benefit schemes. This is unsustainable and eventually they will be forced to reduce these schemes.

So you believe that the social Europe model is under threat in Spain, Portugal, Greece and Italy?

We all know the risks and we have seen the indications of social unrest in those countries. One terrible response to the crisis has been the phenomenon of young people leaving, wanting to get out because they feel there is no future. If the social security schemes and family security are the only options then these will put pressure on families and create further divisions within society, and this will become a highly explosive situation. You could just pay benefits but without a more active approach you will not defuse the social unrest. The main question is where to put the money. If you give a 4%-wage rise to those still with jobs then that is a bad investment.

Where would you spend the money?

I would stop giving passive unemployment benefits. I would take all that money and allot it to creating jobs: offer subsidised employees to companies and tell the companies that the benefits will go to you but that we will not do that forever, we will taper the relief. That way the companies which are afraid of hiring people – because they do not want to spend the money or feel that the worker is not yet skilled enough – will be able to do so.

Would the state cover the whole cost of the worker under that model?

No, you would have to create a formula to calculate their productivity. The formula would be a way of calculating the deficit implicit in hiring that worker. So, for example, if the ‘wage worth’ of the individual was only half of normal productivity, then the state subsidy should at least reflect that.

Is the crisis a good moment to be implementing radical ideas such as this?

Yes, because it is the only thing you can do. The rich countries can afford to continue paying their social security benefits, but it cannot last forever. Even the Danish are reducing the duration for which their unemployed receive benefits. States must start to articulate what people can do and what companies need in a different language.

What kind of social security can Europe afford in the future?

A short-duration income replacement security can be afforded at a reasonably high level for a few months. After that security can be afforded at a lower level for a few months. But we need “in-work” security – payments to companies in return for employing people – so that people can work. Europeans in the future will need to become more self-reliant citizens, but they will need some state security because there will be ups and down, and they will require periodic assistance. This will be the future in Europe and it will be different from the US, where there will still be the working poor. But we will move to this in-work security which we hopefully can afford, and the more traditional social security payments will be for those who cannot work.

If you subsidise employment, could not that give rise to trade complaints from overseas?

Yes, but on the other hand what are we telling China? We say: “You do not play by our rules”, and the Chinese say: “We do not care, because we are state capitalists, so we have different rules.” In such a situation we should not be hesitant, we are doing a fair thing, using employment benefit for better purposes, if the Chinese have problems with this, well they are playing the same game somehow. So why try and be more Catholic than the pope?

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