Austerity, labour reforms will increase workplace inequality

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Workplace inequalities have increased significantly across Europe as a result of the global economic crisis – harshly affecting temporary and low-skilled workers, women and young people – and will continue to do so as more and more countries introduce austerity measures and labour market reforms, says Daniel Vaughan-Whitehead of the International Labour Organization.

Daniel Vaughan-Whitehead is a senior advisor responsible for wage polices at the International Labour Organization (ILO) and a professor at Sciences Po, Paris. He has previously served as an advisor to then-European Commission President Jacques Delors and as an officer with the Commission responsible for social dialogue in EU enlargement.

This article is a summary of 'Work Inequalities in the Crisis: Evidence from Europe', a recent study Vaughan-Whitehead edited for the ILO and co-financed by the European Commission.

"Not only did work inequalities contribute to generating the economic crisis, but these inequalities have actually worsened as a result of it. Our general economic system will thus continue to be at risk until we properly address this critical issue.

Though the crisis emerged in the financial sector, a number of economists, especially from the US, have shown that the crisis's roots are to be found in the insufficient progression of wages and increased inequalities over the last decade. This led to an accumulation of households' debt to allow them to continue to consume despite stagnating wages, something that progressively fed a financial bubble that finally collapsed.

In its early years the crisis led most policy makers to realise the need to boost the real economy and to implement stimulus packages to sustain employment, wages and economic growth. Unfortunately, in the early 2012 we seem to be back to business as usual and the lessons from the crisis seem to have already been forgotten.

One lesson from the crisis was the need to tackle work inequalities. We should thus first see what happened to them during the crisis. We therefore analysed how working conditions, wages and incomes, employment and gender equality, among other workplace issues, have been deteriorating across the continent since the start of the crisis.

Including data from 30 countries and 14 national studies, our findings shed light on one aspect of the crisis that has been poorly documented so far: its microeconomic effects at enterprise level on different worker categories and the areas of work that directly matter to them.

The results are clear: wage differentials between the top and the bottom earners increased in most European countries and especially in countries like Bulgaria, Hungary and the United Kingdom.

Some categories of workers have been the most hit from the crisis:

  • Workers on temporary contracts were massively affected by job cuts and used as 'a sort of employment buffer', as shows the example of Spain where 90% of employment losses affected temporary workers. But this happened also in France and other European countries.
  • Young people are experiencing unemployment rates nearly double those among older workers in the majority of European countries, with sharp increases in the Baltic States of Estonia, Lithuania and Latvia, as well as in Ireland, Spain and Greece.
  • Low-skilled workers have been especially hard hit in the crisis as manufacturing companies started to lay off part of their staff.
  • Despite male workers being initially more affected by the crisis than women (6% more in the three Baltic states, Ireland and Spain), discriminatory practices against female workers have worsened over the past years. In particular, women employed in male-dominated sectors were the first to be dismissed or experienced higher wage cuts than men.

We also looked at how countries that have relied on external flexibility adjustments, such as Spain, have experienced severe difficulties on the employment front. Massive reliance on temporary contracts for nearly 20 years has left the country vulnerable and employment has plunged in response to the economic slowdown.

Compared to 2009, in 2011 the risk of poverty had increased by 2 percentage points in Spain, reaching 21.8%. External flexibility developed in Central and Eastern Europe also led to immediate and massive layoffs.

But there are also a number of 'best policy practices' implemented by governments to address the impact of the crisis. These include the 'German miracle' of low unemployment adjustments in the crisis, which was also achieved thanks to the expanded short-time working schemes; Sweden, which set up specific measures to help young people to keep their jobs or engage in training; and Italy, where the 'Cassa Integrazione' system helped limit immediate unemployment effects from the crisis.

Additionally, industrial policies aimed at supporting sectors in difficulty, such as construction and automobiles – and supported by public expenditure – proved to be efficient.

Last but not least, the significant role played by social dialogue in negotiating alternatives to layoffs generally through wage and/or working time reductions, as in Germany and France must be mentioned. In countries with limited wage bargaining such as Estonia, Latvia and Lithuania, both employment and wage cuts were immediate and substantial.

New labour market reforms decided for 2012 to boost competitiveness, for instance the minimum wage freeze and cuts in social protection in Spain, the decision to multiply short time schemes in France, and further wage moderation and low pay sector increases in many countries may directly increase inequalities.

A greater number of people will also become more vulnerable to future crises. The expected 22% cut in the minimum wage planned now in Greece will obviously contribute to further increase the percentage of low paid workers, and will also further increase the gap between the richest and the poorest. The expansion of the low-paid sector and wage moderation in countries like Germany may also result in increased inequalities.

At the same time, serious cuts in employment and wages in the public sector could lead to a new source of inequality, and start placing public sector employees in a very precarious position. In a number of countries like Romania – after more than 30% wage cuts in the public sector – average wages have fallen below the private sector average, something that could lead to a deterioration of human capital and also quality of services in the public sector.

In the longer term, the crisis may also halt progress made in Europe towards better quality jobs and working conditions. For instance, reductions in spending on training at the enterprise level combined with reduced training programmes financed by the state will have a negative effect in the long term.

This should motivate all policymakers and economic actors – even in a period of fiscal consolidation – to place the fight against inequalities at the core of their policy agenda and develop a full set of policies addressing those inequalities in the world of work."

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