In many parts of Europe, labour market reforms during the last eight years were misguided and backfired. Theory and evidence tell us that:
- It is always better to have institutions allowing adjustment along several margins, not only employment.
- When implementing labour market reforms, it is important to take into consideration cyclical conditions.
- A very tough fiscal consolidation may be inconsistent with an acceleration of structural reforms, not only because such reforms may be politically more difficult, but mostly because they may just not be desirable under a strong fiscal contraction.
However, in Europe the reforms were implemented:
- Under a pro-cyclical fiscal policy due to an ill-designed EU policy coordination framework;
- Giving too much weight to measures that promote wage moderation, implement reductions in severance pay, and increase the retirement age in the midst of a major recession;
- Ignoring other, potentially productivity-enhancing reforms, such as those eliminating contractual dualism;
- Not encouraging adjustment along the intensive margin via short-term work, working time accounts, and plant-level agreements;
- Not using actuarial reductions to pensions as a sustainable way to reduce labour market slack.
Chosen excerpts by Job Market Monitor. Read the whole story at Why Europe needs better labour market reforms – Agenda – The World Economic Forum.