Contemporary Europe:

Equity vs. Efficiency?

Dr Neil Lee

n.d.lee@lse.ac.uk

@ndrlee

The US

Entrepreneurial "job creators" need incentives to do so

• Low regulation means they can hire at low risk
• Low taxes mean they are sure they gain

Flexibility + low regulations + low taxes = low unemployment

Europe

There is no incentive to create jobs

• High benefits = high taxes, lower incentive to work
• Job security makes hiring risky

Job security + regulation + high taxes + generous benefits = high unemployment

Two stereotypes

European countries invest a lot in welfare states

... but some people argue this spending isn't sustainable

Some history

Treaty of Rome (1957) – Founder countries of the European Economic Community aimed to:

“lay the foundations of an ever closer union among the peoples of Europe, resolved to ensure the economic and social progress of their countries by common action to eliminate the barriers which divide Europe, affirming as the essential objective of their efforts the constant improvements of the living and working conditions of their peoples”.

But working conditions were largely ignored for 40 years..

The European Social Model: History

Single European market led to concerns about ‘social dumping’

• Production moved to areas of cheaper (welfare) costs

• Was seen as prioritising‘business’ not people (Corbyn...

​Slow movement to make a ‘European social policy’

• 1957 EEC Treaty – Gender inequality & free movement of labour
• 1987 Single European Act: working conditions
• 1989: Social Charter: Public health, gender equality, working conditions

Other areas subject to “Open Method of Coordination”, with only limited effort

The European Social Model: What is it?

• A rhetorical aim, not a practical strategy
  • There is no single unified strategy
  • The EU has few powers over social policy
• But the idea that Europe can balance competitiveness with cohesion has been important in European policy
  • Europe 2020 (strategy from 2010) set out commitment to model, but no direct legislation
  • Instead, may be enacted in very different ways in different countries

Growth vs. equity:

Theory

Economic theory (1)

• Labour market regulations are widespread in Europe -
  • Unemployment benefits  
  • Minimum wages
  • Regulation around hiring and firing  
• The classic economic view is that this prevents job creation, increases unemployment and reduces competitiveness  
• A simple labour demand and supply diagram shows why

Economic theory (2)

See Baldwin & Wyplosz, 2016

But what does the evidence say? 

The Nordics

Finland

Norway

Sweden

Denmark

Iceland

The Nordic model is quite fashionable right now

Nordic characteristics

• High levels of trust in state and others 
• Sharing of risk
• Good governance - including private service provision
• Generous welfare state

The Nordic model is not socialism, but capitalism with a strong welfare state

But some have questioned the Nordic model...

The Nordic portrayal ignores strong populist tendencies (Denmark) and racism

Is it transferable to larger, more diverse, and less unionised economies?  

The welfare state isn't as perfect as portrayed 

Flexicurity

Denmark & the Netherlands

Flexicurity

• Strategy to reconcile the need for Flexibility and Security (get it?)
• Based on the examples of the Netherlands and Denmark
• Core part of many European labour market strategies
• Currently inspiring Macron

Flexicurity: 4 components

1.  Flexible but reliable contractual arrangements, modern labour laws, collective agreements and work organisation

2. Comprehensive lifelong learning – ensuring continual adaptability and employability of workers

3. Active labour market policies – helping transition into new jobs and reduce unemployment

4. Social security systems – support income when unemployed but encourage employment

Problems with flexibility

Expense - Denmark invests X percent of GDP in active labour market policy

Transition - Hard to get from Spain to Denmark

Job quality - Some argue it incentivises poor quality jobs 

Sapir's model​

Sapir's model

• Like VoC and 3 World's, Sapir categorises European welfare states into different groups - these are focused on the trade-offs between equity and efficiency

• His argument:
  • To afford the welfare state, Europe needs to focus on growth - this requires reforms focused on flexibility
  • Different European Social Models manage this in different ways
  • European Union should coordinate some reforms 

How can typologies help us understand the equity vs. efficiency dilemna?

Sapir's model 

1/ Continental - Austria, Belgium, France, Germany & Luxembourg

2/ Mediterranean - Greece, Italy, Portugal & Spain

3/ Nordic - Denmark, Finland, Sweden & Netherlands (!)

4 / Anglo-Saxon - Ireland & UK

Strong unions, Insurance based benefits

Social spending focused on old, exemptions from LM participation

High social expenditure, universal welfare, active LMP, and strong unions

"Last resort" social assistance, LM activation and liberal labour markets

What are the implications? 

• It isn't a question of whether we can afford welfare states in the context of globalisation, but which countries can
• Reform is needed in those countries which are current inflexible and stuck in an 'old model' 
• Some countries, such as the Nordics, do very well and don't need reform

But.... do you agree with his argument? 

Conclusions

• One of the key questions in contemporary Europe: are generous welfare states affordable in the context of globalisation? 
• This is not just a question for today, but for the whole course
• Basic economic theory says no. But there are plenty of good counter-examples

Next week: Poverty and inequality

Reading for this week is light, so use the time to recap on wk 1 + 2