Is Europe working?

Written by Katinka Barysch [1], 01 January 2004

With more than 14 million people out of work, unemployment is the EU's greatest economic problem. However, while EU policy-makers ponder Germany's 4.3 million unemployed, Britain's low labour productivity and Italy's greying workforce, they have missed one of Europe's key labour market challenges: eastward enlargement.

If the EU's labour market statistics look bleak, those in the accession countries are desolate. Unemployment in Central and Eastern Europe hovers at around 15 per cent. The key Lisbon target of raising the employment rate to 70 per cent of the labour force by 2010 looks out of reach for most east European economies. Only the Czech Republic and Slovenia come near the current EU average of 64 per cent. In countries such as Hungary, Poland and Slovakia, only around half of all people of working age have a job. And while EU employment has grown slowly but steadily since the mid-1990s, the trend in the accession countries is in the opposite direction. Job creation in the private sector still cannot make up for mass lay-offs in old-style industries.

Eastern Europe's jobless woes will not only play havoc with Lisbon targets; they will also put a strain on the EU's structural funds for poor regions; and most importantly, they could prevent the new members from catching up with west European income levels.

It is the member-states, rather than the EU's institutions, which are chiefly responsible for employment and social policy. But the EU is helping to promote employment through the 'open method of co-ordination' the process of drawing up common guidelines, setting benchmarks and encouraging its members to learn from each other. The EU's employment strategy focuses on cutting back labour market regulations, revamping tax and benefit systems to create work incentives, and on so-called active labour market policies (ALPs), for example job search assistance programmes. Such measures are unlikely to do Eastern Europe much harm. But they could be beside the point. The enlarged EU will need a more differentiated approach.

East European labour markets are, on average, less regulated than west European ones. Firing full-time workers can be expensive and time-consuming, but rules for part-timers and temps are flexible. The enforcement of labour laws is often lax, especially in the small enterprise sector. Trade unions tend to be weak, and wage bargaining systems are flexible. Spending on unemployment benefits and ALPs is at a fraction of EU levels. Business people fear that EU entry will make east European labour markets less flexible, since the new members have to adopt EU labour regulations. Most of the 75 employment directives deal with health and safety at work. These rules will add to employers' bills in sectors such as chemicals and construction, but they are unlikely to reduce overall labour market flexibility or hinder job creation.

The same cannot be said of EU social standards. The new members should be able to cope with current EU minimum standards, for example for working time or maternity leave. But the EU must resist any attempts from the 'old' member-states to export their expensive social systems eastward. Social spending in the East is already too high. Poland, for example, spends a larger share of GDP on social security than Germany. As a result, payroll taxes in most accession countries are even higher than in, say, France or Sweden, often adding 50 per cent to employers' wage bills. High taxes
prevent businesses from creating new jobs and drive workers into the shadow economy.

The real problem of east European labour markets is a double mismatch: one geographical, one skills-related. Vibrant job markets in east European capitals co-exist with unemployment rates of up to 30 per cent in declining industrial heartlands and rural areas. But job-seekers do not move or commute, partly because of poor transport links and ill-functioning housing markets, but also because they lack the necessary skills. Most new jobs are now being created in high-tech manufacturing and services, where professional know-how and flexibility are at a premium. Both are in short supply among laid-off coal miners or farmers. The new members therefore need to concentrate on increasing labour mobility, attracting investors to declining regions and upgrading their education and training systems. More EU money from the structural funds would help. Tighter EU rules on working hours, part-time jobs, workers' participation or collective bargaining would not.