Untangling the flexible labor markets theory

William Keegan, Observer News Service, London

People are people and things are things. But to listen to economists and politicians these days you would think they were indistinguishable.

The fashionable talk is of "product markets" and "labor markets". We are told they need to be "freed up." On the eve of the Barcelona summit of European heads of government this week, the supposed need for more "flexible" labor markets is very much on the agenda.

It was therefore a breath of fresh air on Tuesday when the European Commission's employment and social affairs commissioner, Anna Diamantopoulou, emphasized her view that the labor market is not like other markets, because it concerns human beings.

In my youth it was widely assumed that when people took a job, they took it for life. There is an old fashioned word to describe what people looked forward to when they left school or university: A career. Many who did not receive an advanced academic education nevertheless acquired a trade or skill, which they expected to practice for the greater part of their active life, which they usually took a pride in.

If there was a major concern attached to such a way of life, it was not the fear that your employer would fire you at any moment -- which, sadly, is the lot of most modern employees. No, the principal fear was that of boredom which may have been a problem, but which was a lot better than the prevailing sense of insecurity of modern times.

Politicians, economists and officials just love talking in jargon and euphemisms, like "flexible labor markets." By this they mean the freedom for employers to hire and fire at will, with the minimum of social legislation to impede them. In the ideal world of the propagators of the flexible labor market, there would be no trade unions and children would be doing the modern equivalent of sweeping chimneys 18 hours a day for a pittance.

Much of the advocacy of "flexible labor markets" in Europe rests on a false premise, which argues the U.S. has a more successful economy and more flexible labor markets; hence, Europe needs to do the same.

For a start, this argument is usually based on the dubious assumption that the entire U.S. labor market resembles that of McDonald's. Yet not long ago, when the U.S. approached full employment, even McDonald's was reported to be offering long term contracts in order to hang on to staff.

But the real fallacy is the assumption that it is "labor market flexibility" that produces growth and employment. The fact of the matter is that U.S. economic policymakers are bound by law to aim at a combination of price stability and "maximum employment." In the Eurozone the central bank is concerned solely with price stability.

After the Thatcher Revolution of 1979-1990 Britain had the most flexibly labor market in Europe. That did not stop it going into severe recession after the Pound sterling was put into the European exchange rate mechanism at an overvalued rate and interest rates were kept unnecessarily high in order to hold the exchange rate within the required band.

As Diamantopoulou says: "In some member states were there is strong social legislation, there is higher productivity and foreign investment." Labour flexibility is not the only, or even the most important, route to job-creation.