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The persistence of high levels of unemployment in a number of European Union countries for the past two-and-a-half decades and the unequal performance by some of the countries raises the questions of the causes of the job crisis (which affects some 14 million people), and of the uneven outcomes of employment and labour market policies. Indeed, some countries, such as Austria, Denmark and the Netherlands have almost reached full employment, while others, like Finland and Ireland have managed to generate jobs at quick pace. France and Spain have also recorded successes in job creation but the unemployment rates are still high (above the 10% European average), while Germany lags, beyond what could be expected from the aftermath of unification.

This article highlights parts of the findings in my current research concerning the issues at stake, the prerequisites for, and constraints on social dialogue and the new rules of the European Union in this area. The comprehensive research results have just been published in a book form (in French, with factual information up to date to February 1999). An earlier preliminary paper, completed in May 1998 for the World Congress of the Industrial Relations Association (Bologna, 1998), is available in English on the Web. A shorter review article has also recently been published (in English, up to date to November 1998).

These publications, particularly, the book, review the highly controversial debate on labour market flexibility in Europe over the past two decades, including the alleged causes for the persistent levels of high unemployment, particularly the rigidity of labour costs and social protection legislation, the proposed remedies and their limited results. They assess the outcome of solutions introduced in ten European Union countries via social dialogue and collective bargaining to address the job crisis, mainly at national, sectoral (industry) and local (enterprise) levels. These measures aimed at preserving or creating jobs by changing employment practices and work organization, rules governing employment contracts (hiring, firing, duration of contracts), provision for early retirement, social contributions and training.The countries covered are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, The Netherlands, Spain and Portugal. The publications indicate the constraints and prospects for the pursuance of social dialogue within member States and at the European level, particularly in the light of the new unprecedented rights established by the Maastricht and the Amsterdam Treaties. They refute some often-heard arguments about labour market rigidity, liberalisation of trade and capital movements, competitiveness and economic performance including the United States. The main conclusion is that where consensus has been be reached among social partners about balancing flexibility and security, better outcomes have been attained in terms of equity and competitiveness, although the ways to achieve these outcomes differed among countries which have different institutions and traditions.

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Flexibility has been identified during the 1980s as the only solution to the job crisis and inflation which plagued Europe in the wake of the oil shocks in the 1970s and constituted the main element of the strategy recommended by the OECD to deal with this problem by the mid-80s.

The experience of the past two decades of persistent and high unemployment therefore raises the following questions:

Is labour market rigidity the main cause of the job crisis? Is flexibility, with its drastic deregulation of the protective social and labour legislation and the decentralisation or even the dismantling of collective bargaining, the only answer? Have social dialogue and collective bargaining contributed to address the job crisis? What are the lessons that can be learned from the few successful countries in terms of economic and job growth? What are the implications of the Economic and Monetary Union?

These questions have been raised as far back as the 1970s in the context of the recession and stagflation, which followed the two "oil shocks". They gained momentum in the 1980s and early 1990s as the policies and strategies adopted by governments to combat the job crisis achieved unequal results among countries generating a growing concern for social cohesion and for the continued capacity of the social safety net to prop the Welfare State implied by the European social model.

The causes of the job crisis and proposed remedies

The job crisis must be seen in the context of an interaction between multiple factors associated with the growing integration of the world economy, namely:

increased capital mobility and rapid growth of trade in goods and services; the opening of national economies and their integration in the international market; the rapid diffusion of information and communication technologies (ITCs); the growing importance of services in the economy (at the expense of manufacturing); sluggish economic growth in most countries; slow growth of productivity.

Within this global context, the main causes for the persistent and rising unemployment in Europe have been identified by the OECD secretariat as follows:

too restrictive employment and labour protection legislation, which discourages recruitment; collective bargaining, which enables the social partners to fix collective wage levels above productivity levels pricing workers out of the market, particularly the lower skilled; the extension procedures for collective agreements to non-signatory firms - a common practice in most European countries (e.g. Austria, Belgium, Spain, Finland, France, Germany, Greece, Italy, the Netherlands, Portugal, Switzerland), although the scope of this extension and its practical implementation varies widely among countries; high statutory minimum wages, which tend to exclude from the labour market young people and the low-skilled; excessive level of social contributions (e.g. non-wage labour costs), which discourage employers from recruiting and the unemployed from seeking a job; excessive levels of corporate taxation and individuals' income tax which have the same disincentive effect as the previous item; shortcomings of the training and education systems (inadequate or inappropriate supply), which hinder the adaptation of skills and competencies mix of the workforce, limiting their "employability".

How can these measures be assessed?

Seven lessons can be drawn from the past decade experience of trying to address massive unemployment in ten European Union countries:

There is no convincing economic theory demonstrating a positive causal relationship between labour market flexibility and a significant drop in unemployment.

The flexibility and deregulation measures promoted by the OECD have stimulated the development of "atypical" forms of employment - part-time, temporary, intermittent and casual or contingent jobs - with reduced social protection and remuneration - but have not contributed to a significant reduction in unemployment.

Neither economic theory nor econometric calculations have been able to assess the exact impact of minimum wages on employment. (Raising minimum wages by 10% may explain a decline of 1,5 to 3% of youth below age 20, and this ratio is identical in all OECD countries regardless of the level of minimum wages). Countries where minimum pay is high have more limited pay dispersion and have relatively fewer low-paid jobs. Minimum wages do not seem to affect jobs of adults and their increase may stimulate staff productivity and commitment.

Collective bargaining has undergone a change in scope, level of negotiation and topics negotiated at the various levels. In spite of the call for decentralizing or even dismantling collective bargaining, it has survived in most European countries, particularly in the 11 countries, which adhered to the euro.

Different levels of negotiation coexist in the same country, but addressing different issues. Despite the obvious trend toward decentralized bargaining, but its global impact should not be overestimated (local agreements in the private sector represent between 8 and 25 % vs. 70 - 80% of industry wide agreements).

Due to extension procedures and affiliation of firms to employers' organisations, the coverage of wage earners by collective agreements is much wider than could be expected by the prevalent low unionisation rates in most European countries.

There is the complementarity between legislation and collective bargaining, relaying each other in the effort to protect and create jobs.

How did social dialogue evolve?

The magnitude of the European job crisis made it clear to policy makers that the responses escaped the capabilities of a single actor. This led several governments to conclude, during the 80s, tripartite social or employment pacts at central level, even in countries where there was almost no traditional of national social dialogue, namely, Spain and Ireland. Different institutional and cultural contexts were at work in other European countries, where social dialogue and collective bargaining were more developed.

A common denominator of these tripartite pacts was the recognition of the need to combine social policy measures (e.g. social security reform or wage moderation) with macro-economic policies, such as fiscal measures, increased public investment and improved training. Tripartite agreements were concluded in Denmark, Finland, Ireland, Italy, The Netherlands, Portugal and Spain. The importance of such dialogue proved crucial in the achievement of the European Economic and Monetary Union (EMU). Indeed, it enabled the 11 governments, which adhered to the euro prior to its launching in January 1999 to take the necessary steps to meet the Maastricht Treaty's convergence criteria by reducing, sometimes drastically, public deficits and public debt, particularly in Finland and Italy, as well as containing inflation.

Constraints for social dialogue

Why have these excellent outcomes not been replicated throughout the European Union?

The job crisis, like any crisis, means major changes, which require adaptation and acceptance. These in turn, require consensus building, dialogue and negotiation to secure trade-offs for the acceptance of the adjustment that is required from the workforce. In the context of reconciling equity and competitiveness, they involve social dialogue and collective bargaining which have four prerequisites:

Representative social partners and the proper institutional framework. Commitment to dialogue and to achieve results. Shared knowledge of relevant information. Authority and ability to negotiate and to enforce decisions. A dynamic role for the State.

The main following factors hinder the development of social dialogue:

Social dialogue requires independent social actors and an articulate system for consultation and negotiation. Three developments run counter these requirements:

the growing weakness of both unions and employers' organizations; the trend towards decentralized collective bargaining; and the growth of multinational firms, which, due to their transnational structure, by-pass the traditional national institutional framework for collective bargaining.

The traditional structures of collective bargaining have not kept pace with recent developments in the labour market. One example is the growing overlap between the institutions representing wage earners at sectoral and enterprise levels. Another is the prevalence in the European economies of Small- and Medium-size enterprises (SMEs), many of which are not affiliated to the employers' organizations parties to collective bargaining. In addition, their employees are usually not unionized. Both result in divergent outcomes of bargaining and weakening of the presence and representativity of the social actors. Globalisation, deregulation and technological breakthroughs reduce the policy-formulation autonomy at national level and induce governments to transfer to companies functions related to social welfare which were previously exercised by the governments. But in the context of globalisation in which companies strive to achieve higher efficiency and competitiveness, they are less inclined to finance such functions than may have been the case when the economies were less open and capital less mobile. The implicit social contract which characterized the European model of industrial relations of the post-World War II decades is thus eroded. It granted workers regular increments in pay and social benefits as a trade-off for social peace and loyalty to the firm. A model which responded to the needs of the Fordist model of mass production with its quasi-permanent full-time jobs for industrial male workers. The advent of the information technology, globalization and changes the related shifts in consumer tastes and the structure and organization of the production of goods and services have fundamentally changed the rules of the game. The progress of European integration raises major challenges to social dialogue in the following three aspects: (i) The implications of convergence criteria and the launching of the Economic and Monetary Union (EMU), which limit the scope of Governments' autonomy in fiscal and monetary policies, curtailing public spending and reducing the scope for supportive measures to promote employment. They also put pressure on trade unions' pay strategies, which have resulted in moderate wage increments since 1995. Unions fear that the lost freedom of action by government will result in a downward pressure on wages and conditions of work as the only instrument to maintain or gain competitiveness. There may thus be a risk of widening wage differentials among countries.

(ii) The implementation of the Directive on European Works Councils (EWCs) may encourage single employer bargaining in continental Europe, where multi-employer bargaining practice and the extension of the scope of collective agreements are common features of industrial relations. This may result in eroding solidarity among wage earners and further weakening the power of the unions.

The lack of co-ordination among and within the social actors at the European level and the inadequate commitment (or absence thereof) on their part to social dialogue will limit the impact of the new statutory rights granted to them by the Maastricht and Amsterdam Treaties which enables them to negotiate at the European level agreements which apply at national level (Cf. infra). Indeed, UNICE, the representative body of European employers, is opposed to Euro-level bargaining, considering the matter to fall within the scope of national sovereignty. While unions in different countries may have different interests. Unions from Germany, Belgium, Luxembourg and The Netherlands tried to reach agreement on a co-ordinated approach to bargaining to avoid a race to the bottom in wages and conditions of work. In the Doorn Declaration (September 1997), they called for limiting pay increments to increases in productivity and for allowing part of the productivity gains to be devoted to job-creation. In a similar initiative in the metal trades and the building sector, unions aimed at harmonizing work practices, including a recommendation on annual quotas for working hours and overtime. But these initiatives have not yet been endorsed or implemented throughout Europe. Co-ordination may further be hindered by the possible institutionalization of single-employer bargaining under the EWCs directive.

European integration and Social Dialogue

The Maastricht Treaty introduced two major changes in the Rome Treaty in the social field. It enabled the social partners to conclude at European level collective agreements and to validate them, as appropriate, by a decision of the European Council. They can also transpose these agreements to the national level. These changes establish at the European level the characteristics of a social model based on the autonomy of the social partners and on collective bargaining practice that exist at national level. The Maastricht Treaty grants in fact the social partners an unprecedented statutory right to participate in policy formulation. It requires the European Commission to consult management and labour on the possible direction of future Community action: It than has to consult them on the substance of draft proposals. More importantly, the social partners can decide to deal jointly with certain matters and reach agreements. These may then be implemented either directly by both sides of industry at national level or, following a joint request by the social partners, through a directive by the European Council (i.e. European legislation), which is binding on member States. In this latter process, the Commission or the Council may not change the text agreed upon by the social partners.

A slow change is now taking place. For over a decade, the European social partners - UNICE, CEEP and ETUC who represent respectively, private business, public enterprises and trade unions -, have taken part in some form of Euro-level social dialogue which translated into non-binding joint opinions and exchange of information. The new rights have now given rise to Euro-level joint agreements.

Three joint agreements, which have an impact on employment, have so far been successfully negotiated, two of which have already become European Directives (on parental leave 1995, and on part-time work, 1997). The third concerns fixed-term employment contracts (concluded in January 1999 and ratified by the national social partners in March) which seek to guarantee non-discrimination in employment conditions of the 17 million workers with fixed-term contracts throughout the European Union.

At industry level, sectoral dialogue has also taken place for over a decade but only recently have three agreements been reached for agriculture (1997) and rail and air transport (1998). So, where there's a will, there is a way.

By way of conclusion

To conclude - social dialogue and consensus building has been conducive to achieving a balance between equity and competitiveness, or "flexicurity", as the Dutch call it.

It motivates the workforce, alleviates the concerns of wage earners about future job uncertainties and thus creates a positive climate of industrial peace, necessary for an improved economic performance.

Some lessons may be drawn from the success stories of the small European economies such as Austria, Denmark, Finland, Ireland and the Netherlands. They show that an open economy can be beneficial to broad segments of society and the acceptance of reforms through negotiating compromises - not always easily reached - has the advantage of securing acceptability with the necessary trade-offs. To extend the practice to other countries, it is necessary to ensure a broader representativeness to the social partners and to reform the social dialogue and industrial relations institutions to enable them to be up to the challenges of globalisation, European integration, new technologies, and, above all, social exclusion.

Hedva Sarfati
E-mail:  hsarfati@iprolink.ch
Versoix/Geneva, Switzerland

6 June 1999

Other BNWW articles by Hedva Sarfati:

The 35-hour week legislation hotly debated in France

Policy implications of the Labour Market and Social Protection Nexus

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