One of the most interesting things about the healthcare debate in America is how people who in theory support labour market flexibility, are opposed to having a healthcare safety net.
Especially in America, but also in Britain, a feature of the modern economy is that it is easy to fire people. This may seem like a bad thing, but it also has advantages â€“ for instance that it encourages nascent firms to hire people without worrying that if things donâ€™t go as planned, they will be tied down by surplus employees. This can promote more competition and lead to more dynamism in the economy, as younger more efficient firms are able to compete with more established, but less innovative ones.
The flip side to this is that as opposed to say thirty years ago, people donâ€™t enter a job, or at least shouldnâ€™t enter a job, with the expectation that they will be there for life.
This makes the social security safety net even more important than it might be in a more rigid labour market. So for instance, if like in the American system your healthcare is tied to your job, then it can wreck a familyâ€™s ability to get healthcare if they are out of employment and secondly, may also serve as a disincentive to work for a new firm which may be innovative and exciting, but also risky. If the firm goes bust, then not only do you have to relocate and find a new job, but also go without healthcare.
This also has implications for the way in which we think about home ownership. One of the reasons for the economic crisis was the assumption that house prices will continue to rise. Therefore, if you took out a mortgage, provided you didnâ€™t lose your job the very next day, even if you did find yourself in trouble, you could always borrow against the increased value of your home, or if necessary sell it and move into cheaper premises.
Unfortunately, things donâ€™t work like this and with the housing collapse you had people who were trapped in negative equity, because prices started to fall and because they had only placed a nominal deposit on their purchase.
This is bad at the best of times, but when you also lose your job and find it difficult to sell your house and pay of your debts, then things can turn very bad, very quickly. Matt Yglesias had an interesting post on this, when he argued that the ability of people to relocate and find work in a different city was affected when they were tied up to their home. As Yglesias’ post points out, this is still a big issue in Europe where despite important steps in creating an internal market, differences and culture and language still serve as a barrier towards greater labour flexibility.
Finally, I like to link to this piece by Dani Rodrik citing Bob Kutner a lot. It provides some really interesting insights into how in Denmark, trade unions are actually pro-outsourcing, as they don’t mind employers being able to fire people easily, as long as they are provided with substantial welfare security – or flexicurity. Rodrik points out that this isn’t necessarily something which can be transplanted outright into other countries, but the principle behind it needs to be explored as we think about the shape the British and other European economies take in the future.
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Filed in: Economics