Thoughts on Dynamic Labour Markets and the Welfare State – Flexicurity Anyone?


by Shariq
15th November, 2009 at 12:00 pm    

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 – for instance that it encourages nascent firms to hire people without worrying that if things don’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 don’t enter a job, or at least shouldn’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 family’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 didn’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 don’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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  1. Cauldron — on 15th November, 2009 at 3:24 am  

    One of the major impediments to labour market flexibility and job creation in the US revolves around the tax treatment of healthcare costs. If you work for a big company (or government entity) that pays for health care insurance then you don't pay tax on that employee-provided insurance benefit. However, if you start your own business or work for a small company that isn't big enough to subscribe to a corporate healthcare plan then you get no tax deductions on insurance payments you make yourself.

    Some of the original drafts of the healthcare bill proposed removing this tax anomaly. But this was shot down by US trade union movement who, characteristically, paid lip service to the idea of labour solidarity while vigorously defending policies that harm people not as coddled as union employees.

    Likewise, it was the Democrats in Congress, not Republicans who side-stepped any reform of healthcare tort costs – one of the biggest reason why healthcare is so expensive in the US.

  2. Halima — on 15th November, 2009 at 4:03 am  

    Shariq

    Interesting post. You're arguing for more social safety nets linked to innovation and flexibility in the market – which hopefully should appeal to more economical minded thinkers. I like it. Tactically we should all be arguing in this fashion.

    I attended a conference on social protection and the global downturn recently (social protection encompasses a range of options for supporting the vulnerable, as you probably know) and a someone flippantly commented, perhaps social protection is the new [palatable] post-Washington consensus…

    Others argued quite convincingly for social safety nets to be based more on economic justification, and not just on principles of welfare- statism. If you don't plan a reasonable system of social safety nets now, pay more later…

  3. Halima — on 15th November, 2009 at 4:14 am  

    Shariq

    Interesting post. You're arguing for more social safety nets linked to innovation and flexibility in the market – which hopefully should appeal to more economical minded thinkers. I like it. Tactically we should all be arguing in this fashion.

    I attended a conference on social protection and the global downturn recently (social protection encompasses a range of options for supporting the vulnerable, as you probably know) and a someone flippantly commented, perhaps social protection is the new [palatable] post-Washington consensus…

    Others argued quite convincingly for social safety nets to be based more on economic justification, and not just on principles of welfare- statism. If you don't plan a reasonable system of social safety nets now, pay more later…

  4. soru12 — on 15th November, 2009 at 6:07 am  

    In the US, the greatest restriction on personal freedom that I have ever encountered in my own life, or witnessed in the lives of friends, all comes down to health insurance. Creative, innovative, talented people are unable to change jobs because they need the insurance. Small companies collapse because they cannot afford employee insurance. People die because they do not have insurance.
    —American expat Bee Lavender, contrasting US health insurance and the NHS

    From Making Light.

    That seems to match up with a lot of people's experience, and quite likely has an effect at the level of national statistics.

    From a UK perspective, 'NHS is good' is hardly controversial. But I think the reasons _why_ it is good could do with a bit of development and exposure. Build a framework, and then look to see what else could profitably be built using that framework, improving people's lives at a net cost saving.

    Maybe a National Legal Service, or even a British Finance Corporation?

  5. shariq — on 15th November, 2009 at 9:16 am  

    Thanks for the comments. Halima, I think there is an important dignity argument towards social welfare which we shouldn't forget about. Obviously that doesn't appeal to everybody though, so i agree that is important to put things in an economic framework as well.

    Soru12-Interesting points – with regards to legal funding for people who can't afford it, that's one thing which this government has definitely cut down on – i think there are arguments both ways on this. Will Hutton has done some interesting writing on the importance of something like a british infrastructure bank which takes on long term projects which the private sector doesn't necessarily want to get involved in.

  6. shariq — on 15th November, 2009 at 9:24 am  

    Cauldron – Interesting points; its true that both parties have contributed to the mess and their are vested interests such as unions and trial lawyers, but these have existed on both sides. However, the big issue which needs to be dealt with before anything else is finding a solution to the millions of people who are without health insurance.

  7. Sunny H — on 15th November, 2009 at 12:48 pm  

    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

    I agree with this because I think some flexibility is required – but the fact that people's pots of savings and security don't move with them is outrageous.

  8. Halima — on 15th November, 2009 at 7:01 pm  

    Yes, the dignity argument is the more important principle.

    Some people continuously stress that the poor are more likely to spend money in the recession, unlike the rich, who tend to be more disciplined. So get social safety nets working, which will grease the engines of the market well, because the poor can't be trusted to think long-term…

    Within the debates about spending on social safety nets, there are those that would argue for it on entirely different grounds. I don't agree with it, and dislike the moral undertones around it, but in principle, dignity and decent work and growth should work in complimentary ways as your post suggests.

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