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29 February 2016

Reduction of labour costs failed to boost employment

On 18 February a group of researchers presented their main findings on the employment policy consequences of the ‘internal devaluation policies’ conducted over the last few years in the worst-hit crisis countries. These policies were primarily geared to a lowering of labour costs as a means of boosting employment. The researchers’ conclusion is that the policies failed, and that the ‘internal devaluation’ strategy does not represent a viable means of achieving any lasting reduction in unemployment.

According to Martin Myant, Head of the ETUI’s economic, social and employment policy unit, the internal devaluation measures consisting in a lowering of labour costs designed to improve firms’ competitiveness were not the cause of growth in exports that occurred in some countries but not others. The policies billed as leading to higher employment led, on the contrary, he said, to increased unemployment in most of the countries that implemented the Troika’s recommendations.

‘In Greece’, said Sotiria Theodoropoulou, a senior researcher at the ETUI, ‘the reduction in labour costs did not lead to the creation of a stronger and deeper export base but did weigh heavily on domestic demand’.

The same is true of Spain. The thoroughgoing labour market reform utterly failed to achieve any significant reduction in unemployment. On the contrary, it served merely to make conditions even more precarious, leading to an explosion in temporary jobs and a rise in the numbers of people experiencing poverty. Such was the bleak verdict of Jorge Uxo, economics professor at the University of Castilla-La Mancha. He attributed the recent improvement in GDP to external factors – a drop in the oil price, falling interest rates, etc. – rather than to the labour market liberalisation measures.

Ireland, like Spain, experienced a collapse of its property market giving rise to dramatic job losses in the building and real estate sectors, and subsequently in trade. Here too, the government response was to enforce wage cuts. Though the unemployment rate, after increasing fourfold between 2008 and 2012, has indeed since then been falling gradually, Tom McDonnell, an economist at the Nevin Economic Research Institute in Dublin, pointed out that Ireland’s rate of long-term unemployment is well above the European average. This researcher expressed concern for the long term, given the low levels of investment in both infrastructure and training that are leading, he said, to ‘a deterioration of human capital’. Mr McDonnell stressed also the excessive dependency of Irish exports on a few American multinationals.

Poland, as the only EU country to have been spared recession in the wake of the 2008 crisis, is frequently presented as a case apart. Agnieszka Piasna, a senior researcher at the ETUI, reminded the audience that in Poland liberalisation of the labour market has a long history, including reforms in the early 2000s, before EU accession, and an ‘anti-crisis law’ of 2009. The question thus arises of the extent to which a high level of labour market flexibility, precarity and low wages can explain Poland’s apparent resilience in the economic downturn. A series of comparisons with other countries challenges any such claim. Moreover, in the long run, the policies pursued entailed high social costs and coincided with a strong wave of outward migration during which, between 2002 and 2007, 9% of the economically active population left Poland.

To learn more:

Myant M., Theodoropoulou S., Piasna A. (eds), Unemployment, internal devaluation and labour market deregulation in Europe, ETUI, February 2016.

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