1211. "Americanized" Labor Policy Is Spreading in Europe

By Eduardo Porter, The New York Times, December 3, 2013

Union protesters in Lisbon last month hold signs reading “Government Out.” Photo: Francisco Seco/Associated Press

In 2008, 1.9 million Portuguese workers in the private sector were covered by collective bargaining agreements. Last year, the number was down to 300,000.

Spain has eased restrictions on collective layoffs and unfair dismissal, and softened limits on extending temporary work, allowing workers to be kept on fixed-term contracts for up to four years. Ireland and Portugal have frozen the minimum wage, while Greece has cut it by nearly a fourth. This is what is known in Europe as “internal devaluation.”

Tethered to the euro and thus unable to devalue their currency to help make their goods less expensive in export markets, many European countries — especially those along the Continent’s southern rim that have been hammered by the financial crisis — have been furiously dismantling workplace protections in a bid to reduce the cost of labor.

The rationale — forcefully articulated by the German government of Angela Merkel, the European Commission and somewhat less enthusiastically by the International Monetary Fund — is that this is the only strategy available to restore competitiveness, increase employment and recover solvency.

These policy moves are radically changing the nature of Europe’s society.

“The speed of change has certainly been very fast,” said Raymond Torres, the chief economist of the International Labor Organization in Geneva. “As far as I can tell, these are the most significant changes since World War II.”

While most of the debate over Europe’s response to the financial crisis has focused on the budget austerity enveloping the Continent, the comparatively unheralded erosion of worker protection is likely to have at least as big and lasting an impact on Europe’s social contract.

“It has a disastrous effect on social cohesion and a tremendous effect on inequality,” argued Jean-Paul Fitoussi, an economics professor at the Institut d’Études Politiques de Paris. “Well-being has fallen all across Europe. One symptom is the rise of extremist political parties.”

Europe’s strategy offers a test of the role played by labor market institutions — from unions to the minimum wage — in moderating the soaring income inequality that has become one of the hallmarks of our era.

Inequality across much of Europe has widened, but it is still quite modest when compared with the vast income gap in the United States.

The question is whether relative equity can hold as workplace institutions that for decades protected European employees’ standard of living give way to a more lightly regulated, American-style approach, where the government hardly interferes in the job market and organized labor has little say.

The evidence so far suggests the answer is no. The drop in unionization in Portugal “is going to blow the wage distribution apart,” David Card, a labor economist at the University of California, Berkeley, said.

Perhaps the most compelling evidence that Europe’s tentative new path will lead to deepening inequality comes from the country that adopted the strategy earliest and came out at the other end a paragon of success: Germany.

The overhaul of the labor market started after German unification in the early 1990s, when factories in the less-productive Eastern part of the country found they could not compete at the pay scales provided in the West, and defected en masse from the sector agreements negotiated between industry associations and large unions. West German firms soon took up the strategy. The share of workers covered by collective labor agreements fell.

In the early 2000s — when a hobbled Germany won the moniker “sick man of Europe” — efforts to improve competitiveness and employment further eroded worker protections, fueling a boom in low-paid, short-term “mini-jobs” that today account for more than a fifth of German employment.

Today, Germany is seen as a shining example of the virtues of such reform efforts. It is an exporting powerhouse with an unemployment rate, according to the European statistical agency Eurostat, of 5.2 percent: the envy of the Western world. But on closer inspection it becomes apparent that not all Germans have benefited from Germany’s success.

In 1991, the richest 10 percent of Germans took in 26 percent of the nation’s income before taxes and transfers, according to a report by Kai Daniel Schmid and Ulrike Stein of the Macroeconomic Policy Institute in Düsseldorf, which is closely linked to the German Confederation of Trade Unions. By 2010 they took in 31 percent.

Over the same period, the slice of the nation’s income taken by the bottom half of the population fell to 17 percent, from 22 percent.

As Professor Card has noted, the widening of the wage gap among German men from 1996 through 2009 roughly matches that in the United States during the 1980s — one of the periods of fastest-growing income inequality since the Gilded Age.

And though inequality in Germany has abated somewhat over the last two years as the number of part-time, low-wage jobs has stabilized, it remains much higher than a decade ago.

Whether Germany’s strategy will be of any use to distressed European countries today is hotly debated. German exports did take off, but domestic demand sagged, a direct consequence, critics say, of lower pay. So it took a long time for the efforts to produce jobs.

What’s more, the German rebound relied on a fast-growing global economy that was hungry for its exports. The world is very different today. “Demand from Asia was much more important than mini-jobs,” Mr. Torres of the I.L.O. argues.

But there is another issue at play. Even if the strategy were to eventually increase employment, what else will it do to Europe?

Andrew Watt, an economist who heads the Macroeconomic Policy Institute in Germany, worries that the push for labor market deregulation will cascade from one weak country to the next, as all engage in a futile race to create jobs by gaining market share from one another in a world of insufficient demand. “Whichever country is weakest at the time is forced into major cutbacks. First Germany, now Spain, next France,” he said.

“I am concerned about the longer-run costs,” Mr. Watt added. “It is hard to rebuild collective bargaining and welfare-state structures once they have been destroyed.”

Lowell Turner, who heads the Worker Institute at Cornell University, argues that there has always been a tension between the European Union’s economic project — centered on creating a vast single market — and the Continent’s deep-rooted commitment to social equity. The crisis put a thumb on the scales. “For a year or two governments protected their workers,” he said. But “the balance has tipped away from social Europe.”

There are signs of change, though. German elections earlier this year forced the Christian Democratic Union of Chancellor Merkel into a governing coalition with the Social Democratic Party. Part of the deal to form a government included introducing Germany’s first minimum wage, at 8.5 euros an hour, or about $11.50.

Lifting German wages at the bottom end should help other European countries to some extent, expanding German demand for their products. It is perhaps overly optimistic, though, to assume Berlin would welcome similar policies among its poorer, weaker neighbors.

Rather, labor markets in Southern Europe seem destined to increasingly follow the American way. “This is a way to, indeed, make Europe very much more like the U.S.,” Mr. Watt said. “With respect, that is not what most Europeans want.”