Thursday, March 21, 2013

Flexicurity: not so easy

I am working on a project for the Foundation of the Catalan Socialist Party on the Economic Project of Socialdemocracy. This week we had a discussion of labour market reforms. The starting point was that it would be beneficial, in countries that come from very rigid labour markets but that are under pressure to make them more flexible, to advance towards the ideal of "flexicurity," that is, a model that combines security and flexibility. As in other markets, a complete deregulation is not desirable because there is a variety of market failures, and because of reasons of dynamic investments and distributive justice. But it is true that the labour markets in many countries accumulate many distortions, and that the current crisis and the globalization process require labour markets that work more efficiently. Flexicurity would combine dismantling parts of the job security that exists but at the same time increase unemployment protection, improve active labour market policies and spend more resources on them, and provide better incentives for the unemployed to find a new job. These recommendations are no panacea, and should be accompanied by a host of other policies, in education, taxation, administrative simplicity and industrial policy at least. The problem is that as found out in a paper co-authored by the interesting Italian economist Tito Boeri, flexicurity is itself endogenous. This means that it is not so easy for an individual country to modify its combination of security and fexibility. In his empirical work, he finds that countries that have more flexicurity (such as Denmark or Holland), also have a better educated workforce and have in place a strong redistributive system by other means. Hence the need to make progress, at the same time, in increasing educational levels and disparities, and establishing a more efficient and fairer tax system. The economist at Universitat Pompeu Fabra, Sergi Jiménez, who also participated at the discussion mentioned above as an external guest, also argued that one of the biggest problems of the Spanish economy (where advancing in flexicurity would be desirable) was the enormous difference across generations in educational backgrounds, which among other phenomena has caused a reduction in the returns to a university degree in Spain. And creates a disparity of interests between older generations, still dominant in the political system, and new ones.

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