European Employment
Lawyers Association
Conference
4-6 June 2015
Limassol, Cyprus
How is the wider economic
climate influencing the direction
of employment law?
Prof. Dr. Klaus-Stefan Hohenstatt,
Partner, Freshfields, Germany
Dr. Abi Adams, University of Oxford
Prof. Dr. Jeremias Prassl, University of Oxford
2
What are we going to cover today
Introduction
Crisis & Labour Law Reforms across the EU
• The Economics Perspective
• The Employment Law Perspective
Discussion
Greece
• The Employment Law Perspective
• The Economics Perspective
Discussion
Concluding remarks
3
Global trend (ILO): Labour market reforms 08 - 13
4
Long term unemployment in Europe: 2007,2010,2014
2007Q1
2010Q1
2014Q1
80
70
60
50
40
30
20
10
0
5
Labour productivity growth in Europe:2000-2012
6
Employment Law: Only one (minor?) aspect
• Recent insights from new methods have shown that
“Estimated effects prove to be relatively modest in most cases –
certainly more modest than the intensity of the debate would suggest.”
• Too much or too little can harm productivity; in between is the
plateau where both positive and negative effects can be found and
most effects are redistributive.
• “Overall, labour policies and institutions are neither the major
obstacle nor the magic bullet for creating good jobs for
development in most countries.”
Source: World Development Report 2013, p 258.
7
Labour market reforms in Europe
•
•
•
European Governments under
pressure to make local labour
markets more flexible as a
response to the euro zone crisis
Countries looking at retaining
existing or attracting new
investors through more flexible
labour and employment laws
Substantial political pressure
on member states which lack
behind
8
What is changing in Europe?
Changes can be categorized as follows:
• Ability of the system to reallocate workers to
jobs needed to sustain growth
Micro flexibility
measures
Macro flexibility • Ability of the system to adjust to macroeconomic
shocks
measures
9
Labour market reforms in Europe – some
examples
Belgium
France
• Reform of notice periods; higher retirement age;
Limitations for “bridging pensions” for employees; action
plan for employment of workers > 45 y.; limitations for
outsourcing
• Pension reform (retirement age 67 by 2022); Partial
unemployment scheme; higher tax on stock options,
high severances and pensions; “generation contract”;
reform of collective dismissals; “don’t close – sell!”
•
Spain
Italy
New rules on early retirement; possibility of opt-out from certain
CBA provisions (such as working time and salaries) in economic
crisis; more clarity around economic grounds for dismissal;
reduction of severance; softening of rules around collective
redundancies
• Strengthening of open-ended employment agreements;
reduction of dismissal protection for newly hired;
tougher rules on unemployment benefits
10
No unified approach for reforms in Europe
• Most member-states focus on the
sustainability of their pensions
system
• Tendency to tougher rules on
unemployment benefits
• No clear strategy concerning the
tension between high
employment protection and the
flexibility of the job market
• National agendas not aligned
11
The Economics
Perspective
12
Overview
1. The Economic Climate
1. Cyclical v. Structural Drivers
1. The Case for Structural Reform
13
The Economics Perspective - Overview
1. The Economic Climate
1. Cyclical v. Structural Drivers
1. The Case for Structural Reform
14
GDP Growth, constant prices
Source: IMF World Economic Outlook Database
15
Change in Unemployment since 2008
Source: ECB
16
Final Stress and Unemployment
Source: ECB
17
The Economics Perspective - Overview
1. The Economic Climate
1. Cyclical v. Structural Drivers
1. The Case for Structural Reform
18
Types of Unemployment
1. Cyclical
- Laid off during a downturn.
1. Structural
- ‘Permanent’ mismatch between number
looking for jobs and jobs available.
- Rooted in functioning of labour market at the
microeconomic level.
19
Types of Unemployment
• Different policy prescriptions for alleviating
different types of unemployment.
1. Cyclical
Aggregate demand management.
2. Structural
Structural reforms and measures aimed to
improve matching & productivity.
20
Types of Unemployment
• Difficult to identify the extent of
cyclical/structural unemployment in the
economy.
• General consensus that unemployment at the
beginning of the crisis was largely cyclical.
• Now this is up for debate....
21
Measuring Structural Unemployment
• NAWRU: Non-Accelerating Wage Inflation Rate
of Unemployment
- Unemployment rate that keeps inflation
constant.
• Evidence that this has risen in the euro area. . .
• But issues with measurement and the influence
of the business cycle (Estrella & Mishkin (2000);
EC (2013)).
22
The Economics Perspective - Overview
1. The Economic Climate
1. Cyclical v. Structural Drivers
1. The Case for Structural Reform
23
Mismatch
• Unemployment and unfilled jobs coexist.
- Skill mismatch.
- Low mobility.
• Some evidence of an increase in mismatch in
some countries.
-Shift in the Beveridge curve, suggesting a
change in matching efficiency.
24
Evolution of euro area Beveridge curve
Source: ECB
25
Evolution of euro area Employment
Source: ECB
26
Hysteresis
• Evidence that cyclical unemployment
could be turning permanent.
27
Jobless Rate for 1 year or more
Source: Eurostat
28
Job Finding Rate by Duration of UE, Euro area
Source: Commission Services based on Eurostat data
29
IMF Policy Response: ‘Micro-Flexibility’
• Reforms to employment protection
- Too much is harmful — lower reallocation,
increasing unemployment duration.
- Asymmetry between permanent/
temporary contracts
• Reforms to unemployment insurance
- Potential efficiency losses.
- Need high quality ALMPs.
30
Current Account Balances
Source: Eurostat
31
Balance of Payments Crisis
• Internal devaluation.
• Attract inward investment.
• Increase productivity.
32
Conclusion
• Unemployment experiences diverging across the
eurozone.
• Different types of unemployment require
different policy responses.
• There might be a case for structural reform given
fears of hysteresis, mismatch and poor
competitiveness.
33
Employment Law &
Financial Crises
in Europe
IS THERE A LINK?
34
Outline
• Financial Crises and Employment Law Reform
I. No Causative Link
II. Contingent Crises, Permanent Reforms
III. Corresponding Reforms?
A brief survey of several Member States
• Unintended Consequences?
I. Hamper Recovery
II. Deepen Public Deficits
35
Paradox I: a Causal Link?
• The Origins of ‘The Crisis’
• Different Member States, Different Crises
– The United Kingdom
– Greece
• Employment Law as a Trigger?
‘fiscal deficits are not the consequence of excessive welfare
state spending or of over-regulation of the labour market
within the member states most affected by the crisis’
Prof S Deakin, 2012
36
Paradox I: a Causal Link?
• Heterogeneous Crises, Uniform Policy
Prescriptions
– Austerity
– Deficit Reduction and Structural Reforms
• But NB the very different motivations
– Bail-out Conditionality (Portugal, Greece, …)
– Democratic Choice (UK General Election 2010, …)
37
Paradox II: Contingent Crisis, Permanent
Reforms?
• Crises as Contingent Events
– Cyclical vs. Structural Problems
– Short-Term emphasis (e.g. EFSF)
• Reforms as Deep-Rooted, Permanent Structural
Changes
– And a near-complete lack of innovation
38
Paradox III: Corresponding Reforms?
• The Role of Employment Law in Austerity
• 3 Broad Areas of Reform:
– Facilitate Termination of Employment
– Lower Wages and Pensions
– Procedural Changes to limit role of Judicial & Social
Partner oversight
NB: vast differences across the Member States!
39
Key Reforms
Unfair Dismissal Protection
– Hugh Collins: the tail which wags the whole dog
Sylvaine Laulom: four major trends
– Emphasis Employer’s Unilateral Decision Making
– Reduce or Reshape Sanctions
– Relaxation of Collective Redundancy Standards
– Increase Qualification Thresholds
… or remove protection entirely (UK)
40
Key Reforms
• Wages and Pensions
– General Measures
– Targeted Measures
• Public Sectors
• Old / Young Workers
• Procedural Changes
– The Diminishing Role of Collective Bargaining
– Reducing the Role of Judicial Scrutiny
41
Paradox III: Corresponding Reforms?
• Remember the Goal: Deficit Reduction
– Stimulate employment to ensure GDP growth
– Lower public sector expenditure
• Yet Evidence Suggests the Contrary
– UK Government Consultation 2013
– CBI: rapid pace of change as the only main problem
42
A DANGEROUS CONTRADICTION
• Responding to Financial Crises with Employment
Law Reforms
– The Danger of Unintended Consequences
I.
DISPARATE IMPACT
– especially on young Workers, and the socially
weakest
43
A DANGEROUS CONTRADICTION
II. PRECIPITATING DEEPER CRISES
– Employment Termination and the Risk Shift
• Jacob Hacker (Yale)
– Employment Law as a Risk-Distribution
Mechanism
• Once dismantled, individuals to bear the burden
– Significant Impact on Public Finances
• Direct: Unemployment Benefits
• Indirect: Activation Policies
44
CONCLUSIONS
• Financial Crises and Employment Law Reforms
– 3 Contradictions
I. No Causative Link
II. Contingent Crises, Permanent Reforms
III. Corresponding Reforms?
– A Potentially Dangerous Mismatch
45
How is the Wider Economic Crisis
Influencing the Direction of
Employment Law?
Questions and Discussion
Employment Law
Reforms in
Europe
THE GREEK STORY
47
Overview
• Employment Law Reforms in Greece
I. Bailouts and Memoranda
II. Employment Law Reforms: the first wave
III. Employment Law Reforms: the second wave
IV. Greece under ΣΥΡΙΖΑ
48
I
Background
• Since 1990s: slow, piecemeal reforms
– Law on the Books vs. Labour Market Realities
• May 2010: €110bn Loan Facility Agreement
– Accompanied by ‘Memoranda’
– The ‘Troika’: European Commission, ECB, IMF
• NB: legal scrutiny (nearly) impossible
49
II
The First Wave of Reforms
• 2010-13 Draft Programme
– Memorandum of Economic and Financial Policies (MEFP)
– Memorandum of Understanding on Specific Economic
Policy Conditionality (MOU)
• Multi-Pronged Approach
– Lower Public Expenditure
– Structural Changes
• Lower Private Sector Wages
• Revise Employment-Protective Legislation
50
II
The First Wave of Reforms
• Lowering of Employment-Protective Standards
[examples]
– 3863/2010: facilitate dismissals
– 3899/2010: 2 year probation period; flexible work
– 3986/2011: unrestricted FT contract renewal
• Dismantling of Collective Bargaining Apparatus
– 3845/2010: targeted exclusions (young, long-term
unemployed)
– 3899/2010: fundamental changes to standard-setting via
centralised Collective Bargaining
51
III
The Second Wave of Reforms
• Spring 2012
– ‘Second Economic Adjustment Programme for Greece’
• Source of Funds: primarily EFSF (small IMF contribution)
• 4046/2012 – New Loan Agreement & Structural
Reforms
– As of 14 February, ban on agreements to increase salaries
until unemployment rate falls below 10%
– 22% wage reductions across the board; further 10% for
young workers (< 25 years)
52
III
The Second Wave of Reforms
• 4093/2012: ‘Approval of the Mid- term Fiscal Strategy
for 2013– 2016 – urgent implementation measures of
law 4046/2012 and of the Mid-term Fiscal Strategy
2013–2016’
• DISMISSAL
– Notice Period shortened and severance pay cut
• In force 12 November 2012
• PENSIONS
– Retirement age upped by 2 years
– Pensions cut between 5% and 20%
• In force 1 January 2013
53
III
The Second Wave of Reforms
• 4093/2012 (cont’d)
MINIMUM WAGES
– Set centrally by government
– In force 1 April 2013
NB: Greek poverty level = €6,000-7,000
[ILO/EUROSTAT 2011]
54
III
The Second Wave of Reforms
• Did it work?
– Net Reduction in Labour Cost…
– … but ongoing financial crisis
• Social Partner Reaction?
– both Employee and Employer sides critical
– Fear of deeper recession caused by
unemployment and reduction of wages below
minimum living standards
55
IV
Greece under ΣΥΡΙΖΑ
• 25 January 2015: Parliamentary Elections
– Left-Wing Party Controls 149/300 Seats
– Alexis Tsipras (PM); Yanis Varoufakis (Finance Minister)
– Elected on explicit anti-austerity platform
• Renegotiations Commence
– ‘The Brussels Group’
– Cash-Flow Pressures Mount
• Changing Priorities given Outstanding Payments (?)
– IMF – Structural Reforms
– ECB – Primary Budget Surplus
56
IV
Greece under ΣΥΡΙΖΑ
• April 2015: increasingly tense stand-offs
– Payments Continue
• Limited Reforms: VAT, maintain ENFIA (?)
– Rejection of Creditor Demands
• Pension System Reform
• Further Labour Market Liberalisation
– Reversal of Previous Bailout Measures
• Public Sector Re-Hiring
• Slow Reactivation of Collective Bargaining
57
IV
Greece under ΣΥΡΙΖΑ
• Yet many Difficult Questions Remain
– Collective Bargaining
– Pensions
• Entitlement
• Administration
– But cf. Collective Redundancy Changes
• ILO Report (?)
58
What Happens Next?
• Liquidity Crisis Continues to Worsen
– Final Bailout Tranche still Frozen
– ECB retains €1.9bn of Greek bond profits
• 5 June 2015 (today): €300m due
– Major Repayments to ECB loom in July / August
• What is the Real Role of Labour Market
Conditionality?
59
The Economics
Perspective
GREECE
60
Overview
1. Stabilisation Policy and Structural
Reforms
1. Reform Impact
1. The Future
61
Overview
1. Stabilisation Policy and Structural
Reforms
1. Reform Impact
1. The Future
62
GDP Growth
Source: IMF World Economic Outlook Database
63
Government Debt
(a) Primary Deficit
(b) 10-yr Gov Bond Yields
Source: Eurostat
64
Unemployment rate
Source: Eurostat
65
Labour Market
• Large informal sector.
• Highly regulated formal sector.
• Uncompetitive: In 2008, 26 out of 27 EU27
countries for competitiveness.
66
Policy Levers
• Stabilisation Policy
-Business cycle management.
- Debt crisis management.
• Structural Policy
- “Changing the fabric of the economy"
(IMF, 2013).
- Includes permanent labour market reform.
67
Policy Levers
• Business cycle management
- Stimulate demand.
• Crisis management
- Austerity.
• Structural Policy
- Reform of certain labour market
institutions (whilst keeping the impact on
demand in mind)
68
Policy Levers
• How to stimulate the economy while keeping
confidence of creditors?
• Not just “what reform" but “what reform, when"
• Further difficulty: time inconsistency
- Optimal to delay fiscal consolidation (and
structural reform).
- But question marks over credibility of
future
reform.
69
Frontloading and Conditionality
• Sub-optimal frontloading of consolidation.
• ‘Conditionality’: attach conditions to the
provision of benefits.
- Balance likelihood of reform against cost of
consolidation.
70
Overview
1. Stabilisation Policy and Structural
Reforms
1. Reform Impact
1. The Future
71
Simulations of Alternative Reform Programmes
Source: Macroeconomic Policy Institute (2015)
72
Underestimated Costs
“The program initially assumed a multiplier of only 0.5
despite staff’s recognition that Greece’s relatively closed
economy & lack of an exchange rate tool would concentrate
the fiscal shock. Recent iterations of the Greek program
have assumed a multiple of twice the size" (IMF, 2013)
73
Underestimated Costs
• The unprecedented reduction in labour income had
decisive knock on (multiplier-accelerator) effects on
aggregate demand and growth. Employees lost 50%
of their purchasing power as a result of wage
reductions, price index changes and the reduction in
social security benefits" (Greek Finance Ministry)
• Labour market and other structural reforms
contributing to collapse of demand.
• Current account deficit closed by import collapse.
74
Overview
1. Stabilisation Policy and Structural
Reforms
1. Reform Impact
1. The Future
75
Stabilisation Policy
• Greece’s main aim is to roll over its existing debt.
• “Macroeconomic stabilisation can be achieved through
growth and increased efficiency in tax collection rather
than through public expenditure cuts, which have
reduced the revenue base and led to an increase in the
debt ratio. We think that the whole of Europe will benefit
from Greece being given the chance of a fresh start [...] it
was after substantial debt relief that the German
economy was able to grow and reform itself in the
1950s."
Letter from 18 eminent economists, 2015
76
Structural Policy
• Education reform
• Product market reform
• Tax system & collection
77
Conclusions
• Greece is in the midst of a depression.
• Austerity and reforms have had a much
larger negative impact than predicted.
• Re-evaluation of current strategy is
required.
78
How is the Wider Economic Crisis
Influencing the Direction of
Employment Law?
Discussion
The Concept of the Employer
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