Double Edged Sword of Worker Protection

Euro zone joblessness risks economic disaster | Reuters.

European countries have rigid labor markets. It is very difficult to fire workers. In certain circumstances Italy even requires the company to enter the legal system and have a judge approve the firing.

These policies are great if you already have a job, but they hurt workers attempting the enter the workforce. Europe’s young workers have a 23% unemployment rate led by half the young workers in Spain being without a job.

The flip side of guarantees for the jobs of present workers is that it becomes prohibitively expensive to fire workers if they are underperforming or if they are not needed due to slackening demand. The result is that companies choose not to hire workers in the first place.

The severity of these job guarantee laws is sometimes mitigated by allowing companies to hire temporary workers, which do not enjoy the same protections. Of course, these temporary workers are really just permanent employees without the same benefits or guarantees as their permanent co-workers.

Germany allows temporary workers. Its unemployment rate dropped steadily since Gerhard Schroeder’s government reformed the labor market in 2005. In exchange for this lower unemployment rate, workers in all income classes have seen their real wages drop since then.

Germany’s consistent economic strength during both the GFC and the Eurocrisis shows that this trade-off is worth it, so surely other governments will follow. Maybe not, Schroeder lost his job to Merkel shortly after pushing through these reforms. Note that Spain, Italy and Greece have yet to reform their labor markets in any meaningful way, because their politicians fear the wrath of voters.

dareconomics.wordpress.com

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