Debunking Flexible Labor Markets

A higher proportion of working-age men are in the labor force in many of these countries with inflexible labor market policies

Neil Irwin digs into the numbers around various labor markets and examines the premise that increased labor market flexibility — meaning fewer regulations prohibiting employers from easily terminating employees — would lead to higher employment. The results counter that thinking.

Neil Irwin, Would America Have Fewer Missing Workers if It Were More Like France?

In the United States, there is less standing in the way between an employer who wants to hire someone and a person who wants to work than in most Western European countries or Japan.

Many economists have traditionally viewed this as positive. Yes, it means that workers are more vulnerable to being fired when the economy slumps, and many jobs come with fewer benefits like paid vacation and sick leave. But that should help the economy adapt to a changing world more quickly and ultimately lead to higher incomes. A mainstay of American and British economic commentary is preaching to the likes of France and Italy that they need more flexible labor markets.

In theory, this flexibility should create more opportunities for anyone who wants work to find it, in contrast with European countries where companies are more reluctant to add jobs because regulations and union rules make it costly to fire people or sometimes even change their jobs.

Yet a higher proportion of working-age men are in the labor force in many of these countries with inflexible labor market policies. In the United States, 12 percent of 25- to 54-year-old men were neither working nor looking for work in 2014. That number was 7 percent in Spain and France, and 4 percent in Japan. And that’s despite a more generous social safety net in those countries that would, you might think, make it easier to drop out of the work force.

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In other words, whatever the costs and downsides of European-style labor markets, they don’t seem to inhibit the number of prime-age men who work. They may even make less educated men more likely to remain part of the work force.

So, another element of neoliberal dogma — flexible labor markets benefit everyone — is debunked. But that won’t stop its adherents from promoting it, since someone — large corporations in particular — can benefit from these markets. Companies are free to staff up in unsupportable ways and if they get into a bind in a downturn they can dump workers, and in effect, socialize the costs of workers pushed out of the work economy.

Note that the White House economists behind the report grudgingly accept this analysis, saying

The analysis in this report has shown that simply making labor markets more ‘flexible’ is, at least, not sufficient for effective functioning and that making labor markets more ‘supportive’ is essential.

And Irwin is equally grudging in his closing comment,

There is no guarantee that a more European-style labor market would solve America’s missing male worker problem, let alone solve those much bigger problems. But the international comparisons suggest less flexible labor markets might have some advantages.

It’s hard to stick with outmoded policies when the data shows you are wrong, but you obviously don’t have to like it, and we’ll see if Obama or other democrats, like Hillary, begin to push for less flexible labor policies. I bet it will be slow going. Maybe if Elizabeth Warren starts talking it up, but otherwise I expect these results to fall into a vacuum.

Originally published at

Founder, Work Futures. Editor, GigaOm. My obsession is the ecology of work, and the anthropology of the future.

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