Labour market reforms

The 1997 Luxembourg Jobs Summit launched the idea of a European Employment Strategy. The strategy has three objectives: achieving full employment, increasing productivity and quality at work and promoting cohesion.

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In response to the twin challenges of globalisation and demographic changes (ageing population), the European Council (in Lisbon and later in Thessaloniki) has set ambitious employment targets:

  • an overall employment rate of 70% in 2010 (67% in 2005);
  • a female employment rate of 60% in 2010 (57% in 2005);
  • an older workers (55+) employment rate of 50% in 2010.

In 2003, it was clear that the EU was failing to reach its objectives. Therefore, the March 2003 Brussels summit invited the Commission to establish a high-level task force (with former Dutch PM Wim Kok as chairman) to examine the challenges. The Kok report, published in November 2004, inspired the Commission to refocus its Lisbon Strategy on economic growth and jobs.


The Kok report on employment policy underlined the need for more flexibility in the labour markets “while providing workers with appropriate levels of security“. According to the report, flexibility is not only in the interest of employers but also of workers, as they can then more easily combine work with care, education or free-time preferences.

The report urges member states and social partners to:

  • review and adjust the level of flexibility in standard contracts (terms and conditions of contracts, work organisation and working time, wage-setting mechanisms and mobility of workers);
  • introduce other forms of contracts to suit the needs of employers and workers;
  • remove obstacles for temporary work agencies, esp. discrepancies between member states;
  • promote use of ICT and more flexible working times as tools to modernise work organisation;
  • improve attractiveness of part-time work;
  • adapt social protection systems to support workers’ mobility

But, at the same time, the report warns against the creation of a “two-tier labour market”, with “insiders” benefiting from high levels of employment protection, and “outsiders” recruited under systems with lower protection. Pointing to the Netherlands and Denmark, where so-called flexicurity reforms were introduced in the labour market, the report sees the need for security which goes beyond the traditional employment protection systems. New forms of security should not focus on keeping workers in the same job for life, but on “people’s ability to remain and progress in the labour market” (decent pay, access to lifelong learning, working conditions, protection against unfair dismissal, support in case of job loss, right to transfer social rights when changing jobs).

In practice, Labour market models in Europe are quite diverse. André Sapir found that Continental, Mediterranean, Anglo-saxon and Nordic models have a lot in common and this classification has been accepted by most scholars. The Manpower Employment Outlook found that countries with Nordic models such as Norway and Austria or Anglo-Saxon models such as the UK and Ireland will have far more positive hiring trends during the third quarter of 2006 than Continental and Mediterranean economies such as Germany, France and Italy.

Due to its outstanding success, the Danish flexicurity model is much discussed at EU and member states’ level. The model was introduced in 1993 by a Social-Democrat government and has resulted in a decline of unemployment from 12% to 5%, while keeping the growth of nominal wage at a steady 3% to 5% per year. It is based on the country’s centennial tradition of collective bargaining, but has disposed of some of trade unions’ as well as employers’ favourites: A flexible labour market makes it easy for employers to hire and fire, but high unemployment benefits of up to 90% of the latest wage make transition from one job to another easy. The concept of employment security thus replaces traditional job security. An active labour market policy includes the right and the duty to training and job offers.

Another one of the hot issues at EU level is the role of temporary work agencies. In March 2002, the Commission proposed a draft directive regulating temporary work across the Union (the “Agency Workers’ Directive“). The proposal recognised that there is an increasing demand for flexible working arrangements through agencies and that this can be in the employer’s as well as the worker’s interest. The objective of the proposed directive was to combine high-quality employment for agency workers with a high level of flexibility for the agencies.

However, the Agency Workers Directive has been blocked in the Council due to strong opposition by countries such as the UK, Germany and Poland. The main argument used by opponents of the directive is that the “qualifying period” rule (temporary workers would get the same pay and benefits as permanent workers after six weeks) would lead to less flexibility, more paperwork and therefore less temporary work.

One of the challenges facing the EU’s labour market policies is the result of the 2004 enlargement to 10 new member states. According to a recent report by Daniel Vaughan-Whitehead (ILO) the new member states have introduced much more innovative working arrangements (temporary contracts, use of interim agencies, self-employment and part-time work) than the EU-15 of “old Europe”. These American-style labour arrangements are putting pressure on the traditional labour rules in the old member states. Western European trade unions have labelled some of these practices “social dumping”.


Not all economists are convinced that labour rigidities are the cause of high unemployment in some EU member states. David R. Howell and his colleagues of the Schwartz Center for Economic Policy Analysis have published several statistical studies indicating that the evidence does not prove that rigid labour market institutions are the main reason for high unemployment. In a paper published in October 2005 , Howell states that “labour-market reforms are not the answer”. In his view, the complex interplay of country-specific macroeconomic and industrial relations policies with longer term sectoral employment and demographic trends explains much better the differences in performances among EU member states as regards employment policies.

Moreover, governments trying to implement fundamental labour market reforms are often confronted with extensive resistance from unions and citizens. The recent student revolts in France as a reaction to the government’s “contrat première embauche (CPE)” (see Wikipedia) are a good indication of the difficulties facing reformers.

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