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Not for bad weather: Macro Analysis of Flexicurity with regard to the Crisis

Andranik Melik-Tangyan (Tangian)
Karlsruhe Institute of Technology Institute of Economic Theory (ECON)
Andranik Melik-Tangyan (Tangian)
Karlsruhe Institute of Technology Institute of Economic Theory (ECON)
Open Panel

Abstract

The paper presents a macroeconomic analysis of flexicurity with regard to the current economic crisis. Flexicurity is the European labour market policy aimed at compensating the ongoing flexibilization of employment relations (deregulation of labour markets) by means of advantages in social security. The analysis is performed with four composite indicators based on statistical figures for 25 countries. These composite indicators are flexibility, security, gravity of macroeconomic situation by 2010 and aggravation of macroeconomic situation in 2008–2010. The latter indicator is used to separate the pure effect of the crisis from previous developments. The indicator of flexibility covers both institutional and factual aspects, the security indicator includes social expenditure and benefit pay-offs, while the gravity of the macroeconomic situation is expressed in terms of output gap, public debt, size of bailout package and unemployment rate. It is shown with statistical certainty that a high degree of flexibility is not advantageous. Both the gravity of the situation by 2010 and the aggravation of the situation during the crisis in 2008–2010 depend significantly on flexibility. A possible explanation is that flexibility encourages firms to indulge in more risky market behaviour, given that potential losses can be recovered through restructurings with trouble-free labour adjustments. Restructurings require credit, making firms more sensitive to failures in the financial sector. When a crisis occurs, both economic losses for firms and labour adjustments take place on a massive scale, aggravating both the economic and the social situation (increase in the output gap and in unemployment). Flexibility-security combinations are not advantageous either, although the pure effect of the crisis is softened if social security is generous. The conclusion is that a better alternative to flexicurity would be a normalization of employment relations; in other words, low flexibility, which also would result in less social security expenditure. The closing discussion argues that the flexibilization of employment relations and the crisis both stem from the same root: financial liberalization is the background cause of both phenomena, rendering them dependent on one another.