The orthodox approach: Flexibilisation

‘Flexibility’ as applied to the labour market refers to ‘the ease with which firms lay off workers and alter pay as economic circumstances change, and to the ability of workers to move among jobs and between unemployment and employment’ (Reference FreemanFreeman, 2013: 78). The conceptual framework for labour market flexibilisation – that is, the promotion of ‘flexibility’ – was provided by Layard, Nickell and Jackman’s cornerstone book of 1991, Unemployment: Macroeconomic Performance and the Labour Market, and followed closely by related research including Reference NickellNickell (1997, Reference Nickell1998), Reference Elmeskov, Martin and ScarpettaElmeskov et al. (1998), Reference Blanchard and WolfersBlanchard and Wolfers (2000), Reference Daveri and TabelliniDaveri and Tabellini (2000), and Reference Nickell, Nunziata and OchelNickell et al. (2005), among others.

Proponents of labour market flexibilisation argue that unemployment is caused by excessive rigidity in labour markets. They generally blame LMIs for persistent unemployment. The theoretical basis evolved from the notion of a natural rate of unemployment (NRU) to the non-accelerating inflation rate of unemployment (NAIRU), underpinned by a model developed by Reference Layard, Nickell and JackmanLayard et al. (1991). ^{Footnote 4} According to the standard NAIRU model, the equilibrium unemployment rate is fully determined by ‘wage-push factors including long and durable unemployment benefits, strict employment protection legislation, generous social security contributions and high labour taxes, collective wage coordination, and strong labour unions’ (Reference Storm and NaastepadStorm and Naastepad, 2008: 527). In turn, unemployment is unrelated to aggregate demand. Then, unemployment works as an impediment to the workers’ bargaining position, thus keeping inflation controlled. The bottom line argument is that maintaining a strong bargaining position for workers requires a higher equilibrium unemployment rate in order to accommodate real wage demands to corresponding labour productivity level (Reference Storm and NaastepadStorm and Naastepad, 2008).

Storm and Naastepad explain how all demand-side policy is dismissed in the NAIRU framework since it is assumed to be ineffective in the long run. The mechanism is as follows: a demand stimulus may temporarily reduce actual unemployment below equilibrium unemployment, but this will lead to rising wages and prices, and these inflationary tendencies can only be compensated by a rise in unemployment up to the NAIRU level, so as to force workers to accept the given long-run wage share and desist on their wage demands.

At this point, there is abundant and robust evidence that global deconstruction of institutional structures is not a solution for unemployment. As stated by Reference Berg and KuceraBerg and Kucera (2008), ‘there is only weak evidence for the negative impacts of labour market regulations’ (p. 1). Rather, investment (capital accumulation) policies that stoke aggregate effective demand, and active labour market programmes and policy, among other drivers, are more strongly associated with better labour market outcomes and other desirable macroeconomic conditions (such as lower income inequality) than is deregulation.

Challenges to the flexibility orthodoxy

One of the most relevant critiques of the flexibility orthodoxy is research by Reference Baker, Glyn, Howell and HowellBaker et al. (2005). Analysing stylised models, they argue that there is no observable relation between the strength of crucial institutions (like employment protection legislation (EPL) index) and unemployment. Baker et al. also demonstrate that there is no consensus among the most popular NAIRU-flexibilisation papers regarding the magnitude of the measured impact of LMIs on unemployment. Evaluating the most cited papers one by one, they show that their findings (i.e. that LMIs increase unemployment) are not robust to alternative definitions of the variables, time periods or estimation methodology.

This same study performs regression analysis, using several LMIs as explanatory variables for unemployment (levels), and applies a similar methodology to the NAIRU literature for comparability, but extends the data to longer time periods and combines institutional variables from diverse sources. Among their strongest results, they find that bargaining coordination is a ‘good’ institutional variable as it tends to reduce unemployment. They also characterise two LMIs as ‘bad’ institutions – employment protection and unemployment benefits – but here their findings are much more equivocal: depending on the model specification, these variables have positive, weak or non-existent effects on unemployment. In all, the results of Reference Baker, Glyn, Howell and HowellBaker et al. (2005) suggest a significant gap between the confidence with which flexibilisation policy has been promoted and the evidence that the regulating institutions are behind poor labour market performance.

In a related paper, Reference Baccaro and ReiBaccaro and Rei (2007) also question whether the empirical evidence actually supports flexibilisation policies. They conduct a time-series cross-section analysis of 18 OECD (Organisation for Economic Co-Operation and Development) countries between 1960 and 1998, including one macroeconomic control (the interest rate) and six institutional variables: employment protection, unionisation rate, generosity of unemployment benefits, tax wedge, central bank independence and wage bargaining coordination. They conclude that the empirical evidence does not support deregulation since ‘the generosity of unemployment benefits and the size of the tax wedge do not seem to be associated with higher unemployment’ (Reference Baccaro and ReiBaccaro and Rei, 2007: 528).

Nevertheless, the investigation by Baccaro and Rei includes possible indirect effects of institutions on unemployment. They test whether institutions could eventually magnify the size of adverse external shocks, but the results are inconclusive. Union density is the only variable they find to show a positive and robust (though small) effect on unemployment.

Importantly, neither Reference Baker, Glyn, Howell and HowellBaker et al. (2005) nor Reference Baccaro and ReiBaccaro and Rei (2007) find empirical support for the relationship between LMIs and unemployment levels. A central conclusion of both papers is that one-size-fits-all approaches like flexibilisation are, at best, ineffective. The effect of LMIs on unemployment is country-specific and depends strongly on the regulatory setting and other idiosyncrasies. In the context of the NAIRU model, there is a null long-run effect of capital accumulation on unemployment because the elasticity of substitution between labour and capital is assumed to be one (following the Cobb–Douglas model of aggregate production). Nevertheless, sound empirical evidence shows that this elasticity is rarely unity. ^{Footnote 5}

Keynesian economics provides an alternative approach to labour market policy. Reference Stockhammer and KlärStockhammer and Klär (2011) use econometric analysis to explain medium-term unemployment according to the evolution of capital accumulation, LMIs and macroeconomic controls in a panel including 20 OECD countries. They find that capital accumulation and the real interest rate have robust effects on unemployment, whereas LMIs have weak effects. Among LMIs, only union density and the coordination of collective bargaining were found to have statistically significant and robust effects (in line with the other cited papers), where robustness is defined as results that hold over time and across countries in two different LMI datasets. They conclude that institutions do have an effect on unemployment, but it is a minor one compared with that of macroeconomic variables, which have a much greater impact. Then, it follows that inadequate capital accumulation and/or high interest rates are more strongly responsible for high unemployment rates, and investment is the ‘genuine Keynesian variable in explaining unemployment’ (Reference Stockhammer and KlärStockhammer and Klär, 2011: 438).

Despite considerable effort, researchers have not (yet) come near a broad agreement on the effects of institutions on other aggregate economic outcomes such as unemployment (Reference FreemanFreeman, 2008). Notwithstanding the lack of conclusive results, these issues still attract mainstream attention.

From flexibility to flexicurity

In the last few decades, there have been efforts to bring about a convergence of the welfare state of the mid-20th century with the axiomatic truth of ‘flexibility’, fostering the link – and a certain ‘balance’ – between social protection and economic paradigms such as efficiency and competitiveness. The European public policy arena gave birth to the concept of ‘flexicurity’, initially stimulated by the experiences of Denmark and the Netherlands during the 1990s, where policymakers argued that ‘flexibility’ is not necessarily contradicted with labour security for workers. After experiencing periods of high unemployment, both countries were able to reduce unemployment significantly while keeping unemployment benefits. One may wonder about the likelihood of applying that model to other countries with weak labour market outcomes. Is ‘flexicurity’ the end of the trade-off between flexibility and labour protection?

The European Commission (EC) has adopted ‘flexicurity’ as the main labour market policy scheme in its public discourse since 2007. According to Reference HeyesHeyes (2011), the four pillars of the EC implementation of flexicurity are (1) flexible and reliable contractual arrangements, (2) lifelong programmes for learning and skill transmission, (3) effective labour market policies and (4) modern social security systems that not only provide adequate income but also encourage employment and facilitate labour mobility. As pointed out by Heyes, several concepts are quite ambiguous. For example, what does it mean to achieve contacts that are both ‘flexible’ and ‘stable’? What does ‘modern social security’ imply in this context? In addition to the ambiguity, ‘flexicurity’ was constructed on the basis of a reductionist view of both ‘flexibility’ and ‘security’. Sectoral and industrial heterogeneity in the institutional setting, regional differences in production schemes and the role of communitarian organisations, among other factors, are not brought into the scope of policy design (Reference Burroni and KeuneBurroni and Keune, 2011).

The EC approach to EPL is complex. The Commission does not encourage further protection, but the ‘flexicurity’ discourse does not allow for free-market ease of hiring and firing. This is the main difference between flexicurity and a full-flexibilisation scheme. Moreover, it is assumed that unemployment could be reduced with better mobility between firms, locations and industries. ‘Flexicurity’ allows this mobility through active policy and skills acquisition, leading to the concept of ‘employability’, understood as employment security based on a match between worker and job characteristics (Reference HeyesHeyes, 2011).

Heyes argues, however, that there is little evidence of any widespread shift towards the pursuit of ‘flexicurity’ or even strong evidence of successful implementation. For example, Spain experienced an extremely large fall in employment rates despite having a notably high score in employment protection ranking, which can be explained by the high proportion of workers with limited-duration contracts. This contractual scheme was the reform made in Spain to allow for a certain level of ‘flexicurity’: subsequently, 90% of job losses in 2008–2009 were among those on temporary employment contracts (Reference HeyesHeyes, 2011). From this point of view, ‘flexicurity’ was not a productive solution for the enduring malfunctioning of the Spanish labour market; on the contrary, it seems to have exacerbated its problems.

Other aspects of ‘flexicurity’ include mandatory job-seeking activity for recipients of social security benefits. In the fallout from the Great Recession, some EC countries (e.g. Belgium) increased and extended unemployment benefits for vulnerable worker groups, including temporary workers, migrants and young workers. In return, beneficiaries submit to stricter supervision. Recipients of unemployment benefits must show to be actively searching for work in the UK, Denmark, Italy, Poland and several other European Union (EU) countries (Reference HeyesHeyes, 2011).

These combined policy schemes had uneven results. Reference HeyesHeyes (2013) explains that in Ireland, which had weak employment protection and a liberal welfare state, along with active unions and active social dialogue, the unemployment rate rose from 4.6% to 11.9% between 2007 and 2009, one of the highest crisis-induced increases in any EU country. In the UK, the impact was relatively mild compared to Ireland. The government response, as in Ireland, was creating schemes for the unemployed rather than job protection to limit losses (benefits and skill acquisition to facilitate mobility). In Germany, work-time reductions helped a robust mitigation of job losses, and the labour market performance was remarkable during the recession, considering gross domestic product (GDP) fell almost 5% in 2009 (Reference HeyesHeyes, 2013).

The unsuccessful performance of ‘flexicurity’ approaches allows us to question ‘flexibility’ altogether as a desirable characteristic or policy target for labour markets. Following Reference FreemanFreeman (2013), given that the US labour market is the model of a flexible, market-oriented, competitive labour market, why did it have such a painful recovery from the last Great Recession?

The US had a remarkable employment performance in the 1980s and 1990s and was indeed considered a ‘flexible jobs machine’ despite, as Reference FreemanFreeman (2013) remarks, hiding ‘high earnings inequality, stagnant poverty rates, falling collective representation of workers, and reduced pension and health insurance coverage’ (p. 79), which are the big hazards of flexibility.

During this same period, European labour markets were old-fashioned, overly complex and sluggish. Europe’s unemployment problem was supposed to be solved by deregulation of labour markets. Policy advice included recommendations to increase working-time flexibility, increase wage and labour cost flexibility, reduce employment security provisions and reduce unemployment and welfare benefit systems (e.g. OECD, 1994). Germany, with its works councils, apprenticeship system and social partner bargaining, was a prime example of the sick economies of 1990s Europe. Despite failure to implement flexibility reforms, with its relative success in mitigating the impacts of the Great Recession, Germany became the new north star of labour market policy (Reference Rinne and ZimmermannRinne and Zimmermann, 2013).

In contrast, US-style flexibility was supposed to enhance the ability of unemployment to fall and recover promptly, closely following the economic cycle; however, that did not happen. The 2007–2009 recession provoked the most profound and long-lasting job loss in modern US history. Most of the unemployment phenomena were economic cyclic phenomena rather than the byproduct of regulation (Reference Lazear and SpletzerLazear and Spletzer, 2012; Reference RothsteinRothstein, 2012). In other words, LMIs were not to blame for unemployment.

When looking into the causes of the job-less recovery, Reference FreemanFreeman (2013) stresses that public sector employment fell in those years, contributing to the problem instead of providing a countercyclical buffer. Also, wages did not adjust flexibly to the negative output shock. Theoretically, a decline in the demand for products that reduces demand for labour should produce downward pressure on wages, preserving employment at individual firms (albeit with debatable consequences for aggregate demand and employment). That did not happen. Layoffs went from being a last resort for troubled firms to accepted practice in quotidian managerial activities. This is, according to Freeman, another possible explanation for the weak employment performance of the United States in the recession: it reflects a broad change in business policy towards layoffs.

We agree with Freeman’s view that there is not an ideal labour market system for all problems in the complex economic world in which we live, whether it be a flexible structure à la United States or institutionally driven à la advanced Europe. From this point of view, a mixed scheme like ‘flexicurity’ may work better than a fully ‘flexible’ labour market. But when we take a look at social well-being, we see major prevailing concerns for welfare. Regarding economic inequality, there is a consensus that LMIs play an important role in guaranteeing a more desirable distribution of income. Reference FreemanFreeman (2008), for example, contrasts the consensus about the positive function of LMIs with the lack of consensus as to their effect on labour market outcomes.

Changes in bargaining institutions affect the dispersion of pay, as documented by Reference FreemanFreeman (2008). The decline in collective bargaining coverage as in the US or UK, the partition of centralised negotiations between the major union federation and major employer association in Sweden or the end of the Scala Mobile mode of centralised wage setting in Italy, all present increasing inequalities. The fact that more institutional wage determination (and less full-market wage determination) narrows earnings inequality is hard to question.

The numerous critiques of this new orthodoxy have driven the OECD to retreat from its strong Jobs Study claim to a more equivocal position about the impact of institutions on outcomes. The 2004 OECD Employment Outlook admitted that ‘the evidence of the role played by EPL (employment protection legislation) on aggregate employment and unemployment rates remains mixed’ (OECD, 2004: 81). The Outlook also argued for ‘the plausibility of the Jobs Strategy diagnosis that excessively high aggregate wages and/or wage compression have been impediments’ to jobs, while admitting that ‘this evidence is somewhat fragile’ (OECD, 2004: 165).

Back to the consensus, while proponents and opponents of the case against labour institutions disagree about whether labour institutions are a significant contributor to unemployment and aggregate economic efficiency, it is important to recognise that they concur on one point: that labour institutions, particularly those associated with trade unions, reduce inequality of pay compared to pay in competitive markets. The outcome of this debate, following contrasted empirical evidence, is that labour institutions reduce earnings inequality but that they have no clear relation to other aggregate outcomes, such as unemployment (Reference FreemanFreeman, 2005).

The joint issues of inequalities, social needs and anaemic employment require a fresh policy approach that needs to reset the whole board of labour market policy. Full old-style security, full flexibility or even ‘flexicurity’ has not performed well in the last decades. Labour policy must include not only the idea of ‘flexibility’ (i.e. market efficiency) and traditional job ‘security’ (i.e. worker rights) but also social capabilities in a fully democratic environment.

Towards a social capabilities–based flexicurity for a learning economy

From the above considerations, it would appear that ambiguities in the concept of ‘flexicurity’ can be overcome in light of concrete country experiences and putting the idea of quality of employment and job security in the forefront. Doing this will require a form of lifelong learning and training flexibility, funded by employers and social state policies. Furthermore, it will also involve guaranteed minimum moral and historical standards of living for all. This might be achieved in various ways, including the guaranteed basic income programme championed by many in Europe and around the world. To this end, Reference KhanKhan (2008, Reference Khan2013a, Reference Khan and Augustin2013b, Reference Khan2014, 2016) has advocated a capabilities-maintaining and enhancing programme. Thus, a more secure ‘flexicurity’ may be called social capabilities–based flexicurity. It may be useful to elaborate upon this somewhat novel idea to pinpoint its relevance in formulating better employment policies.

Fundamentally, social capabilities–based flexicurity is a concept developed from key insights that go as far back as Adam Smith in economics to Aristotle in ethics. Recently, Sen and Nussbaum extended the scope of the concept and gave it a rigorous modern form. Reference KhanKhan (1998) gave an explicitly social and political economic formulation of capabilities grounded in a network of normative institutions by extending Hegel’s idea of Sittlichkeit (ethical community).

To put the argument very succinctly, various theorists drawing upon the insights of Adam Smith have proposed a theoretically rigorous and elaborate evaluation of well-being (Reference SmithSmith, [1759] 2006, Reference Smith and Cannan[1776] 1904). Sen is the originator of this ‘capability approach’ in recent times (e.g. Reference SenSen, 1992, Reference Sen1999, Reference Sen2004). The primary theoretical criticism to the utilitarian approach by Sen, Nussbaum and others – namely, that this approach reduces all qualities into quanta of utilities – is a serious one. Nussbaum gives a graphic example of this by quoting the exchange between Mr Gradgrind, economist and grief-stricken father, and his pupil Bitzer. The student outdoes his mentor by adhering to a strict code of utilitarian rationality that cannot comprehend a father’s grief (Reference NussbaumNussbaum, 1995, Reference Nussbaum2000). ^{Footnote 6} Khan has pursued a similar line of criticism in a number of recent papers and in the book Technology, Development and Democracy. ^{Footnote 7} This approach makes the capabilities explicitly social and asks what concatenation of economic (real and financial) and other (e.g. political and social) institutions will allow capabilities to both increase steadily on the average and tend to equalise them among diverse individuals. In effect, as the following discussion makes clear, we are asking, how can we increase and equalise real positive freedom for individuals in specific social contexts?

In discussing the well-being implications of human rights for workers in particular, we wish to take on a version of the social capabilities approach. It is not our intent to present how human rights policies for labour affect detailed empirical indicators of well-being. We simply wish to pose clearly the conceptual problem of evaluating the problems of denying workers their rights and the possible consequences of labour rights–based reforms. The institutional reforms and changes proposed by progressive labour scholars, suggesting alternate labour market structures, must be proven to be capability-enhancing for workers or at least not to be capability-reducing for them. Furthermore, we still need to ask what social capabilities means both abstractly and concretely.

In a number of influential and insightful contributions, Reference NussbaumMartha Nussbaum (2000) has developed an Aristotelian interpretation of capabilities. The connections between capabilities and a distinctly Aristotelian conception of human flourishing are indeed striking. We have available now (see, for example, Reference KhanKhan, 1998) a list of general capabilities drawing upon both Sen and Nussbaum and extending these for addressing the question of well-being for workers in particular.

Reference KhanKhan (1998) points out some Hegelian connections as well. In particular, the Hegelian concept of freedom as an interactive arrangement in society where concrete institutions of family, civil society, and state all play definite roles seems a specifically modern way of viewing the possibilities and limits of human flourishing in a liberal society based on private property. Reference Hegel and DydeHegel’s ([1821] 2005) Philosophy of Right is a landmark contribution, in this sense, to the elucidation of the problem of freedom in modern societies.

Following this line of reasoning, Khan has emphasised elsewhere the irreducibly social (not merely biological) character of these human capabilities. Sen himself emphasises ‘a certain sort of possibility or opportunity for functioning’ without always carefully specifying the institutional setting (Reference KhanKhan, 1998, Reference Khan2014). In particular, neither Sen nor Nussbaum has addressed directly the question of workers’ capabilities.

In order to assess the critical reach of such a fully social capabilities perspective to labour, we need to go further and try to describe more concretely what some of the basic capabilities may be. Reference CrockerCrocker (1992) gives an admirable summary of both Nussbaum’s and Sen’s approach to capabilities in a recent essay. Mainly relying on Nussbaum, and also on other sources, he has compiled a list that is reproduced in Appendix 1.

As Reference CrockerCrocker (1992) correctly points out, we can facilitate this ordering by requiring that ‘it might be better for practical rationality and affiliation to infuse but not organize the other virtues’ (p. 176). Reference CrockerCrocker (1992) contrasts Nussbaum’s approach with Sen’s:

Furthermore, Nussbaum has included items such as ‘being able to have attachments to things and persons outside ourselves’ and ‘being able to live with concern for and in relation to animals, plants and the world of nature’ (Reference CrockerCrocker, 1992: 175), for which Sen has no counterparts. These items are welcome features. Item 8, ‘ecological virtue’, is an especially important addition to Nussbaum’s outlook. ^{Footnote 8}

Both Sen and Nussbaum agree, however, that these capabilities are distinct and of central importance (Reference CrockerCrocker, 1992). One cannot easily trade off one dimension of capability against another. At most, one can do so in a very limited way. One cannot reduce capabilities to a common measure such as utility. As Crocker points out, ‘capability ethic’ has implications for freedom, rights and justice going far beyond simple distribution of income considerations. If one accepts the capability approach as a serious foundation for human development including maintenance and development of social capabilities of workers, it then follows that going beyond distributive justice is necessary for a complete evaluation of the impact of economic policies.