While there are many reform proposals to reduce European unemployment, little attention is devoted to their political feasibility or their impact on different social groups. In Discussion Paper No. 1223, Research Fellow Gilles Saint-Paul first argues that the role played by labour market rigidities in Europe is best understood as political, in the sense that they help to build consensus within the 'core' of society, at the expense of a 'periphery' of politically and economically excluded individuals. He then examines why it is politically difficult to enforce labour market reform, and concludes by suggesting various strategies for its implementation.

The author repudiates common normative arguments in favour of rigidities, such as their compensation for other market distortions or redistributive functions; instead, he highlights their political advantages. He offers reasons why, despite frequent calls for liberalizing European labour markets, reform may be politically difficult to implement. These reasons are: first, even if unemployment is a painful experience for a large number of people, these people are a poorly organized minority, and thus unlikely to influence political outcomes; second, the gains from the reform may be unevenly distributed; and third, market reforms are likely to benefit an 'extreme' coalition of social groups that only shares one single interest for increased flexibility, but has diverging views on all other related issues. The paper concludes by discussing the following strategies for successful labour market reforms: side transfers, appropriate timing of reform activities, liberalization 'at the margin' and the redistribution of property rights.

Reforming Europe's Labour Market: Political Issues
Gilles Saint-Paul

Discussion Paper No. 1223, August 1995 (IM)