At a CEPR lunchtime meeting on 29 July held to mark the launch of Mismatch and Labour Mobility, Dennis Snower argued that the European Commission's proposals in its `Social Charter' could have severe detrimental effects on the Community's labour markets. Snower is Professor of Economics at Birkbeck College, London, Co-Director of the Human Resources programme of the Centre for Economic Policy Research, and a contributor to the volume. Financial support for the meeting was provided by the UK Economic and Social Research Council as part of its support for the Centre's dissemination programme. The views expressed by Professor Snower were his own, however, not those of any of the above organizations nor of CEPR, which takes no institutional policy positions.

Snower noted that the European Commission's `Community Charter of Fundamental Social Rights of Workers' commonly known as the Social Charter is intended to avoid the danger that `social dumping' will lead to a `levelling down' of social protection in the Community. The Charter's proponents argue that if countries offering relatively low worker protection and benefits enjoy a competitive advantage, entrepreneurs will increase investment in such countries hence creating more firms and jobs at the expense of those offering higher protection. The unemployed will have an incentive to migrate to countries where they have the fewest rights; and average levels of job security and social benefits will fall. The Social Charter is meant instead to raising social provision throughout the Community to the levels provided by the more generous countries. Snower argued, however, that the proposed policy is inappropriate to its stated objectives and can be expected to hurt precisely those workers and firms that it is intended to help. Further, it will reduce investment, create mismatch, and raise the overall level of EC unemployment, particularly in the aftermath of a world-wide recession.

Snower focused initially on the Charter's effects at the microeconomic level. First, if the proposed directives become national law in the EC member states, firms will provide more favourable work conditions to their current employees particularly those whom it would be too costly to fire in any case but they will be discouraged from hiring new people. Hence the Social Charter may be expected to help the the `insiders' established, incumbent workers at the expense of `outsiders' the long-term unemployed, school leavers and temporary staff. Second, the Charter will strengthen the bargaining position of current established employees, because it will increase the costs of laying them off and improve their fall-back position if they are laid off. As a result, they will achieve higher real wages and increased job security. Increased wages will discourage the firm from hiring new recruits and insiders will benefit once again while outsiders lose.

Snower argued that the Community's proposed policies will therefore increase the inequality of income distribution. Over the long term, its effects will be even more pernicious: as insiders retire while fewer new entrants are hired, the insider workforce will shrink; and number of the policy's beneficiaries will fall relative to the number of losers. Measures to finance the increased provision for social security and employment protection will further exacerbate these effects.

Implementing the Charter may also create substantial `mismatch'. Incumbent workers will become less mobile as their jobs become more attractive with more security and higher wages while their chances of getting other jobs will be simultaneously reduced. They will therefore be less likely to move in response to new economic opportunities resulting from technological progress, swings in consumer tastes or changes in raw material resources. Firms will also become less responsive to changes in business conditions, since the worker protection legislation will increase the costs of starting up new firms or closing down existing ones.

Snower then turned to the Charter's macroeconomic implications and argued that its implementation would create unemployment inertia, making economies less resilient in the aftermath of recessions. Measures of worker protection and employment security will raise the insiders' chances of keeping their jobs while reducing the outsiders' chances of finding them. If this year's employment rate is low say, because of a world-wide recession so insiders comprise a smaller proportion of the labour force, next year's employment rate will also tend to be low. Long-term unemployment will reinforce these effects: as the skills of unemployed workers deteriorate and become obsolete, over time they will become discouraged and therefore search less intensively. Even conservative estimates indicate that a successful implementation of the directives following from the Social Charter could nearly triple the time the Community requires to recover from any temporary shortfall in labour demand.

Snower maintained in conclusion that governments aiming to ensure that workers are treated well in market economies should take steps to ensure that their labour is and remains in demand. These may include supply-side measures to increase the mobility of firms and workers and provide incentives for employment, investment and the creation of new firms, so that all citizens of the EC member states can share in the benefits of a buoyant, integrated labour market. Policies such as profit-sharing and apprenticeship schemes which make it more difficult for incumbent workers and firms to insulate themselves from competition may play a particularly important role. The Commission's efforts in deregulation, training, the liberalization of government procurement policies, elimination of exchange controls, harmonization of standards and the removal of countless further non-tariff barriers should enhance firms' responsiveness to business opportunities throughout the Community. This progress in liberalizing Europe's product markets should be reinforced with deregulation and measures to promote mobility in labour markets. Once such labour market activity is `levelled up' across the Community, competitive forces will ensure that social provision follows suit.


Mismatch and Labour Mobility, Fiorella Padoa Schioppa (ed.), Cambridge University Press for CEPR, £40.00/$64.50.