Christopher Pissarides (2011) - The Future of Work in Europe

When I received the kind invitation from Countess Bettina Bernadotte to come and speak at this meeting, I correctly guessed that I would be following either Diamond or Mortensen or both. Because what I learned since the Nobel Award is that in Nobel terms the sequence is determined the sequence is determined either by age or by alphabet, and I come third in both so... I also correctly anticipated that the first speaker would be talking about search, unemployment, using data from the United States, so I decided to differentiate myself by talking about employment and data from Europe. Not only Europe as a whole, but from the sustainable group of countries known as the Eurozone and that’s what you’ll be seeing here. I’ll begin with the employment themes. Now, employment in Europe, as you know, has been a constant theme of labour market research and European leaders have attached a lot of importance to the employment record, you know, how many people are in work. They have targets which go up to 70 % for men, 50% for men over 55 and so on. That was more than ten years ago when they fixed those targets, and European countries, especially the Eurozone are still not quite there. Now, a lot of the recent work on employment in Europe is comparing performance of Europe and America. And there are reasons why we should be doing that. That’s partly because United States, being the leading nation in terms of economic and technological development, it leads the way in the creation of jobs, of new types of jobs, developing new sectors of work in the theme of Silicon Valley, for example. So by studying what is happening in employment trends in America and comparing what we have over here in Europe, we could learn a little bit about the future of work in Europe. But the other reason is that had we done the same things that they did in the United States, then we would have satisfied the targets that were set in 2000 and since then at the European summits. In other words, we would have had the preferred percentages of work, we would have had high tech jobs, you know, what you see in the final bullet point there, whereas we haven’t done that, and that’s why we’re still a bit behind. So what I am going to focus on is the comparison of the Eurozone with the US. Now, Europe 15, the sort of old members of the European Union, of course we also have data on that. There’s sort of two countries that are in Europe 15 but not in the Eurozone, that are of a relatively big size, Britain and Sweden, and I’m going to leave them out of this group of countries I want to look at, because they have some distinct characteristics that puts them apart and I will come back in fact and say something about Sweden in particular, about employment in Sweden. And I am going to sort of take a brief look at the various aspects that concern employment. Now, first, I’ll show you a graph which shows the hours of work per person employed in Europe and America. From now on, I should say, when I say Europe I mean the Eurozone, I think it’s ten countries are in the Eurozone, something like that. And you also see the employment record of these two continents maybe I should say. The blue top line is employment in the United States, the green line below is employment in the Eurozone. In 1977, when reliable data by sector began, we were more or less at the same level, we’re at about 70%, that is also the target of course in Europe currently. Then in America employment has been increasing, mainly because of increased participation of women. In Europe it’s been decreasing until about 1990 when it started increasing again. Where the biggest contrast is though, is in the hours of work per person employed, where in the United States there has been a small decline. In 1977 they used to work close to 36 hours a week. Now they are working 34,5/35. But in Europe we also used to work close to 36 hours a week and now we’re working about 31 hours a week. That’s the biggest contrast between that we’re taking. I think, to summarise here, the biggest contrast is, if you look at the figures overall, it’s that there are more women coming into the labour force in the United States, they have been coming for a long time and each person in the labour force in the Eurozone is working less and less. And that’s mainly come about through longer annual leave, whereas in 1977 we used to take about two weeks annual leave both here and in the States. In the States they still take more or less two weeks a year, Europe is now six weeks a year that we take leave. Unless you live in France, of course, where the duration of the working week has come down as well. Now, because of those changes, we created a big gap between the US and Europe, and of course we also created a fairly sizable gap between the targets that European leaders have set and where we are. I’ll skip that except to say that the gap currently but not historically, the gap in hours is, half of it is explained by persons, that there are more persons employed in America and half by hours of work per person. It’s not very interesting though. I’ll show you the, I mean I’ve been talking about the Eurozone as a whole, here is a breakdown of all the countries that we have data, and you can see where the failures are. The red lines is the United States, Europe 15 and Eurozone. The failures, as you can see, are right at the end, the new members of the European Union, Hungary, Slovakia, Poland and some of the old members that tend to be in the south, like Greece, except for Belgium, actually. I think Belgium, if you look at the economy of Belgium and regulation, it behaves exactly like a Mediterranean country, except that it doesn’t have the Mediterranean, so it seems to be getting the worst of both worlds actually. At least, when things go really badly in Greece, they all go to the islands and they forget about the economy, which is what happened in August. That is why the riots stopped. But in Belgium where do you go? And then there is Italy, Spain and so on, failing to satisfy targets, okay. Now, first point I want to make about the future of work and how we can improve things, it’s really summarising this graph here. I mean, I call it work sharing because what I do here is to see if the number of hours of work that each person works, influences the overall employment rate. Now, that’s very intuitive of course, you know. We’ll say, well, you know, if everyone of us was to work two or three hours a week less, then obviously we would need to bring more people into work. But economists did deny that many times in the past. They said, the hours of work you work have nothing to do with employment. In fact you do see a correlation here, Korea is always an outlier when it comes to work, because they work so hard in Korea. They work, well, here the average comes out to be about 46 hours, the average is 46 hours, you know, which is incredible. But the other thing, maybe the next slide in fact explains that a bit more. The other thing that you will see there is striking, I want to point out here, if you see the country there, GRC on the right down, I don’t know if you know this here, is Greece. And I’m going to compare it a little bit with the Netherlands, which is up here, see, NLD. Now, you see how completely apart those two countries are, you know. When you look at employment rates, for example, Greece is somewhere around under 55%, Netherlands had about 75%. But what’s happening in these countries? You know, Netherlands meets the EU targets comfortably. In fact, now if you ask – well, these two countries are, I should say they’re about the same size as well, about ten million people each, two small countries within the Eurozone. I think if you asked a sort of typical European now: Show me one country that is your kind of shop window, why should I think the Eurozone is a good idea? They will probably show you either Denmark or Netherlands. And if they ask you: Show me a country that’s been doing really badly and why the Eurozone is a bad idea, they’ll probably show you Greece, well, they might. And yet, when you look there, you know, the Greeks actually work more hours per year than the Dutch. The Greeks work 1.135 hours per year, per person in the age group, the Dutch work 1.066 hours. Easy to remember because it was the Battle of Hastings from what I remember in my British history. The reason of course is that when a Greek goes to work he stays to work much longer, and I say ‘he’ because not many women go to work in Greece, because men just leave their home and stay at work all day, all evening, so someone has to stay home and do the work at home, I guess. And the reason of course for that, if you look at the policy, you know, is that an important issue and should we do something about policy? Well, it is an important issue because the reason that we see this difference is that in the Netherlands part time work is widespread and it helps women a lot more when they come into the labour force. In Greece part time work is both highly regulated and part time workers are not well treated by employers because they cost too much. There are a lot of fixed costs of work. So one way to move forward, to improve the labour market performance of the southern countries, in this example Greece, is not so much to find ways of encouraging more, increase overall hours of work, but find a way of making it easier for employers to offer part time employment or what they call a-typical employment, to attract more people into work and do more work sharing, as it were. Okay, let me now change topic and move on to the distribution of employment, and in particular which sectors are creating jobs. And what I’m going to do is to look behind the aggregate figures and see where the biggest failures are in Europe and ask the question: Is that because of taxes or regulation? And in particular the question is: Does Europe tax too much and does it push work to the home or to self-help rather than in the market? Now, here I’m showing you a decomposition of the economy into six or seven, seven sectors rather. I mean, it might look complicated there and seem, the acronyms below may not be very easy to read. What I want to draw your attention to, though, is that - this here is the gap between United States and Eurozone, and of course the focus will be on these three sectors here, where the biggest gaps are. It’s about a hundred hours a year, as you can see there. The other four sectors, which is public administration, manufacturing is the brown line, agriculture and community services. We’re more or less at the same level. So the main differences are in these three sectors I pointed out, and I classified the sectors in the following way. The first one is trade hotels and restaurants, they’re mainly services provided directly to the public, the biggest sector in the first one is retail trade, the biggest employment sector is retail trade. The second one is finance/insurance/real estate and this is mainly employment where it’s business to business provision of services. The final one, sort of health and education, which is mainly sort of service for self improvement, you know, we get better educated or better health. Now, in the second one, in finance/insurance/real estate, you might think that the biggest gap, or at least the growth of the gap recently, is in computing or finance because so much, there is so much finance going on in the United States. In fact that is not true, the biggest difference between Europe and America in that sector is in the host of jobs that are completely unspecified in the statistics. It’s usually called ‘business services, not elsewhere classified’ and that would include accountants, expert advisors, outside people who have brought in the business, going out to get help, whereas in Europe a lot is done within the company and it’s done by the same people where they switch jobs from one to the other. There is much more specialisation in the States in business with a lot of outside work being used. And here you can see the gaps. Now, this first column is, it says real estate etc, but in fact what drives it is the business services that I just mentioned. And then the second biggest gap is in education, health, finance, retail, hotels, restaurants and catering, maintenance of motor vehicles and wholesale trade, where America has been a lot better than Europe in job creation. Okay, let me give you an evaluation of the figures you’ve just seen. Now, about one third of the overall gap is in sectors that have home production subsidies. I’m going to talk a little bit more about that, but it’s about health care, you know, for example, if you need, if you’re not well you might call the nurse to look after you, you might go and see a doctor or you might stay home until you recover if it’s not a serious illness. That’s what I call home subsidy. You might stay home and ask your partner or your children or someone to come in and take care of you or your might call a nurse or you might see a doctor. Retail trade, again I’ll talk a little bit more about it. You might go to a shop that has lots of assistants, you get served quickly, you leave. Or you might go into a shop that doesn’t have many assistants and you line up for hours to get served. Same for hotels and restaurants. You eat at home or you go to the restaurant, motor vehicle and maintenance, you spend hours trying to sort out why your car wouldn’t start in the morning or you just call an engineer and he comes and does it for you. Now, another third of the gap is explained by business services which I explain is mainly finance, accountants, consultants, financial advisors and so on. And the final third is in education and specialised health, like hospitals. They are more or less the same, it is about a third each one that the gap is there, so when we’re talking about job creation then those are the cases that you should look at. Let’s first look at market home substitution. Now if that’s important in explaining why there aren’t enough jobs being created in Europe in these sectors, then what we should be looking at mainly is, is childcare: Why do we look after children at home in Europe? And then retail trade: Why aren’t there more retail assistants in Europe than we have? Now with retail trade, regulations like minimum wage are extremely important because retail assistants usually are paid, get paid very low, very little. And then that probably applies also to motor maintenance and fuel sales, hotels and so on, but it’s mainly retail trade. Now, how does this work? I mention it because some of you may not have come across before. Now, households, you know, people spend their time in a variety of ways and the most convenient way of dividing this here is into three types of users. One is leisure, leisure time - or leisure if you like, for American colleagues – where what we define as leisure time is time you spend, that you actually enjoy the time you spend. Like if you’re watching television, you’re enjoying your time watching television. Or if you are talking to a friend, you’re enjoying the time that you’re making that conversation. And that should be contrasted with what you might call home production, where you are doing things for your own benefit at home or outside the home, where you don’t like the time that you spend doing it but you like the output of that good. And shopping is like that, you know like, most people don’t enjoy shopping as such, what they enjoy is the consumption of the goods that they buy. Same goes with cooking, you know, you don’t enjoy cooking, standing in a hot kitchen, but you enjoy the food if you’ve done a good job. So that is home production time. Then, other tasks of course, these are the things that we go and buy in the market, you know, you work in the market for a wage. That’s a use of your time, which is market use. Now, a lot of the tasks that are about home production, like shopping and cooking, they could be marketised, in other words rather than doing them yourself, rather than you spending your time doing it, then you let someone else do it and you let someone else do it and you buy the product which is close enough to what you have done. Rather than cooking at home you could go to a restaurant and eat, or you could ask a chef to cook for you and bring you that home, a caterer to bring it to your home. And that’s called the marketisation of work. Now, the claim that we make here - and I should say that this work followed the rather controversial short paper that Ed Prescott has written a few years ago - the claim made is that if you tax market work a lot, then people will switch their activities from the market to the home. They will marketise a lot less, you are going to do your own gardening, you are going to mow your lawn yourself, you are going to go to a shop like IKEA that doesn’t have assistants and you stand there for hours to buy your furniture, and you have to carry them on your shoulders maybe, and when you think you’ve succeeded and you’ve found what you want and you go to pay, you see a line that extends up to the end of the wall and you spend another hour doing it. Alternatively, I guess you may know of Harrods, you know, you could go and buy a similar thing in Harrods and you are in and out within fifteen minutes but you’re worse off, at least three times as much. That’s called marketising that time, the time that you spend queuing up in Ikea, you’ve given it to the successor of Mr. Al Fayed. I don’t know who actually bought Harrods from Mr. Al Fayed, but I know he doesn’t own it anymore. Now, if we look at total work. Now, here I’m adding market and home from time use surveys, then there is a lot of variation. I don’t know why Portugal comes out as the most hard working country with data, I’m assuming that there is something wrong with the survey, but there isn’t. I have checked it and double checked it on our Portuguese colleagues. The other countries are not so much of a surprise you know, like Japan, Sweden, Australia, Canada, United States, work a lot harder than Germany, Finland, France, Belgium and Netherlands, which are at the other end. The countries that are missing from here haven’t done a time use survey, so I can’t compare with Greece, Poland and the other countries that were at the low end before. Now what’s interesting, though, is that even within this context of total work, countries marketise differently, this is the share of market hours of all the hours of total work. The countries are marketised most, that do most things outside the home are the Asian countries, Japan and Korea. Countries that marketise less are Italy, Germany, Belgium. I was surprised to see Germany there. I’m not surprised to see France and Italy because they do like doing things at home, like especially child care. In fact, the biggest contrast between Italy and Sweden, which should be to the left, marketising a lot more, Denmark and all that, comes out in a recent survey that I’ve seen about asking young mothers whether they would trust their children to a child care centre outside, even if you subsidise them, of course the Swedish always, and the Scandinavians generally said I wouldn’t have my child be looked after by anyone else because the state is doing such a good job providing childminders outside. And when they asked the Italians they said I wouldn’t trust the state to look after my child, my mother is much better at this job. And therefore they do the childcare at home. That’s what explains the biggest difference in marketisation that a lot more things are done at home in Italy than in Denmark for example, or Sweden. In Belgium there is very little work anywhere, either market or home. Now, here is a sort of a general picture of ‘Does taxation play a role in the marketisation of work?’. This is a claim that Ed Prescott was making, for example, and the answer is that it seems, seems so. Countries that tax more heavily, which is the left figure, work less, take more leisure. That’s the way you should read the left feature, they spend more time watching television, for example, or talking to friends. In addition to that, countries that tax more, marketise less. They do more work at home. I mean, there are one or two outliers, but the whole trend is like that, you know. You can see on the marketisation graph, for example, you see that here, these are countries, Sweden and Finland are countries that tax a lot because this is one minus the tax. And they marketise very little, they do a lot of things at home. But then look at Japan, Korea, United States, they tax much less and they do things in the market rather than at home. Okay, that completes the first third of where job creation would be. The next one is in business services. And business services, again, there are a lot more business services being created in the United States. Here the main difference is that in Europe our campaigners seem to be doing a lot of things that could be done outside. They do it internally from the same people. They don’t use specialised advisors or accountants or anything people might do. You know, the manager of a small company in Europe might do his own accounts or his or her own tax returns, and that’s where we fail here. And I suspect again here the reason is that it’s not so easy to set up companies in Europe, there is a lot of product market regulation. If you look at the OECD index of product market regulation, here, there is a lot of product market regulation and regulation of small companies in Europe than there is in America, and maybe that is why we’re not setting them up. So again here you could say that it’s regulation of the business environment that is stopping more job creation, that will create these additional businesses. And finally, the third sector, which is education and health. Now, here it’s our biggest failure, we’re going to talk about this in the panel after lunch as well, because we have ageing populations and in America there’s been a lot of growth of jobs, especially in the health sector. In Europe there has been very little growth of jobs in the health sector, despite the fact that we have a more ageing population, and of course the main feature of these jobs in Europe is that they’re mainly funded by the State. Health is mainly nationalised, education is almost exclusively nationalised. So if we are going to pay for creation in these jobs, then we have some very difficult decisions to make and here is where I said that Sweden does things differently. What you see there is some contrasting countries. Like in Sweden for example, taxes generally are very high and that’s why you saw that low marketisation of activities like retailing and hotels and restaurants, you know. I mentioned IKEA before and it’s not a coincidence that IKEA is a Swedish company. How can you find a way of minimising the number of employees and getting people out to buy and, you know, letting them queue. But the other feature of Sweden is that a large fraction of that tax revenue is used to create jobs in health and education, and as you can see, it outperforms even the United States in job creation in those sectors. Then the United States is a much freer economy, both in education and health and you can see a lot of job creation again there. The Eurozone is the other extreme where it doesn’t encourage so much the private job creation in these sectors, but at the same time it doesn’t subsidise them very much. So it’s a really bad performer, as far as job creation there is concerned, whereas the United Kingdom, and I thought I should mention one of my two countries here, the United Kingdom, at least since the 1980s there has been a lot of encouragement of private job creation, both in health and education, but at the same time subsidisation is continuing at fairly high rates and you can see that it’s doing a fairly good amount of job creation in those sectors. In fact, around early 1980s, the UK and the Eurozone were at about the same level in the job creation, so this jump in the red columns that you see is one that’s taken place since the liberalisation and the encouragement of private job creation in these sectors. So if I should conclude, you’re probably thinking that I’m depriving you of your lunch but don’t worry, there isn’t much left to go. In terms of our targets that we set in Europe, we’re still lagging behind America. Had we done the same as America, we would have satisfied our targets, it seems that taxation and regulation, and especially at the lower end of the jobs market, is affecting the job creation. I should say that most of the recent research on this has focused on the market home substitution between Europe and America, the retailing example that I mentioned. But that accounts maybe for about a third of the gap. We really need new models of employment in business services, you know, whether you provide the business services internally or externally and why and what’s the difference and how does regulation affect this job creation in the business sector. Then we’ll be able to account for the second third in our failures in job creation over here, and finally, I shouldn’t say too much about that because we’re going to talk about it after lunch. But finally, the final third in the gap is sectors where in Europe we rely a lot on state financing. We’ve got a lot of debts as well and we have to come to terms on how are we going to move forward in those sectors and we haven’t really done that yet. Okay, thank you very much. That’s the end.

Christopher Pissarides (2011)

The Future of Work in Europe

Christopher Pissarides (2011)

The Future of Work in Europe

Abstract

Employment in Europe is still behind the targets set by European leaders more than ten years ago. Although in some countries the targets of 70 per cent employment rate for men and 60 per cent for women are met, in others they are not likely to be met in the near future, especially for women. Employment rates for the over-55 year old are also too low, compared with the objectives. With an ageing population and still high unemployment rates, questions arise whether we are entering a new era of low employment rates, high taxes to finance increasingly expensive pensions and high unemployment.

Yet when comparing European employment patterns with US patterns, and when looking at trends, it emerges that Europe is still behind America in the creation of jobs in business services and in the health and education sectors. Health and education in Europe is largely funded by governments, and this might explain why there is restraint in the creation of more jobs. The fiscal costs might be too high for voters. Business services need to operate in a flexible environment, because in a regulated market firms might prefer to service their own business internally. The presentation will review the work patters in Europe and compare them both across Europe and with America, and reach conclusions about the type of jobs that can be created in Europe to satisfy the overall employment objectives of the Union.

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