Deregulating Labor Markets in Europe

I take issue with a few of the claims made here about social cohesion.  If you look at a chart of before versus after taxes and transfers inequality, you’ll find that there’s very little difference between the US and European states before government fiscal policy.  What the United States does less of is tax and transfer.  Labor market reforms will (slightly) increase pre-tax and transfer inequality, but there’s no reason to suppose that this effect cannot be cancelled out by more aggressive redistribution if the country so desired.  This is what happens in France and in the Nordics.  In a situation of mass unemployment, with a currency union depriving nations of altering their exchange rates, supply side reforms to loosen labor markets are the only choice.  One can imagine that cheaper labor will lead to an increased velocity of money within the country (more people buying the now cheaper goods and services) promoting a virtuous cycle as well as increased exports.  Given that the pretax inequality must only increase during mass unemployment (so many people making nothing), it seems hard to believe that deregulating labor markets would lead to a significant increase in inequality.

Heavy handed labor market regulation once seemed a great idea.  The vicissitudes of the modern economy, with flexible firms and globalized competition mean the old model of one job (complete with heavy benefits) for life no longer works.  Countries with deregulated labor markets have succeeded whereas those that have kept the old, ossified system have not.  And this holds true no matter the level of government redistribution – whether you’re Sweden (high), Germany (medium), or the US (low).  Neoliberalism rides again.


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