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Mr. László ANDOR

EU Commissioner responsible for Employment, Social Affairs and Inclusion

Opening speech of the Conference on the future of European Labour Markets

Conference on The Future of European Labour Markets

Brussels, 10 March 2011

Ladies and gentlemen,

It is my pleasure to welcome you to today’s conference on the future of European labour markets.

It is also my pleasure to introduce — and “raise the curtain” for — our keynote speaker today, Nobel Prize laureate Christopher Pissarides.

His Nobel Prize acknowledges work that is not only of outstanding importance to research in economics, but also fundamental to the lives of all Europeans.

The economic fortunes of most people are largely determined by their experience on the labour market. Finding, changing or losing a job are decisive events in life and have a huge impact on the individual’s livelihood and well-being.

Every year around 20% of jobs in Europe are created or destroyed. Depending on the Member State, up to 30% of all workers may be hired or leave their employers every year.

So labour markets do not work on static patterns, with stocks of the employed, unemployed and inactive. They are more like a machine in perpetual motion.

However, there is no "invisible hand" to shift workers automatically from one job to another, so unemployment and vacancies coexist.

Professor Pissarides' theory of search and matching led to a breakthrough in the macroeconomic analysis of labour markets and in the modelling of the individual’s behaviour.

It has laid the foundations for a better understanding of the dynamics at work in labour markets, which is of key importance for policy-making too.

By pinpointing the frictions due to search costs on the labour markets, he has strengthened the case for better-designed active labour-market policies and more effective employment protection legislation.

The European Employment Strategy's focus on labour market transparency and anticipating skill needs is aimed precisely at removing skill mismatches and improving the connection between those outside employment and the vacancies available.

In 2003 the European Commission invited Professor Pissarides to join the Taskforce headed by Wim Kok which sought to refocus the European Employment Strategy.

At the time, the EU faced the challenge of persistently high unemployment on the eve of a major enlargement.

Professor Pissarides' hand is visible in the Taskforce's report "Jobs, jobs, jobs", which highlighted three factors — labour supply, adaptability and human capital. These have shaped the current policy consensus on the importance of skills and policies to balance flexibility and security.

The EU’s Europe 2020 Strategy sets ambitious targets for employment — to achieve an average employment rate of 75% by 2020.

Increasing overall participation and employment implies both micro-economic and macro-economic policies, focusing in particular on young people, women and older workers.

Meeting the 75% target is a considerable challenge given the current crisis, with unemployment standing at 23 million, which is 7 million higher than before the crisis. Youth unemployment rose by 1.3 million young people, many of whom never got a chance to acquire work experience.

Although unemployment did fall slightly at the beginning of 2011 after remaining stable for the previous 12 months, I am very concerned at the labour markets’ slow reaction to the recovery, especially for young people.

There are key challenges facing us — both in the short term, to boost the employability of workers after the crisis — and in the long term, to match the change in skill requirements.

Today's conference has been designed to tackle three topics — matching and anticipation, flexicurity in post-crisis labour markets, and the role of economic policies in fostering a job-rich recovery. The search theory is relevant to all three.

Today’s three panels involve ministers and other policy-makers as well as experts from the academia and from the social partners.

I am confident that the debate will generate ideas on how to move faster towards the employment target.

* * *

Let me say a word about the topics for the panels. The first panel is on policies for matching and anticipation of skills, which is very closely linked to Professor Pissarides' work.

The EU unemployment rate has now been stable for a year at about 9.5%. This is, in a way, good news since it follows the increases in unemployment in 2009 and early 2010. But the longer unemployment persists at the current level, the bigger is the risk that it will become structural. Already today, the figures on youth and long-term unemployment are worrying.

Yet, we have also seen throughout the recession significant numbers of unfilled vacancies. Currently the number is about 4 million.

Whether this is the result of an exceptional process of sectoral reallocation or whether it results from rigidities in the matching of labour supply and demand can be debated.

In any case, on the supply side, unfilled vacancies and ineffectively managed transitions mark the individuals permanently and weigh down unemployment insurance schemes.

On the demand side, the "skill intensity" of jobs is continuing to increase.

By 2020, the European Centre for the Development of Vocational Training (CEDEFOP) expects some 81 million job opportunities.

Jobs employing highly qualified people are projected to increase to over a third of the total.

By contrast, those requiring low or no formal qualifications are projected to decrease to around 15%.

Reducing rigidities and frictions on the labour market is of key importance to each and every European currently looking for a job or struggling to find one that meets his or her aspirations, as well as being an issue from the point of view of labour market efficiency.

People need the right mix of skills and competencies, but so far our training systems are insufficiently responsive. This lack of the right skills is an important obstacle to future growth.

That is why the Europe 2020 strategy calls on the Member States to empower people by investing in skills to meet the anticipated increase in high qualifications needed and the fall in low qualifications. Geography, demography and specific sector needs obviously need to be taken into account.

I would suggest that the first panel consider three main sets of questions:

  • First, what can be done by employment services and other players to improve matching and direct skill acquisition in areas where workers are needed? How can employment services, business and education and training institutions work better together?

  • Second, how important is geographical mobility and how can it be improved through labour market policies?

  • And thirdly, how can we combine the need to increase older people's participation in the labour market with increasing skills requirements? How can enterprises anticipate skill needs better and what can policymakers do to ensure that older people are involved?

* * *

Panel 2 will be looking at the concept of flexicurity and its implementation.

It was thought — in particular in the 2003 "Jobs, jobs, jobs" report — that flexicurity could improve the matching equation by widening the range of contractual arrangements available to the employer, and offering the employee sufficient guarantees and social safety nets.

But, even after the Member States adopted the common principles of flexicurity in December 2007, the impact of reforms has been more temporary work and fixed-term contracts, and more duality on the labour markets.

The segmentation between the well-protected insiders and the vulnerable outsiders has increased. And the less-protected, temporary job-holders have often been those hit by the crisis.

There was a widespread consensus in the 1990s and early 2000s on the need for the Member States to reduce employment protection, which was blamed for introducing rigidities and adversely affecting job creation.

That consensus has grown weaker in recent years.

Professor Pissarides' work underlines how important it is for the right partners to link up on the labour market. Making a match on the labour market, and maintaining it, is something that is worth safeguarding — for example through employment protection.

Job security also bolsters workers' confidence and may therefore boost consumption and productivity too.

Even employment contracts between private agents often contain voluntary firing restrictions — such as severance payment compensation or extra-legal dismissal delays.

In this connection, Professor Pissarides’ recent paper on why single firms offer employment protection is very relevant.

However, in the current recovery, the extra jobs that are being created often involve temporary agency work and fixed-term contracts, offering only slight protection.

As I said on a number of occasions, flexicurity only makes sense when both components — flexibility and security — balance each other and thus set in motion a process that may lead to better jobs, upward mobility and optimal development of workers’ talents.

We need to look into how employment protection legislation can be further reformed to ensure proper balance between employment growth and job quality and to reduce labour market segmentation.

I recommend two issues for consideration by Panel 2.

First, even before the crisis, the number of temporary contracts and jobs arranged through private work agencies rose steeply, even in countries where employment protection has been reformed.

The labour markets did not really benefit from this, despite the short honeymoon when employment increased before falling sharply during the crisis. And job insecurity has increased.

The benefits of the pre-crisis growth have been unfairly distributed and inequality increased in the economy and on labour markets.

So my question is whether the panellists agree that this has a negative impact on the capacity to create sustainable employment. Or was the increase in temporary work inevitable? If we agree that it has been a negative and avoidable trend, how should policy-makers and social partners best address it?

Secondly, the Commission has put forward the idea of a “single” open-ended contract, which would make open-ended contractual arrangements more widespread. The “single” contract would involve a sufficiently long probation period and a gradual increase in protection.

Would the open-ended contract be a good starting point for reducing segmentation and helping young people get into the labour market? And if not, what are the alternatives?

* * *

Panel 3 will deal more broadly with the recovery and with the role of economic policy.

There is wide agreement that the European social model, with its relatively high social protection, has played a stabilising role during the recession.

But despite our robust labour market institutions, the quality of our social dialogue, and our efforts to anticipate labour market shifts, the recovery is, on the EU average, still virtually jobless.

It is a duty of economic policy-makers to avoid the scenarios from previous economic crises, which saw persistent long-term unemployment and high unemployment despite a return to growth in GDP.

Jobless recovery is something we have already seen, and Professor Pissarides' search and matching model helps explain this behaviour.

Unemployment rises faster after an adverse shock than it falls following a positive shock. The reason is that adverse shocks bring an immediate increase in job separations, and thus a jump in unemployment, while positive shocks bring only a gradual fall in unemployment, because hiring is a time-consuming process.

In practical terms, a jobless recovery means losses in human capital, reduced future employability and reduced future pension rights too.

Therefore the Annual Growth Survey, adopted on 12 January, identifies four key priorities for mobilising labour markets and creating job opportunities:

  • making work more attractive;

  • reforming pension systems;

  • getting the unemployed back to work; and

  • balancing security and flexibility.

Against this background, my first question for Panel 3 is:

  • Does the jobless growth merely confirm the severity of the recession, or are more radical labour market reforms needed to restore employment to pre-crisis levels?

However, it is clear that whether recovery will be jobless or job-rich does not depend only on labour market policies.

Employment is also a function of broader economic developments and broader economic policy. That is also why the Annual Growth Survey focuses besides structural reforms also on fiscal reforms and growth-enhancing measures. And it is also why economic imbalances between countries, putting pressure on workers and labour markets, are rightly in the centre of attention.

In fact, the Annual Growth Survey makes a difference between countries with a financial surplus and deficit countries. There is, however, concern that the current weaknesses of the deficit countries will not only mean the recession lasts longer and the rise of unemployment stops later, but the macroeconomic disadvantages will turn out to be obstacles for job creation in the long-run.

I believe therefore that we need to highlight the structural importance of EU transfers in maintaining a growth potential and job creation capacity.

So I would like to ask two more sets of questions to the speakers in Panel 3:

  • First, the ILO promotes wage policies that stimulate income-led growth and reduce poverty. Now, it is clear that wages need to rise in line with productivity to avoid a loss of competitiveness. But how can “deficit” countries become competitive again without weakening the purchasing power of their workforce? And what should countries where wages have for a long period risen less than productivity do? Could this have had an impact on job-creation capacity? Should they adjust or not?

  • The second set of questions is also linked to the issue of labour costs. The Annual Growth Survey asks the Member States to shift taxes from labour to pollution. This could bring a twofold dividend — for the environment and for the labour markets. But is this the right way forward? And how can we help create the necessary political support?

* * *

Ladies and gentlemen,

Academic research strengthens our evidence base and helps us in identifying the good policies and practices that the EU should support. However, there is also another question, namely what are the good policies and practices the EU should support with money. In designing the European Social Fund of the future, it is our key objective to support the best policies and achieve maximum effectiveness of funding. Evaluation of the performance of policies, including in the area of labour market and education, is therefore particularly important.

Because behind the anonymous figures and abstract trends we quote are individual people who are suffering from the direct impact of the crisis and who need well-targeted support.

As Larry Summers said recently, we are in period of "statistical recovery and human recession". Our task is to do all we can to help people through this difficult pass.

The work of Professor Pissarides and his colleagues has provided significant analytical input for the policy debate in Europe over the last two decades and continues to fuel discussion.

The debate should involve all stakeholders at each stage. Only close dialogue between policymakers, the social partners and the research community can take us forward.

Linking up the work of academia and that of institutions and public organisations is vital for sound evidence-based policymaking.

Our main motivation for holding this conference was to provide a venue for debate, from which not only the Commission but also other European institutions and all our stakeholders would benefit. I look forward to your feedback on our analysis and policies.

I will now leave the floor to Professor Pissarides.

Thank you.

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