“Structural Reforms” and Unemployment

Philip Arestis and Malcolm Sawyer

There is little doubt that the “fiscal compact,” which has replaced the Stability and Growth Pact of the Economic and Monetary Union, reinforces an already-established neoliberal perspective on macroeconomic policy—with the emphasis on balanced budgets and an “independent” central bank only concerned with price stability (the latter to be achieved through interest-rate manipulation).

The perspectives on labour and product markets were not so clear-cut initially, but recent developments have seen a distinct shift in the neoliberal direction. There had long been calls from institutions such as the European Central Bank (ECB) for “structural reforms,” “liberalisation,” etc., alongside fiscal consolidation. Now, the Treaty on Stability, Coordination and Governance imposes, for any country subject to an “excessive deficit procedure,” that it “shall put in place a budgetary and economic partnership programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of its excessive deficit” (emphasis added).

“Structural reforms” are usually interpreted as a euphemism for deregulation, reduction of union rights, etc. The term is not actually defined within the Treaty. However, there can be little doubt as to its meaning. For example, Mario Draghi, President of the ECB, stated that the needed reform of the labour markettakes different shapes in different countries. In some of them one has to make labour markets more flexible and also fairer than they are today. In these countries there is a dual labour market: highly flexible for the young part of the population where labour contracts are three-month, six-month contracts that may be renewed for years. The same labour market is highly inflexible for the protected part of the population where salaries follow seniority rather than productivity.” The European Commission President, José Manuel Barroso, argued that the European Union member states “should now intensify their efforts on structural reforms for competitiveness.” He specifically highlighted the need for comprehensive labour market reforms as “the best way to kickstart job creation” (Press Conference, Brussels, 29 May 2013).

Would a combination of “structural reforms” and “fiscal consolidation” bring economic prosperity? This is a relevant question, and in our previous blog post we argued that the latter will not. What about the former, though? Will it bring prosperity and jobs? It is treated as obvious, by neoliberals, that de-regulated labour markets—reduced job protections, more “flexible” (lower) wages—will bring more jobs. If that were so, however, then reducing wages to close to zero should bring a boom. The difficulty with that is immediately apparent—if wages are very low, who buys what is produced? Further, is it really the case that for workers to be engaged with their work and well-motivated, the lower the pay the better?

There is now a great deal of evidence (some of which we summarise in Arestis and Sawyer (2013) Chapter 6) that the lower the pay the worse, not the better. A couple of further examples make the point. Baccaro and Rei (2006) summarise their empirical results as follows: “[V]ery little support for the view that one could reduce unemployment simply by getting rid of institutional rigidities. … Changes in employment protection, benefit replacement rates and tax wedge do not seem to have a significant impact on unemployment” (p. 150). Vergeer and Kleinknecht (2010): “Superior growth of labor input in flexible Anglo-Saxon economies is not due to superior GDP growth. Over a long period (1960–95), it has been due to a lower growth of labor productivity when compared to ‘rigid’ European economies. Only after 1995, the picture changed as the ICT boom enhanced U.S. labor productivity growth. At the same time, several European countries experienced a worsening labor productivity performance as they gradually engaged in wage-cost saving flexibilization of their labor markets.”

Policies designed to reduce wages will likely increase unemployment—particularly when such reductions are taking place in a range of countries. Evidence supports the view that economies are wage-led rather than profit-led, and hence that lowering wages would reduce demand and raise unemployment (see, for example, Lavoie and Stockhammer (2014)). Lower wages in a country may boost exports; but in a relatively closed economy such as the European Union, that effect is likely to be small. We can share the view of Capaldo and Izurieta (2013): “[P]ursuing labour market flexibilization with the aim of increasing employment via export-led growth is bound to fail, especially if fiscal austerity prevents government spending from picking up the slack in global demand” (p. 23).


Arestis, P. and Sawyer, M. (2013), Economic and Monetary Union Macroeconomic Policies, Houndmills, Basingstoke: Palgrave Macmillan.

Baccaro, L. and Rei, D. (2006), “Institutions and Unemployment in OECD Countries: A

Capaldo, J. and Izurieta, A. (2013), ‘The imprudence of labour market flexibilization in a fiscally austere world’, International Labour Review, Vol. 152 (2013), No. 1

Lavoie, M. and Stockhammer, E.(eds.), (2014), Wage-led Growth: An equitable strategy for economic recovery, Basingstoke: Palgrave Macmillan

Panel data analysis’ in W. Mitchell, J. Muysken and T. van Veen (eds.), Growth and                Cohesion in the European Union, Cheltenham: Edward Elgar Publishing Limited.

Vergeer and Kleinknecht (2010) Vergeer, R. and Kleinknecht, A. (2010), “The Impact of Labor Market Deregulation on Productivity: A Panel Data Analysis of 19 OECD Countries (1960–2004)”, Journal of Post Keynesian Economics, 33(2), 371-407.

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  1. […] Debunking the Idea that “Structural Reforms” Reduce Unemploy Posted on January 16, 2014 by Yves Smith By Philip Arestis, Director of Research at the Cambridge Centre for Economic & Public Policy and Professor of Economics at the University of the Basque Country, and and Malcolm Sawyer, Professor of Economics, University of Leeds. Originally published at Triple Crisis […]

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