Labour market rigidities can be useful. A Schumpeterian view

2013 – With the emergence of supply-side thinking in the 1970s, the claim that high (European) unemployment is caused by ‘rigidities’ in labour markets became dominant. The usual suspects making labour markets ‘rigid’ are high minimum wages, high social benefits, strong trade unions, the power of insiders and strong protection against firing. Removal of labour market rigidities tends to weaken the bargaining position of labour and thus can bring down wages. Ultimately, reduction of wages carries the promise of more jobs. Against this, the authors argue that (1) countries with more flexible labour markets have a low-productive and hence more labour-intensive GDP growth; it is highly doubtful, however, whether this indeed results in lower rates of unemployment; (2) that GDP growth does not differ between countries with ‘rigid’ versus ‘liberalized’ labour markets, and (3) labour market rigidities can be useful for the working of what is called the ‘routinized’ (‘Schumpeter II’) nnovation model. Claims about the beneficial effects of removing labour market rigidities tended to be made under the (often implicit) assumption that this would not affect innovation and labour productivity. The authors give theoretical arguments and quote empirical evidence that it does. The next section gives illustrations of some key macro-economic variables over the period 1960–2011 for a group of typical ‘Rhineland’ (‘Old Europe’) countries that are supposed having rigid labour markets compared to a group of Anglo-Saxon countries that have liberalized labour market regimes. Thereafter the authors summarize theoretical arguments of why flexibility in labour relations should influence innovation and labour productivity growth, and we discuss empirical evidence.

Reference: Kleinknecht, A., Naastepad, C.W.M, Storm, S., and Vergeer, R. Labour market rigidities can be useful.A Schumpeterian view. In: Fadda, S., Tridico, P., (eds., 2013) Financial Crisis, Labour Market and Institutions. Oxon: Routledge Taylor & Francis group. (see attachement pdf)

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