The good and the bad flexibility
Jean Pisani‐Ferry
One of the striking features of the current crisis is the extent to which companies have reacted in step with
each other. World wide they are responding at the same time to the same information, and indicators show
perfectly parallel expectations.
Except on one point – employment. In the space of a year the unemployment rate has climbed eight points in
Spain and six points in Ireland but has remained practically unchanged in Germany and the Netherlands, and
has only risen by one‐and‐a‐half points in France.
In part these differences of course reflect the uneven severity of the recession – even if developments have
been simultaneous, the degree to which growth has gone into reverse varies from one country to another. But
this explanation does not apply either to Germany or to Spain. Germany is at the same time one of the
countries which has seen the steepest plunge in output and where the labour market has suffered the least.
And in spite of the property crisis, Spain is not among the countries with the biggest drop in GDP.
The key to this paradox lies in the way employment markets have adjusted. Spain is the world champion of
fixed‐term contracts. Following the Franco era, which had witnessed the introduction of legislation highly
protective of workers, the labour market was made more flexible at the margin through the creation of fixed‐
term contracts, which today make up one third of all labour contracts (as against less than 5% in the US).
More than anywhere else, such contracts have become an established way of life in Spain. Though not
equitable, this situation was tolerable as long as the boom lasted. But as soon as the cycle flipped, businesses
put a stop to temporary contracts and unemployment leapt.
On the other hand Germany has since last autumn been making huge use of Kurzarbeit, or short‐time working,
which provides leeway to adjust annual working time downwards. The company cuts monthly wages in
accordance with hours worked and the government makes up two thirds of the loss incurred by the worker.
This form of adjustment is often part of German collective bargaining agreements, and has been given a push
by the stimulus plan.
So both economies are flexible in the sense that companies are adjusting their employment levels and
reducing their costs, but they are going about it in very different ways. Spain is putting the burden of
adjustment on young people and the less qualified, whereas Germany is relying on flexible working hours and
spreading the social cost of reducing them.
There are limits to contrasting the two models. In Spain, the construction sector will not recover for a long
time and preserving jobs there would be pointless. And in Germany, while a temporary reduction in working
time will cushion the shock for a few quarters, it is clear that unemployment is now set to rise considerably.
But even if the contrast will appear less stark, it will not disappear.
These collective choices are not only to be distinguished by their social impact. They also risk having different
economic effects. The priority for employment policy in the immediate future will be to ensure that the
unemployment triggered by the crisis does not lead to a permanent loss of a part of the labour force. The
danger is great, as it was precisely this which happened in Europe with the early retirers in the 1980s, and
also in most countries which have suffered serious financial crises. Even if they do not retire, workers
spending a lengthy period away from the jobs market lose their skills and their motivation, and can only
subsequently be employed at considerable cost. The OECD has thus estimated that even after the immediate
employment effects have been absorbed, the crisis might entail a rise in so‐called structural unemployment of
one‐and‐a‐half points in the euro area. Significantly, it expects this increase to be much bigger in Spain (more
than two‐and‐a‐half points) than in Germany (half of one point).
The crisis is therefore posing the question of labour‐market flexibility in a new light. In the past, the key was
to encourage reallocation of jobs between sectors and companies and to ensure a gradual return to full
employment. Now, it is a question of absorbing a violent shock while minimising the immediate social costs
and the long‐term economic costs. In both cases, some social models will be seen to be more equitable or more
effective than others.