Reply to post: Re: Knee Jerk

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Re: Knee Jerk

And what is the social cost of firing people without any safety net? Try to put yourself in their shoes...

In a country that has a flexible labour market and is growing from recessions faster, they should find it easier to get into another job. So it isn't just a simple decision of strong social safetynet = good - evil-neo-liberal markets (red-in-tooth-and-claw) = bad. There are costs to that stronger welfare state, and it's possible that it works well in the short-run, but over decades makes everyone poorer. Which isn't necessarily a reason not to do it, but is something you need to think about.

In Scandinavia they tend to run their markets pretty freely - and I believe it's pretty easy to sack people. But they also have high taxes and a very strong welfare state, so you've got something of the best of both worlds. More chance of good economic growth, more chance of finding another job, less stress about getting sacked - because you can live off your generous unemployment benefits (that's what all them taxes are for) until you find something else.

Another reason the US grows quicker from recessions is that US business gets a majority of its capital from the markets and investers - rather than from banks (as in Europe). And banks are incredibly risk-averse during recessions - even when the same management take stupid risks during the boom. In the jargon banks tend to be pro-cyclical (they make booms bigger and busts worse). So that makes it harder to say whether labour-flexibility is worth the costs - one of the things that makes economics so bloody annoying to study.

There's another reason for flexible labour markets being a good idea. People hate taking pay cuts. They will rarely do it. You may think this is a good thing, but actually it can be very bad. Because companies who don't have enough work to pay their staff go bust, and that makes recessions snowball and get worse. So if you can't sack people easily, you'll be less willing to hire - slowing growth - but also you'll bend your whole business to surviving the recession and paying those wages - rather than trying to invest in the future and win more work. I see this a lot in the construction industry. During recessions, people "suicide bid". They take jobs at a loss, to keep the company going for another year in the hopes of making it to the next boom. This distorts the market, and risks them going bust anyway , but also means the well-run companies can't get work without suicide-bidding. Then you get whole chains of companies going bust all at once, taking out suppliers, that's what turned the 90s recession in the UK from a normal cyclical recession into a horrible 2-3 year nasty one.

The Eurozone can't survive without more flexible labour markets. Because the Euro causes asymetric shocks to the various countries by its very design. And all having one single monetary policy makes this worse. Then if the governments don't have the ability to counter the wrong monetary policy by deficit spending (which they often don't because they're effectively borrowing in a foreign currency) - the thing that has to take the strain is wages. Wage-cuts can quickly equalise the productivity gap, and help to bring those economies back into equilibrium. But people won't take wage cuts - which is why austerity failed to improve productivity in many Eurozone countries as hoped - and so the alternative is currently their employers going bust. Whereas if they could sack people and make themeselves competitive again, they would survive (paying their remaining staff the same wages) and new companies could risk recruiting the ones they'd sacked because they'd be cheaper.

So this is a bad thing you might say. People have lost jobs and now get less money, even if they do get new ones. But the recession is then shorter, as more companies hire and more survive and more people are in work (if poorer) and so you get out of recession faster and wages can start going up again quicker. Sometimes the policy choice that sounds nice, is so counterproductive that it actually becomes nasty.

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