CHAPTER 6
Labor and Government Chapters 2 and 3 focused on the 26 economies in emerging Europe, analyzing their economic links with the 19 countries in the EU15 and European Free Trade Association (EFTA) economies. In assessing trade and finance, the chapters paid special attention to services, which comprise more than two-thirds of the European economy and are believed to be performing worse than in America and Asia. Chapters 4 and 5 shifted the focus to the 27 member states of the European Union. The link between the chapters on enterprise and innovation was productivity, whose pace of improvement is less than satisfactory. Chapters 6 and 7 widen the scope to all of Europe’s 45 countries. The link between the chapters on labor and government is that the population is aging, which provides the strongest imperatives for rethinking the European model of work and government. Most parts of the world have to contend with aging, but Europe must do so with a model of work that might be least suited to deal with the approximately 50-million-person decline in the workforce expected over the next 50 years, much of which will be occurring in the next two decades. Europe’s work model is marked by unprecedented security for those with jobs, relatively generous benefits for those without, and easy pension eligibility. Chapter 6 finds that this model is making Europe uncompetitive. To address this, most countries in Europe have to increase labor force participation and make it easier for younger people to get jobs that “insiders” have secured for themselves. Collectively, Europe has to decide how to unify its labor market and by how much, and how to attract global talent. Labor has become one of the weak components of the European economic model. Finding a better work-life balance has meant that most European governments are about a fifth larger than their peers and that they spend about 10 percent of GDP more than governments in other parts of the world. Much of this difference is due to spending on social protection (pensions, unemployment insurance, and social assistance). Well-organized governments in Europe manage to keep their economies growing despite the high taxes needed to finance this spending; others have begun to stagnate and accumulate debt. Chapter 7 discusses what helps some economies with large governments— such as Sweden and Finland—keep growing. It requires considerable discipline in delivering social services, making it easy to pay taxes and conform with regulations, and allowing enterprises the economic freedom to compete abroad. Others can make governments more efficient by reforming social protection and social services: this should be the long-term objective. But it is not easy to increase the efficiency of governments. In the meantime, chapter 7 reasons that many European governments must shrink. Their ability to consolidate spending during the 1990s—and the willingness of many to do so during the sovereign debt crisis of 2010-11—should be cause for optimism.
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