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to make suboptimal skills investments (too few engineers, technicians, and competent managers). Are employment and social protection practices inhibiting labor participation and efficiency? Yes, by creating powerful insiders with well-protected jobs at the cost of marginalizing others. In the broadest terms, reforms will have to reduce job security while modernizing how income security is provided. In wealthier countries, reduced employment protection can be combined with relatively generous unemployment benefits and social assistance, as long as there are strong incentives and effective assistance programs to return the unemployed to work and to encourage the inactive to participate. Governments capable of administering programs that supplement employment protection legislation with well-designed income support and job search assistance should institute them. But to work well, this “flexicurity” requires high labor force participation rates that are many years away for many in Europe, as well as institutional maturity and fiscal and administrative resources that are out of reach for most. Especially in the east and south, there may be no alternative but to reconsider the extent of employment protection and the generosity of social protection. But all countries should synchronize social insurance for the unemployed with social assistance for the unlucky in order to align incentives for work, as Germany did between 2003 and 2005. Is Europe taking advantage of the greater potential for labor mobility due to economic integration? Undoubtedly, the European Union is the most integrated region in the world, and migration between EU countries is higher than in other world regions. Europe’s aspiration is, however, more ambitious: the aim is a fully integrated labor market with no borders. Against this yardstick, Europe still falls short. Significant challenges to improving labor mobility, even within European countries, remain. Mobility does come with social costs—missing the support of family and friends—that governments cannot easily reduce. But the costs related to education, housing, and health care can and should be reduced. These are some of the features that make the United States the most mobile economy in the world, and Europe can learn without losing its uniqueness. How can Europe attract the best and brightest? A million people emigrate to Europe every year, but less than one in five has more than a high school diploma—and three of five do not even have that. Attracting global talent would require looking closer at successful, demand-driven schemes from the Traditional Immigration Countries—Australia, Canada, New Zealand, and the United States. Immigration policies should focus less on political factors such as family reunification, asylum, and human rights and respond more to the demands of employers and longer-term assessments of skill shortages. Changes in immigration policies need to be combined with reforms aimed at making Europe a good place to innovate, start businesses, and reward risks. Similarly, increased immigration without more contestable jobs and reformed social safety nets could undermine the success of immigration reform. Over the last decade and a half, emerging Europe may have done better than advanced Europe in taking advantage of expanding opportunities for trade, finance, and enterprise. The prospects ahead are bleaker. Demographic shifts threaten Central and Eastern Europe just as much as most countries in Western Europe, which have been reforming labor market policies and can more easily
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