Thought for the day: redefining flexibility

from Merijn Knibbe

Unemployment in Norway is 3%. Unemployment in Spain is 20%. This difference is remarkable, even exotic. Why did the Norwegian labor market do so much better than the Spanish one? Did the Great Financial Crisis pass the vikings by? To the contrary. The Norwegian economy – or at least the Norwegian labor market – was hit even harder than the Spanish one. The total number of hours worked declined even more than in Spain which, as Spain was one of the countries which was hit hardest, is astonishing.

So, how is it possible that the labor market which, of all European countries, took the hardest hit has to lowest unemployment of Europe, while Spain has the highest?

The answer is: flexibility. But in this case ‘another kind of flexibility’. Generally, economists tend to equate ‘flexible labor markets’ with USA style ‘easy fire and (so they hope) easy hire’ policies which are supposed (despite the dismal post 1999 job creation record of the USA) to increase the number of jobs. But in the Norwegian case, not the number of jobs, but the number of hours has been flexible (see graph below from Andersen et al). 

One of the hallmarks of the GFC has been that in some countries declining demand led to an increase of firing and a decrease of hiring, with rising unemployment as a result. Spain is an extreme example (see graph below). In some other countries, the problem was solved by decreasing the average number of hours worked. Norway is an extreme example. But in Germany the average number of hours also decreased so much that the number of people at work actually increased! It’s also interesting to compare Canada and the USA.

I do not say that Spain should have followed this strategy: circumstances in Spain differ quite a bit from those in Norway, though it’s indeed weird that the average number of hours in Spain in fact increased a little. This might however be due to the severe crisis in construction.

I do say that, considering the Norwegian success, it might be useful for economists to pay more attention to flexibility, viking style. And not just because of the Norwegian example. It’s not the first time something like this happens. During the last centuries there have been several episodes were the relentless increase of labor productivity which is so characteristic of modern economic growth gave rise to  ‘backward bending supply of labor’ and wasn’t used to increase wages but to enable the eight hour working day (after World War I), the five day working week (after about 1960) and paid vacations (after World War II). The Norwegian example might be another episode (and isn’t ‘bending over backwards’ the proverbial phrase for flexibility?!).

Graph 1. Change in employment, hours and people.  

 

Technical remarks: this graph probably shows relative changes with the average change rescaled to 1, with each country as one observation. The authors so not state this in a precise way. They also do not state the time period, which is probably 2008-2009 as the large and fast 2010 increase of Danish unemployment is clearly not included. The text of the article contains by the way some arithmetical mistakes. 

Source:  http://www.voxeu.org/index.php?q=node/6332

This leaves us with the question why the people who published this graph (Torben Anderson, Nicole Bosch, Anja Deelen and Rob Euwals) did not see this elephant in the room and restrict themselves to some cosy observations on the Danish labor market. An answer can only be tentative. But epic changes are not the only thing which they do not see.  They assume that the flexible Danish labor market works quite efficient and effective – but their graphs do not show this. Also, they forget to mention that flexibility does not seem to be much of an asset during a crisis – Danish unemployment increases at the moment not only faster but also longer than German, Swedish, Belgian, Dutch, Norwegian, Swiss or Czech unemployment, to mention some more or less neighboring countries. But that may indeed have little to do with the flexibility of the labor market – they also miss the ‘internal devaluation’ hippopotamus next to the elephant. Why aren’t they able to read graphs, why don’t they grasp the idea that there might be a connection between the dismal performance of the Danish labor market and the well known fact that the Danish currency is overvalued, why do the miss out on the opportunity to make a historical analysis?

My idea is that this it’s their education as an economist. They are versed into a kind of a-historical economics which prevents them from seeing the real world outside their stylized market models. Lack of knowledge of the history of labor and economic growth as well as a trained inability to discuss the results of their models against the background of the general economic and political environment makes them shortsighted. But that’s just an idea.

P.S. – the ‘backward bending supply curve of labor’ of course indicates that a forward bending curve might be as much of a solution to retirement and pension problems as the increase of the de facto retirement age, just like a decrease in unemployment.

T.M. Andersen, N. Bosch, A Deelen and R. Euwals, ‘The Danish flexicurity model in the Great Recession’, http://www.voxeu.org/index.php?q=node/6332On hours and productivity: H.J. de Jong, Catching up twice. The nature of Dutch industrial growth during the 20th century in a comparatie perspective, Jahrbuch fur Wirtschaftsgeschichte Beiheft 3 (Berlin 2003).