A Common Tool for Adjustments in the Labor Market

From an Italian report

An innovative approach is needed to promote and facilitate adjustments in European labor markets. In the euro area in particular, given the absence of the exchange rate most of the effort of the adjustment is borne by employment. 

A macroeconomic stabilization mechanism is needed as countries under tight fiscal constraints may not be able to smooth the cycle and to deal with increases in unemployment in case of asymmetric shocks. Moreover, monetary policy may prove insufficient if the shock is country-specific. 

A common mechanism to mitigate cyclical unemployment and its consequences would represent a feasible opportunity for the Eurozone to make a step forward towards sustainability and to strengthen the social dimension. Moreover, long term benefits would ensue as high levels of unemployment for a prolonged period of time entail a deterioration of human capital, lower productivity and a negative impact on potential growth. A Fund to stabilize the labor market would provide resources to countries experiencing large increases in cyclical unemployment.

 Once established, it would be triggered in an automatic way avoiding complex and lengthy decision making processes. An unemployment insurance scheme could help consolidate medium-term growth by smoothing the adjustment needed in presence of adverse shocks and limiting negative impact on other countries. It would amplify impact effectiveness and positive spillovers of national reforms.

Countries that are not direct beneficiaries will gain from a more stable and prosperous macroeconomic environment. It would be a further sign of the irreversibility of the Euro, with a positive impact on confidence.

An appropriate incentive structure can be built to limit moral hazard and avoid permanent and unidirectional transfers from some countries to others while increasing risk sharing. For example, the mechanism could be triggered by a sufficiently large downward cyclical phase in a country leading to an increase in unemployment.

The activation of the shared resources would be outside the control of national governments. As the mechanism would not deal with structural unemployment beneficiary countries still bear the responsibility of introducing structural reforms in the labor market .

Far from being a shortcut for countries that are not accelerating reforms, the risk-sharing involved would be a driving force behind reforms and towards implementation of coherent measures across different Member states. It could be financed either by earmarking part of the national resources allocated to unemployment benefits or with a fresh common fiscal capacity. Such an instrument could be established without Treaty changes, while building mutual trust and support for Treaty changes when needed.