European unemployment trends and social dumping - Financial crisis aftermaths -

Author:Simona Mihai Yiannaki

Simona Mihai Yiannaki. Ph.D. MBA, Lecturer in Banking and Finance at European University Cyprus (e-mail:

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The facts are that the OECD, a think tank of rich countries, expects to attain a post 1945- high of 10% unemployment or some 57million people in late 2010.1

In E.U, as in the world, states are pursuing divergent routes in their way out of the 2007-2009 financial crisis. Except for solutions with strong political, economic and social contents, present integration theories in Europe spin around three main ideas: federalism, neofunctionalism and liberal inter-governmentalism, with the later acquiring the leading position2. Strictly related to the labour market, some solutions rely on general politics, others on trade unions, while others on the flexibility of the wage contract, facts which lead to a centre-periphery type positioning among countries. Since the Maastricht treaty did not manage to shift towards the 'flexibility' solution entirely, the Lisbon treaty now in force, with article 28 states that workers may “take collective action to defend their interests, including strike action”, it immediately qualifies this “fundamental right” by explaining that “the limits for the exercise of collective action, including strike action, come under national laws and practices”.

Under this context of law and the need to tackle new involuntary unemployment3 trends as a result of the latest financial crisis, this paper addresses the area of E.U. unemployment in the main regions of E.U. trying to identify differences and common issues for the purpose of forecasting, utilizing the New Classical Macroeconomics theory, modified so that it comprises agents’Page 336 engagement in information acquisition and presenting unexploited gains from trade. The analysed data are mainly from secondary and tertiary information as input sources.

The novelty of the study is that it keeps away from analyses set out by previous financial crises except for the first oil price crisis in the 1974, where the author has identified specific common parts related to the topic of the study.

It looks into the specific scenario settings of the latest economic recession in an integrative way at macroeconomic level. For such purpose, the study redefines the unemployment forecasting procedure focusing on four main E.U. models (the continental, the Nordic, the Anglo-Saxon and the South-Eastern European model), rather than by each country characteristics. The reason is dictated by the minimal error input of the most populated countries in E.U., building up to over 90% of total E.U. population and employed population.

Next, since the main concern post crisis and post Lisbon Treaty remains the ‘social dumping’, the paper reviews the theory of unemployment and social dumping in terms of migration waves and market rigidities, important in productivity determination.

Then, as a spin out of unemployment and as a main concern for corporate and social wage policies, the study looks into the social dumping effect of raising unemployment trend in E.U., providing thus also an analysis of the most recent cases in E.U. (the Rüffert, the Laval, and the Viking cases).

Finally the conclusions relate to the impact of “imported” unemployment on social dumping if any and recommendations regarding possible ways to reduce chronic unemployment and avoid future social dumping effects not through law implementation but rather through practical applications of social work, strengthening of EU social policy that may assist the creation of a high skill and high productivity growth convergence.

1. The European labour market and the premises for forecasting post financial crisis unemployment trends

In order to forecast unemployment, it is recommended to see what kind of unemployment we deal with, specify the terminology employed within this paper, besides the theories used, as well as review some main causes of the concept applied for the financial crisis period and immediately thereafter.

1.1. Terminology

In Keynesian economics, Duffy (2009) declares that involuntary unemployment is represented by the gap between the number of people working when the labor market is in equilibrium and the total number of people available to work. Unemployment is but one symptom of a malfunctioning labour market (Baldwin & Wyplosz 2004, p.429).

The discussion in this paper regards involuntary unemployment type 1, 2 and 3, as mentioned by Lindbeck and Snower (1988). “U1: At prevailing current wages and expected future wages (normalized for productivity differences), the unemployed workers would be better off being employed than remaining unemployed, but they are unable to find jobs.

U2: At prevailing current wages and expected future wages (normalized for productivity differences), some workers are unsuccessful in finding jobs because they face a more limited choice set between work and remuneration than incumbent employees face.

U3: Workers unsuccessfully seek work at real wages that fall short of their potential contribution to society (given the appropriate, feasible intervention) „4.

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Fig.1. The U.S. example of breakdown of population in 2004 as per the Bureau of Labour Statistics5.


Fig. 2. The EUROSTAT statistics for EUO area and EU 276 unemployment rates7.

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Grant, Vidler with Ellams (2003, p. 92)8 help us define the term ‘unemployment’, which indicates that labor markets are not clearing. Some of those willing and able to work cannot obtain a job. The existence of unemployment signifies that a nation shall not be producing on its production possibility curve and so will not be achieving productive efficiency. The extent to which unemployment causes labour market failure is obviously influenced by the number of people who are out of work. Moreover, it is influenced by how long people are out of work. The longer someone is unemployed, the more they get out of touch with the skills needed and the greater the risk that they may quit hoping in finding a job!

1.1. 1 How to measure unemployment

Firstly, Mankiw (2007) writes that it is the job of the Bureau of Labor Statistics (BLS), which is part of the Department of Labor to carry this task. The BLS produces data on unemployment but also on other aspects concerning the labor market once per month. For instance, types of employment, length of the average workweek along with the duration of unemployment. The data under discussion are derived from a regular survey of about 60,000 households – named, the Current Population Survey. Then, the BLS -based on the answers to survey questions- places each adult (aged 16+) in each surveyed household into 1 of the 3 following categories:

- Employed: This category includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business. It also includes those who were not working but who had jobs from which they were temporarily absent due to e.g. vacation, illness, or bad weather.

- Unemployed: This category includes those who were not employed, were available for work, and had tried to find employment during the previous 4 weeks. In addition, it includes those waiting to be recalled to a job from which they had been laid off.

- Not in the labor force: This category includes those who fit neither of the first 2 categories, e.g. full-time students, homemakers, or retirees.

Unemployment rate = (No. of unemployed/Labor force)x 100

1.1. 2 Historical background

“All peoples throughout all of human history have faced the uncertainties brought on by unemployment, illness, disability, death and old age [and] in the realm of economics, these inevitable facets of life are said to be threats to one's economic security”9. Grant and Vidler (2000, p. 22) hold that unemployment did not exist in communist times. All those of working age were given a job. State-owned companies produced not according to demand but in response to orders from the Ministry of Economics. Many firms employed way too many workers by western standards10.

1.1. 3 Other employed terminology

■ Unemployment rate: the percentage of the labor force that is unemployed (Mankiw 2007, p.878).

■ Labor force: the total number of workers, including both the employed and the unemployed (Mankiw 2007, p.875).

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■ Natural rate of unemployment: the normal rate of unemployment around which unemployment rate fluctuates (Mankiw 2007, p.616)..

■ Social: this term derives from the Latin socius meaning, a partner or acting jointly11.

■ Dumping: The export of products at a price below their cost of production.

■ Labour Migration/mobility: labour relocation from one nation to another in search of better wages or other...

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