A policy for centrists who care about the left-behind
The future of western democracies hinges on whether centrist political forces can offer an economic policy in which the left-behind can believe. The failure of mainstream parties to do so for decades created a large enough constituency in many countries for populist movements to gain political power. Those populists do not have real answers to the plight of the left-behind, but at least they treat their grievances as worthy of attention.
How can centrists do the same, in a way that actually makes a difference to the lives of those who support populist movements as a last hope?
Here is one principle to guide an inclusive economic policy at times of structural economic changes from de-industrialisation to globalisation: protect workers, not jobs. When this principle is honoured, things tend to go better than when it is not. And that seems to hold about as universally as any economic rule of thumb can be expected to.
In France, for example, the economics Nobel laureate Jean Tirole criticises President Emmanuel Macron for not pushing this principle far enough in his ambitious labour market reforms. Those "efforts to loosen the country’s labour code ... might help attract more investment", he argues. "But if France truly wants to reconcile the interests of companies and workers, it also needs a different kind of reform — one focused on protecting people, not jobs."
His proposal is that as companies get more flexibility to fire workers, their social security contributions should reflect the cost they put on the unemployment insurance system. This would reward those who keep people employed, and, importantly, incentivise employers to keep workers well trained so they are easily re-employable should they be dismissed.
That would mimic the sort of nimbleness for which the Nordic countries are well known. In Sweden, employers are already involved in private job re-allocation schemes on a sectoral basis, which creates just the incentives Tirole calls for in France, and improves the ease with which workers can move between jobs according to changing economic conditions.
Denmark, meanwhile, is the inventor of the "flexicurity" concept (or at least it came up with the name): the combination of flexible hiring and firing rules, generous unemployment benefits and active labour market policies. The system’s stated purpose is "to promote employment security over job security".
As France and other countries with more rigid employment laws show, the alternative — of protecting jobs rather than workers and employment generally — ends up making those with secure jobs desperate not to lose them and those without unable to get decent work at all.
(There is a parallel here with those who think you need to protect existing banks to protect the banking system — resulting in propped-up zombie banks that do not lend to the real economy, and a banking system that worsens under the burden of low growth.)
It is good for individuals because it allows for workers to find better jobs; and it is good for the economy because it contributes to productivity growth, which in turn makes higher wages possible.
There are misgivings about whether flexicurity is all it is cracked up to be — some claim that Denmark is no more flexible than the typical Organisation for Economic Co-operation and Development (OECD) country. But the system clearly has the desired effect of making it easy to move from one job to another. As one study documents, Denmark had some of the highest hiring and firing rates in Europe in the pre-crisis boom; with almost 25% of the workforce changing jobs ever year. OECD data show a similar pattern for 2013.
(This is surely related to the fact that Denmark has impressively high social mobility in labour earnings — though not in capital income.)
This sort of churn in the labour market is something good economic policy should strive to facilitate. It is good for individuals because it allows for workers to find better jobs; and it is good for the economy because it contributes to productivity growth, which in turn makes higher wages possible.
Thus Bradford DeLong is right to argue, against Dani Rodrik, that the US in the 1990s was rather good at dealing with the fallout from de-industrialisation and globalisation: "The 1990s saw, for the most part, workers pulled into higher paying jobs and occupations by the then high-pressure economy". In practice, even if unintended, the economy protected workers as part of not protecting jobs.
But policy makers should do better than just hope to retrieve the luck of the 1990s. A high-pressure economy is something that is amenable to macro-economic policy and can be counted on to make job-switching easier.
A new study of German companies finds that "churn" in the labour market is up to 40% higher in a boom than in a downturn. This is one reason to think that fiscal or monetary stimulus can increase supply-side productivity, and even productivity growth, permanently.
Another important policy choice is how much to spend on active labour market policies: it is no surprise that Denmark and Sweden top the table of such expenditures, whereas the US and the UK linger near the bottom.
Different countries need different policies. But the goal those policies should pursue is the same. The principle of protecting workers, not jobs, is one that sensible policymakers everywhere should adopt.