The Ministry

Is Full Employment a Utopian Dream?

Speech of Jörg Asmussen, State Secretary of the Federal Ministry of Labour and Social Affairs, about Rencontres Économiques d´Aix-en-Provence - What if work were the Key?

It is a pleasure for me to be here with you today and talk about employment as a source of wealth and opportunity.

Let´s face reality first. Talking about unemployment in Europe today means talking about 10 % of the European population being without a job. Unemployment rates are ranging from less than 5 % in Germany to 25 % in Greece and 23 % in Spain.

Youth unemployment in Europe is even twice as high. In April 2015, youth unemployment rate was 20,7 %. This is unacceptably high, with levels of up to 50 % in Greece and Spain, and 40 % in Italy. If these unemployment figures remain unchanged, this poses a threat to the European society. Excluding a whole generation from social participation and income-generation through work, cannot be a Social Model, on no account.

So let me put important things first: The two main challenges in Europe today are:

The unemployment rate, especially the youth unemployment rate has to fall significantly.
Regional economic divergence needs to be reduced to a socially acceptable level.
These objectives cannot be achieved in the short run, and will require a considerable amount of effort in the mid and long term.

Let´s keep this reality in mind when discussing if full employment is a utopian dream.

The paramount question we are striving to find answers to is no less than the question about how a New Social Model for the 21st century may look like. Ultimately, it is about well-being. And it is about what our societies want if it comes to work.

From the economic perspective, work does not provide utility to the individual. In contrast, economists are assuming a working burden, as consumption and leisure are the arguments in the utility function.

In this sense, a utopian dream of an ideal society would probably not be a story of people going to work for eight hours a day, but would rather be about people sitting under a tree, lazing. As labor historian Hunnicut argues in his book: “Free time: the forgotten American dream”, the American dream today is “full-time work and full employment for all”, whereas before the 1960s, people talked about progress in terms of higher wages and shorter working hours. In 1930 John Maynard Keynes suggested that by the mid 20th century we would be working like fifteen hours per week.

So why don´t we just keep on dreaming like this? One simple answer is: people need to work in order to fight against poverty. We are, quite simply, depending on work as a mean to ensure the standard of living.

But it is not simply a matter of income, it is also a matter of general life satisfaction. Work remains an important economic, social and societal anchor. Unemployment and a lack of social participation makes people dissatisfied. To achieve full employment is still the most widely-shared goal.

As such – in my view – full employment is not a utopian dream, but a social objective in order to create wealth and opportunities.

We first need a definition of full employment.

Keynes defined full employment as a situation marked by the absence of involuntary unemployment. A potential worker is involuntarily unemployed, if he/she would accept a job offer at the prevailing conditions, at the actual wage rate in particular, but is not able to find a job. Voluntary unemployment in contrast describes a situation where a person is unemployed, yet jobs would be available in the economy. The conditions – like the wage rate, fixed-term contracts, lack of career prospects – are such that the person decides either not to work or to search for a better job.

Let´s ease some constraints of this definition, and we get to Lord Beveridge, who defined full employment as the number of unemployed workers being equal to the number of job vacancies available. I shall be very brief here, because my next speaker, Olivier Blanchard, knows a lot more about this nexus than I do.

The resulting Beveridge curve also distinguishes between cyclical unemployment and structural unemployment. These two types of unemployment are the main components of unemployment in Europe today.

In what follows, my speech will be structured around the following two questions:

Why doesn´t the labor market just provide full employment?
What can labor market policy add in order to achieve full employment?
With regard to the first question, I would like to refer to economic theory again. Keynes saw mechanisms at work in modern monetary macroeconomies that can make less than full employment - and even high unemployment - a possible equilibrium outcome. Samuelson replaced this notion by the neoclassical synthesis. According to this idea, the Keynesian unemployment equilibrium applies only in the short run and is thus temporary. In the long run, when prices and wages are flexible and had time to adjust, the economy returns to a classical equilibrium with full employment. The missing equation that explains the transition from the short run to the long run is the Phillips curve.

Broadly speaking, according to Keynes, the labor market does not provide full employment due to a lack of labor demand, which results from a lack of aggregate demand. This cyclical unemployment may become structural due to a malfunctioning of the classical mechanisms that restore full employment. Central cause is uncertain future expectations, leading to systematically lower investment levels than would be needed to achieve full employment.

The neoclassical synthesis takes both types of unemployment into account. Roughly sketched, advocates of this theory can be positioned on a scale between (neo)classical and Keynesian, depending on the relative weight attributed to structural and cyclical unemployment.

This leads me to the second question about what labor market policy can add in order to achieve full employment.

The policy recommendation concerning cyclical unemployment is relatively straight-forward:

Because it is regarded as being short-term, and vice versa will decline again with economic recovery, the task of economic policy is to speed-up and strengthen recovery. Or, to use an old Keynesian metaphor: “good macroeconomic policy aims to fill in troughs without shaving off peaks.”

In light of high public as well as private debt levels in some European countries, there is little room of manoeuvre for fiscal policy designed to stimulate aggregate demand. But the situation in individual countries differs greatly. Countries with some financial scope can use it to encourage investment. Investment weakness in Europe due to the crisis has subtracted several points to potential output.

As investment is a key driver of economic growth and employment, to strengthen investment will speed-up the economic recovery, lift growth and create jobs. With this in mind, the Juncker Plan is an important step in the right direction.

The policy recommendations concerning structural unemployment are more differentiated, but mainly relate to reducing the mismatch between labor demand and labor supply. Structural reforms in this sense relate to increase mobility and to invest in education and training, notably for the low-skilled.

One of the biggest questions facing European labor market policy makers is exactly the question about the nature of unemployment in Europe: is it mainly cyclical or structural unemployment?

The economic outlook for Europe and for the Euro Area is brighter today than it has been for the better part of the past seven years. Growth is picking up. European commission predicts GDP growth in the Euro Area to be 1.5 % this year and 1.9 % next year. In Europe, growth is projected to be 1.8 % this year and 2.1 % next year.

Related to this, unemployment is expected to fall. In the Euro Area unemployment rate is predicted to fall to 10.5 % next year (from 11.6 % in 2014). In Europe, labor markets are also projected to slowly improve, with unemployment rate to fall to 9.2 % next year (from 10.2 % in 2014).

Nevertheless, that is to say: Unemployment remains way too high.

The actual unemployment rates in Europe are largely understood as being a combination of both types. My former colleague Benoît Coeuré just pointed to the significance of structural unemployment.
In the well-known Jackson Hole speech by Mario Draghi, he also points to the relevance of structural unemployment in Europe.

Several member states put considerable efforts in reforming their labor markets, which should be honoured, primarily against the background that structural reforms are associated with considerable societal costs in the short run.

Tackling unemployment is an objective of the society as a whole. It requires large efforts of companies, workers, unions, and labor market policies. Social partnership plays an important role in this respect. The joint responsibility needs to be strengthened in many European countries and at the European level.

The point I want to make here is the following: the significant divergence in unemployment across European member countries indicates that there is no blueprint, no single policy that will help dealing with the problem of high unemployment in Europe.

What we need is a Policy Mix to strengthen recovery and reducing structural unemployment. As Olivier Blanchard called it (already in 1985 but again recently): we need a “two-handed approach”.

Regarding the latter, policy measures need to focus on the upskilling and re-training of low-skilled workers in particular, which allows for smoother sectoral reallocation. In addition, the concrete design of the education and the training system – last but not least dual training – will decide on whether we manage to get the major problem of youth unemployment under control.

Tackling unemployment is a joint mission. All the more so if you think about our two future challenges: demographic change and digitalization.

There are more questions than answers. First, Europe is getting older.
How can we ensure the futureproofing of our social security systems?
What is the best way of dealing with immigration?
And how can we prevent the anticipated shortage of skilled labor in some countries?

With regard to digitalization, we basically don´t know yet how it is going to affect requirements of work. Evidence suggests low-skilled as well as medium-skilled work to come under pressure.

Jeffrey Sachs et al. just published the paper: „robots: curse or blessing?”. According to this paper, robots may raise or lower economic well-being, depending on the degree of substitutability between robots and labor.

But new technical conditions lead to fundamental changes. To cite Bruno Latour: “Change the instruments and you will change the entire social theory that goes with them.”

Technological change (digitalization) has the potential to free up resources and to allocate theses scarce resources more efficiently to their most productive uses. And, who knows?, maybe there will be the possibility to sit under a tree, lazing, in the future.

And until then, work is the key, and the societal aim of full employment remains the most important public policy. Particularly in these times when we are far from full employment in some European countries, the aim to achieve full employment should guide labor market policies.

We have to meet these challenges together at the European level. My clear political position as a European Social democrat is to strengthen Europe by going further in European integration. This includes further labor market integration, as labor mobility is key in enhancing overall labor market performance in Europe combating structural unemployment and stabilizing the Economic and Monetary Union.

With this, let me conclude by coming back to the European Social Model. There are few competing definitions, but following Anthony Giddens, its whole point should be to combine economic dynamism with social justice.

As I see it, this would always include anti-poverty strategies, deployed to cope with embedded forms of poverty and social exclusion.

But above and beyond that, the focal point of the European Social Model has to be the equality of opportunity. And in our contemporary European societies, I would argue, equality of access to education and training is at the very core of equal opportunities.

Ladies and gentlemen, I look forward to a fruitful and enlightening debate. And I hope we will find a few answers to this bulk of questions.

Thank you for your kind attention.