Economic View
Job Security, Too, May Have a Happy Medium
By LOUIS UCHITELLE
Published: February 25, 2007
NYTimes
FOR more than a decade, many American economists have pointed to Europe and Japan as prima facie evidence that layoffs in the United States are a good thing. The economies in those countries were not nearly as robust as this country’s. And the reason? Too much job security in Europe and Japan, the economists said.
American employers, in sharp contrast, have operated with much more “flexibility.” Hiring and firing at will, they shift labor from where it is not needed to where it is needed. If Eastman Kodak is struggling to establish itself in digital photography, then Kodak downsizes and labor moves to industries and companies that are thriving — software, for example, or health care, or Wal-Mart Stores or Caterpillar.
This shuffling out of one job and into another shows up in the statistics as nearly full employment. Never mind that the shuffling does not work as efficiently as the description implies or that many of the laid-off workers find themselves earning less in their next jobs, an income roller coaster that is absent in Europe and Japan. A dynamic economy leaves no alternative, or so the reasoning goes among mainstream economists.
“Trying to prevent this creative destruction from happening is a recipe for less economic growth and less productivity,” said Barry Eichengreen, an international economist at the University of California, Berkeley.
Starting in the mid-1990s, Europe and Japan did wallow in recession or weak growth while the American economy expanded at a spectacular clip. But no longer. Growth is slowing in the United States just as it speeds up in the 25-nation European Union and in Japan. Unemployment rates in those countries are also beginning to come down, suggesting that the American system is not the only route to full employment.
As the gaps close, does that mean that job security, in the European and Japanese style, is the right way to go after all? The question would be easier to answer if the European Union countries and Japan had stuck to their orthodox job security. They have not. On their way to revival, they adopted some of America’s practices.
“A number of countries have found ways to make their labor markets more flexible, without sacrificing their greater commitment to a government role in equalizing incomes,” said Paul Swaim, a senior economist at the Organization for Economic Cooperation and Development in Paris.
So the old dichotomy — insecurity versus security — is gradually giving way to a new debate. “It is obviously the right mix of security and insecurity that has to be achieved,” said Richard B. Freeman, a labor economist at Harvard. “You can’t protect people their whole working lives. That undercuts incentive. But you can’t tell people they have no security at all.”
The guideposts in this search for the right mix should not be just economic growth rates and unemployment levels. These are too often affected by business cycles. Many American economists, bent on demonstrating the payoff from layoffs, paid relatively little attention to the cyclical reasons for the underperformance of Japan and Europe.
“Sometimes we forget these cyclical forces,” said Sanford M. Jacoby, an economic historian at the University of California, Los Angeles.
Japan and Western Europe flourished in the 1980s. And then the cycle changed. Japan plunged into a prolonged recession, brought on by the bursting of stock market and real estate bubbles, an overcautious central bank and a banking crisis. Europe also fell into the doldrums, partly because of the difficulties of organizing the European Union. Integrating East Germany into West Germany, Europe’s strongest economy, did not help, either.
But now Japan is in the fifth year of an ever-stronger recovery, and this year, according to some forecasts, growth in the European Union may even exceed that in the United States, where the economy may be weakening in the sixth year of a recovery.
Cycles count. But so do labor policies.
In some European countries, employers are using temporary and part-time workers much more than they did in the past. That gives them leeway to expand and contract their work forces without having to add full-timers who are protected against layoffs. Similar protection exists in Japan, which also relies for “flexibility” on part-timers and temps.
If cost-cutting is necessary in Japan, there is a pecking order, says Yoshi Tsurumi, an economist at Baruch College in Manhattan and a consultant to Japanese companies. Dividends are cut first, then salaries — starting at the top. Finally, there are layoffs — if attrition is not enough to shrink staff.
“The matter of flexibility is important,” Mr. Tsurumi said, “but the Japanese notion is to retrain and transfer people within an organization.”
Elsewhere, France and Germany have eased job protection for employees of small businesses. Payroll taxes paid by employers have been cut for some low-income workers, increasing the demand for them.
And the Danish model is getting a lot of attention. Employers in Denmark are relatively free to lay off workers, but the state then steps in with benefits that replace 70 percent of the lost income for four years. Government also finances retraining and education, pressuring the unemployed to participate and then insisting that they accept reasonable job offers or risk cuts in their benefits.
THE Danish government devotes 3 percent of the nation’s gross domestic product to retraining, compared with less than 1 percent in the United States. And, of course, everywhere in Europe, the state pays for health insurance and for pensions that often encourage early retirement by replacing big percentages of preretirement income.
“What the Europeans and the Japanese understand is that modern economies can sustain social protections without killing the golden goose,” said Jared Bernstein, a senior economist at the Economic Policy Institute in Washington.
That is an understanding that perhaps will take root among American economists and policy makers, deprived as they now are of their long-running contention that job security resulted in weak economic growth in Europe and Japan.
