Croissance et emploi : l'ambition d'une initiative européenne

Abstract

Growth and employment the scope of an European initiative Jacques Drèze, Edmond Malinvaud et Alii Executive Summary 1. Since almost twenty years now, European unemployment is a major social problem and the sign of significant underutilisation of resources at a time of substantial unfilled needs. Whereas employment increased by nearly 6 % between 1987 and 1990 in EC12, the rate of employment is now again exceeding 10 % and rising. Even under reasonably optimistic forecasts (a growth rate of 2.5 to 3 %), the unemployment rate will remain above 10 % for at least four or five years. This position paper reviews the short-, medium- and long-run policies best susceptible of promoting growth and employment in Europe. 2. We argue that fiscal policy is not, at this time, a suitable instrument of short-run stabilisation. Attention should rather be focussed on medium-term structural budget consolidation, which was neglected during the expansion of the late eighties. On the other hand, we argue for monetary stimulation through a strong decrease of short-term interest rates, and propose the reference level of zero short-term real interest rates. 3. Turning to medium-run policies, we advocate two sets of measures, concerning respectively labour costs and investment. 3. a We note that high unemployment is heavily concentrated among unskilled workers. Moreover, we find evidence of a trend in the skilll composition of labour demand, which contains a declining proportion of unskilled jobs. These considerations justify investment in training and education. We believe that they also justify immediate measures aimed at reducing the cost of unskilled labour relative to the cost of skilled labour and of capital. An important element of labour costs consists in taxes and social insurance contributions, which drive a substantial wedge — 30 to 50 % in the EC member countries — between the cost of labour to employers on the one hand, take-home pay or the social opportunity cost of unskilled labour on the other hand. We argue that the time has come to reduce that wedge, and we propose exempting minimum wages from employers' contributions to social security. This may be done either by collecting such contributions only on that part of all wages that exceeds minimum wages ; or by introducing an exemption amounting to 100 % of these contributions at the minimum wage level but decreasing linearly to zero at twice that level. The first measure is very costly — of the order of 3.2 % of GDP on average in EC12, with substantial country differences. The second measure is much less costly, rather like 1.2% of GDP. In either case, substitute resources should be allocated to the social security. The CO2 tax currently under consideration by EC countries (with estimated receipts of the order of 1 to 1 .3 % of GDP) is a natural source. Raising the ceiling on VAT rates is another source. There is room for country- specific measures. Econometric simulations of labour tax exemptions in France and Belgium must be regarded as imprecise. Generally, they confirm our belief that no miracle should be hoped for, but that appreciable medium-term gains in employment are in sight, at no budgetary cost, if our proposal is implemented on a bold scale. 3. b With regard to investment, we recognise that unused capacities limit the immediate prospects for business investment. But we argue that idle resources could be mobilised towards labour-intensive investments with adequate social returns — contributing in addition to sustain aggregate demand. This is also the logic of the Edinburgh initiative, where Trans-European Neworks receive priority, together with small firms. We argue however that the Edinburgh package falls short of what is needed. An investment program matching the structural budget consolidations to come would place no strain on capital markets, while making up the shortfall in public investments of the past decade. We advance a figure of 250 Bilion ECU'S (or roughly 8 times the Edinburgh objective) as a realistic medium-term target, and propose to privilege in addition areas like low-income housing, urban renewal and urban transportation. In order to stimulate such targeted investments, we suggest to rely mainly on employment subsidies, proportional to the labour content of approved projects. This would reinforce, or possibly anticipate, our previous suggestion for reducing labour costs — while enlarging the set of investments attractive to private investors and local authorities... Improved access to capital markets should in addition be sought through collaboration with institutional intermediaries, through an extension of the mission of the European Investment Bank and through an extension or replication of the European Investment Fund. 4. Our discussion of structural problems is foccused on basic principles. We first stress the detrimental incidence of the prevailing uncertainty about some inflation, interest and exchange rates, but also about institutional developments in the monetary area — including the recurring temptations of competitive devaluations. We do not opt for a specific political program. But we stress that reducing institutional monetary uncertainties is an important goal in its own rights. It should be pursued actively, to put monetary Europe on a track more promising for employment than a return to floating exchange rates between the currencies of relatively small economies closely integrated through trade. We next turn to public finance and the Welfare State, recognising the need in several countries for structural budget consolidation, and the elements of disenchantment with respect to the performance of the Welfare State. Reviewing its economic logic, we conclude that the agenda should be to make the Welfare State leaner and more efficient, not to dismantle it. This calls for reviewing in depth the operating and distributive efficiency of existing programs, with the conflicting aims of reducing the share of social transfers in GDP by several percentage points, while strengthening the protection of the least endowed. Economists should intensify their participation in this important research challenge. Finally, we draw the implication for wages of an European Growth Initiative aimed at a period of sustained growth, with priority given to employment relative to real wages. We feel that a realistic pattern combines output growth in excess of 3 % with employment growth above 1 %. This leaves a margin of at most 2 % for real wages. Given the presence of wage drift, this seems to call for negotiated settlements at roughly constant real wages. Is such a pattern realistic ? We bring out the controversial issue of the significance for wage developments of the relative tax burdens on capital and labour. And we recognise that the decline of the labour share in the eighties has been accompanied by a rise in the share of interest income, which in many cases is subject to little taxation, due in particular to capital mobility and intercountry tax competition. A uniform withholding tax on interest income at the European level is the only avenue to correct that imbalance. Whether or not such a tax is desirable in its own rights is a debated issue. That debate should be enlarged to recognise that distributional fairness in the tax treatment of capital and labour could make a significant contribution to wage moderation — even though it may be premature to regard the empirical evidence as conclusive. 5. We hope to have identified a set of measures endowed with overall consistency and with a globality commensurate with the magnitude of the problem confronting us. They have budgetary implications that call for reallocating a few percentage points of GDP, which is more than usually contemplated. And they fall under the responsibility of a whole set of institutions which are not engaged in systematic policy coordination. Serious problems of implementation should thus be tackled. We call on policy makers to exert boldness and determination in tackling these problems. And we call on academic economists to participate actively in the definition and promotion of an ambitious European initiative — starting perhaps with a criticism and elaboration of our own views.