On Europe and 'Structural Reform'

Spain, unemployment rate 22.9 percent, shows why structural reform really is needed in Europe. What does "structural reform" mean? Mostly, labor-market reform--which is another euphemism. Let's be plain: Spain and some other EU countries need to confront their unions. I've a new column for Bloomberg View on the subject.

To say the problem is merely the power of organized labor is too simple-minded. Germany has strong unions yet has been successful -- too successful from Europe's point of view -- in controlling wage costs and maintaining high employment. The problem is not powerful unions in their own right, but powerful unions combined with maladapted wage-setting arrangements that, once established, unions are determined to defend.

That's why it's not only simple-minded but also plain wrong to deny that Europe's unions are part of the problem. Unions arguably act in the longer-term interests of their members. What Spain shows is that, depending on the rules, these gains may come not mainly from the owners of capital but from fellow workers, or ex-workers to be more precise.

In other words, there's a social justice component to structural reform -- but not the soak-the-rich, save-the-worker one emphasized by the European left. It would be good to understand that before taking sides.

The column mentions an article by Samuel Bentolila et al. There's a short version on Vox, The Spanish labour market: A very costly insider-outsider divide, and a fuller study, CEPR Discussion Paper 8691, posted on the CEPR website (gated). If you don't read the column--how dare you even think that?--do read the Vox article.

This article available online at:

http://www.theatlantic.com/international/archive/2012/02/on-europe-and-structural-reform/252353/