EMU Labour Markets Two Years On: Microeconomic Tensions and Institutional Evolution

SUMMARY: Economic and monetary integration imply more intense and more pervasive competition in product and labor markets, and make it more di¢cult for unions and labor market institutions to shelter workers from competition. It is often argued that competition among systems should lead to deregulation and “races-to-the-bottom ” in protective institutions. Such institutions, however, do serve some intended purpose. More intense competition may increase demand for protection, and certainly calls for reforms. We propose a stylized model of the e¤ects of given institutions in the face of structural change and of the resulting reform tensions, and we examine recent evidence in its light. The tension between more competition and status quo institutions is quite apparent in the data. Labour market reforms are be-coming relatively more frequent in EMU countries, and many of them reduce welfare system generosity and deregulate labour markets. Most reforms are marginal, how-ever, and in many cases deregulation-oriented reforms are accompanied by measures which appear to try and o¤set the implications of stronger competitition instead. Our theoretical and empirical perspectives o¤er insights into possible patterns of future evolution for the institutional landscape of European labour markets. In order to exploit fully the advantages of economic and monetary integration, the institutional structure of labour and other markets needs to be revised extensively. The distri-butional implications of structural changes and institutional reforms, however, pose di¢cult political problems, and the transition process may well entail substantial wel-fare losses for large groups of the population. A clear understanding of the relevant tradeo¤s is essential to prevent EMU economies from retaining unsuitable institutions in the new, more competitive environment