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Why are structural reforms so difficult?

In times of economic crisis, politicians and analysts alike are typically quick to call for structural reforms to stimulate economic growth. Job security regulations are often identified as a policy area in need of such reforms. These regulations restrict the managerial capacity to dismiss employees to allow for downsizing or to replace workers and use new forms of employment such as fixed-term contracts when hiring new workers. Mainstream economics typically blames such regulations for the sclerosis of European labour markets, in particular in southern Europe. But so far, European countries have mostly failed to reform dismissal protection – despite the economic crisis and pressure from international organizations. Why are these regulations so difficult to reform (i.e. dismantle)?

The easy answer is, of course, that some powerful groups, in particular trade unions, oppose these reforms. However, opposition to reform is costly, and unions have been under massive political pressure in recent years to assent to such structural reforms. Why are unions so adamantly opposed to structural reforms and in particular the reduction of dismissal protection in case of open-ended contracts? What is so special about these regulations?

Job security regulations are more important to trade unions than one might think at first sight. In fact, trade unions have at least three reasons to fight the reform of dismissal protection in case of open-ended contracts. The first reason is rather straightforward: unions need to represent their members’ interest in statutory dismissal protection. The two other reasons, however, are often overlooked: unions have an organizational interest in retaining dismissal protection because these regulations prevent employers hostile to trade unions from singling out union members in workforce reductions. Put differently, protection against arbitrary dismissal also involves the protection of the local union organization against anti-union employers. In addition, unions have an interest in protecting their involvement in the administration of dismissals because this involvement allows them to influence management decisions at the company level. In many countries, job security regulations give trade unions important co-decision rights in case of dismissals (e.g. Swedish regulations award unions the right to co-decide the selection of workers in case of dismissals for economic reasons). Put simply, job security regulations often make unions relevant actors in the workplace.

dismissed
The Apprentice: you’re fired? by Adam Foster. CC BY-NC-ND 2.0 via flickr

Of course, these three reasons don’t have the same weight in all European countries. For instance, the fear of employers hostile to unions is probably more important in southern European countries characterized by conflictual industrial relations (in most of these countries, employers were not required to recognize local union representations before the 1970s), while the involvement in the administration of dismissals is particularly important in countries characterized by long traditions of cooperative industrial relations (e.g. Germany and Sweden). Everywhere though, unions have sufficient reason to fight any reform of dismissal protection.

Facing such union resistance, governments have typically resorted to the deregulation of temporary employment. Unions have been more accepting of such two-tier reforms because temporarily employed workers are underrepresented among the union rank-and-file and because in the case of temporary employment unions have no organizational interests to defend. The deregulation of temporary employment (while the protection awarded to workers on open-ended contracts has remained more or less constant) has become a prominent example of so-called dualization processes, which are characterized by a differential treatment of workers in standard employment relationships (‘insiders’) and workers in more precarious employment relationships (‘outsiders’). Arguably, in some countries like Italy, the share of workers benefitting from (overly?) strict dismissal protection is now lower than the share of workers benefitting from hardly any dismissal protection at all.

So where are we standing after about three decades of calls for structural reforms such as the deregulation of job security? The three aforementioned reasons for unions to oppose the reform of dismissal protection in case of open-ended contracts are still there. The average union member still benefits from these regulations, unions continue to be worried about employers taking advantage of collective dismissals to rid themselves of unionized workers, and the institutional involvement in the administration of dismissals continues to be an important source of union power – in particular in times of dwindling membership.

Today, however, unions have a fourth reason to oppose structural reforms. For three decades they have reluctantly assented to two-tier reforms only to be confronted with further calls for numerical flexibility. By now there are as many workers on precarious contracts as there are workers on regular open-ended contracts – in particular in the countries that are said to be in greatest need of structural reforms. Nevertheless, calls for reform focus almost exclusively on dismissal protection of workers on open-ended contracts rather than on measures to improve the lot of the disadvantaged young, women, or elderly on precarious contracts. You don’t have to be a radical Italian trade unionist to find this one-sidedness a little bit odd.

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