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The political economy of labor market regulation by the European Union

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Abstract

Since the introduction of qualified majority voting, at least 58 labor regulations have been imposed by the European Community/Union. Three types of explanations are considered: i) the asymmetry of the EC budgetary process, ii) regulatory collusion and iii) the strategy of raising rivals’ costs. Collusion and the strategy of raising rivals’ costs are compared in a two-country game-theoretic model with international capital mobility. The empirical analysis shows that the transition to qualified majority voting was not preceded by a striking tendency of competitive national deregulation. In all cases in which a directive was contested, the UK was among the contestants. Various indices show that the UK has the least regulated labor market. More generally, the anti-regulation coalition also includes Ireland, the Scandinavian countries and the Netherlands. There are examples showing that if the coalition is too small to block the regulation, its members prefer not to record their dissent officially. In most investigated cases, the European labor regulation is more restrictive than most but not all prior national regulations. The empirical analysis demonstrates that the strategy of raising rivals’ costs plays an important role in EU labor regulation.

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Notes

  1. For a detailed account of EU labor market regulation up to 1987 see Addison and Siebert (1997).

  2. According to Mattila (2004, Table 1), the governments of these countries are most likely to vote "no" or abstain. Thomson et al. (2004) report that the disagreement between Northern and Southern member states is mainly about regulation versus market-based solutions.

  3. It is quite unusual to apply population weights in a federal chamber representing the member states. Usually, as in the U.S., Germany or Switzerland, the smaller states are given a larger weight than corresponds to their population. In this way, regionally concentrated minorities are protected against the federal majority. Population weights (or electoral weights) are appropriate in the first chamber of parliament. But the composition of the European Parliament is inconsistent with this principle, and the new treaty will not remove the disproportionality either.

  4. For example, the employers’ obligations have been extended by the Court’s decisions and preliminary rulings on working time, the remuneration of ready service personal in hospitals, collective redundancies, transfers of businesses and discrimination by sex and age.

  5. This was the so-called Barber decision (262/88, ECR I-1989) concerning gender-based differences in pensionable ages. It was overridden by the “Barber Protocol” attached to the Treaty of Maastricht.

  6. The so-called ”compulsory expenditures“ (notably on agricultural subsidies) are exclusively controlled by the Council. As for the rest, the Parliament can impose its will on the Council by a 3/5 majority of the votes cast. If the Parliament lacks the requisite majority but still does not agree with the Council, the spending pattern of the previous year applies.

  7. For a more detailed analysis see Blankart and Kirchner (2004).

  8. The European Union does not have a budget but the European Community, its first pillar, does.

  9. Why has budgetary austerity not prevented the farm subsidies from exploding? Unlike labor market policy, the common agricultural policy has been part of the original deal. Its rules cannot be altered except by unanimous agreement of the Council. France as the main beneficiary does not accept major cutbacks. Yet labor market policy, which developed much later, was effectively constrained by the budgetary process.

  10. The first international labor regulation was adopted by France and Italy in 1904. Two years later, two multilateral labor regulations were agreed in Berne by 15 and seven states, respectively. ILO was mainly a French project, and its first Secretary General was a French Socialist.

  11. Figure 2 assumes for simplicity that the equilibrium cost of labor is identical at home and abroad. Thus, the liberalization of capital movements does not lead to net capital movements in equilibrium.

  12. International interdependence through capital mobility has also been analyzed – though differently – in game-theoretic models of tax competition, notably Persson and Tabellini (1995) and Kehoe (1987). Our model can be applied to tax competition as well.

  13. The problem could be avoided by rendering these claims negotiable. For example, if any employed worker could trade his claim, or part of his claim, to the legal employment protection in exchange for wage increases and if any unemployed worker could trade it for a job, the social cost of regulation would disappear.

  14. For the notion and evidence that regulations are sought by interest groups which try to raise their rivals’ costs see notably Marvel 1977, Landes 1980, Goldberg 1982, Oster 1982, Michaelis 1994, Teske et al. 1995, Fishback 1997, 2005, Körber 2000, Ch. 4.

  15. The northern states also raised labor cost in the South by abolishing slavery but this does not seem to have been their primary motive for refusing secession and starting the civil war.

  16. Note that this is not a “leadership solution.” Government 2 does not choose to adjust in an optimal way, it is forced by government 1. Only government 1 is optimizing – under the constraint that the regulation must be the same for both countries.

  17. It still exists via-à-vis third countries (currently Art. 59).

  18. In a panel data analysis of government regulation in the OECD countries, Pitlik (2007, Table 4) does not find a significant effect of trade integration (openness). However, the index he uses (a subindex from Gwartney/Lawson) does not only reflect labor regulation, in fact not only government regulation at all. Helbling et al. (2004) report a significantly positive effect of openness to trade on Nickell’s and Nunziata’s index of labor market “regulation” in the OECD countries which, however, includes not only employment protection but also the net replacement rate and the duration of benefits in the unemployment insurance. Heinemann (2007) replicates this panel data analysis with additional explanatory variables. He confirms the result for trade openness. Capital movements do not have a significant effect on the index. But political centralization raises the index significantly.Unfortunately, these three studies are neither confined to the European Union nor to labor regulation proper.

  19. On a cross-sectional basis, the index of Nickell and Nunziata is highly correlated with the other indices of labor regulation shown in Figure 5. The correlation coefficients are .98 with the OECD index,.61 with Botero et al. (2004) and -.81 with Gwartney/Lawson.

  20. For a survey of the historical sources see Vaubel (2002).

  21. See the opinion poll among European and national parliamentarians (as well as the citizens) in the European Representation Study (Schmitt and Thomassen 1999, Table 3.1). This may be attributed to self-selection, a “déformation professionelle” in the parliaments or the fact that the parliamentarians try to maximize their own power. More specifically, with respect to “employment and the economy,” 53 percent of the European parliamentarians but only 44 percent of the national parliamentarians (and 42 percent of the citizens) prefer European solutions (ibid., Table 3.3).

  22. Exactly the same problem arises for a government or parliament refusing to ratify an ILO convention.

  23. In 1992, average weekly hours of work were 43.4 in the UK but 40.3 in the European Community as a whole (O’Reilly et al. 1996, Table 29.6).

  24. Watson 1992: 540.

  25. This is reminiscent of the German Sailors’ Regulation (Seemannsordnung) of 1872 which Prussia and its majority coalition imposed on the seaport states Bremen, Hamburg, Lübeck and Oldenburg. According to the minutes of the Bundesrath, the federal chamber, the minority complained that the regulation “will require time and costs which can lead to heavy losses for the shipping lines” and that “no sea-faring nation knows a regulation of this kind” (my translation). “That Prussia as a state would use its military-political superiority to subordinate the interests of the more distant and more recent interests of North Sea shipping, which are alien to the Prussian bureaucracy, to those of Baltic Sea shipping in such a reckless way is something one would not believe until one has seen it with one’s own eyes” remarked the Nationalzeitung. Even the delegates of the southwestern inland states felt uneasy. One of them wrote: “The inland states are in a strange position to tip the balance in a matter which does not concern them… They vote with Prussia even though they may do grave damage to the seaport states” (see Vaubel 2007: 198).

  26. For an excellent economic critique of droit de suite see Schmidtchen (2000). Note that droit de suite is not a tax. The EC Treaty (Art. 93) requires unanimity for the “harmonization” of indirect taxes.

  27. British sources estimate that the directive will wipe out about 5.000 jobs in the London art market.

  28. In 2002, for example, two thirds of all temporary workers in the EU of 15 worked in the UK.

  29. The directive would have been adopted if the threshold for a qualified majority had been lowered to 65 percent as envisaged by the ill-fated constitutional treaty of 2004.

  30. The share is 36.5 percent if the submission of formal statements is counted as opposition (ibid.). As this share exceeds the threshold for a blocking minority (27.7 percent during this period), formal statements do not necessarily indicate opposition, however.

  31. This is in line with Hosli’s (2007) finding that large net payments to the EU budget significantly raise the probability that the government may oppose the Council majority (Hosli 2007).

  32. The cooperation between the UK and the Scandinavian countries is also emphasized by Elgström et al. (2001: 122).

  33. The division has been less clear since 2001 (Hagemann and De Clerk-Sachsse 2007, Figures 3, 6 and 8).

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  1. Professor of Economics, University of Mannheim, 68131, Mannheim, Germany

    Roland Vaubel

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Correspondence to Roland Vaubel.

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The author thanks Stefanie Bailer, Friedrich Heinemann, Thomas König and two anonymous referees for very helpful comments and suggestions.

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Vaubel, R. The political economy of labor market regulation by the European Union. Rev Int Organ 3, 435–465 (2008). https://doi.org/10.1007/s11558-008-9041-6

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