The European Employment Strategy and Welfare State Reform: The Case of Increased Labour Market Participation of Older Workers

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The European Employment Strategy and Welfare State Reform: The Case of Increased Labour Market Participation of Older Workers

Paper to be presented at the Ninth Biennial Conference of the European

Union Studies Association (EUSA), Austin/Texas, 31 March – 2 April 2005

Werner Eichhorst and Thomas Rhein

Institute for Employment Research, Nuremberg, Germany1


The European Employment Strategy (EES) aims at increasing labour market participation and employment in the member states of the European Union through common objectives, supranational guidelines and recommendations addressed to EU member states while leaving the responsibility for the design and implementation of appropriate action with the national level. This paper analyses one particular area of the EES which contributes to overall employment performance and requires different reform paths in divergent welfare state arrangements: better labour market integration of older workers. After identifying the most important economic and institutional forces influencing the employment rate of workers aged 55+ and the factors conducive to the successful implementation of institutional reforms, the paper assesses the status of “active ageing” in the EES, the Council guidelines as well as the recommendations for national reforms. It then compares relevant national reforms and tries to give a preliminary answer to the question if and to what extent the EES contributed to these changes.

1. Introduction

In the second half of the nineties European Integration progressed in the field of employment policy not by “hard” supranational regulation but through establishing the European Employment Strategy (EES) as a tool for “soft” governance by means of common objectives, comparative assessment of performance and policy recommendations addressed to EU member states. However, the EES leaves the responsibility for implementing appropriate policy reforms with the member states. They have to explicate their decisions in annual National Action Plans (NAPs) that are reviewed by the European Commission (Mosher/Trubek 2003, Jacobsson 2004, de la Porte/Pochet 2003, 2004, Scharpf 2002).

One area where supranational effort has gained in importance recently is better labour market integration of older workers. To achieve this goal, institutional provisions in different policy areas have to be revised. However, since national labour market institutions are embedded in divergent welfare state arrangements, this also means that the need for adaptation will be different across EU member states.

This paper addresses the question which policies and recommendations for an improved labour market integration of older workers were formulated at the supranational level and how and to what extent the European Employment Strategy is transposed in different national contexts as far as employment of persons 55+ are concerned. We first identify the most important factors that determine the labour market position of older workers and then formulate some hypotheses on the design of policy reforms taking into account both national and supranational factors present in the European system of multilevel governance. Next we shift our focus to an empirical analysis of the European guidelines on policies for older workers and review the policy reforms implemented in selected EU member states after the EES was launched. For a systematic comparative analysis we cover EU member states that belong to different welfare state regimes. Our third step provides a preliminary answer to the question why reform dynamics regarding policies for better employment opportunities for older workers differ and if the EES matters in the formulation of these reforms.

2. Some Theoretical Considerations

2.1. Determinants of the Employment of Older Workers

Labour market participation of older workers is influenced by various economic, institutional and societal factors that interact closely. The most important factor explaining the employment situation older workers is certainly the overall labour market situation. The level of the overall employment rate (15-64) co-varies with the level of the employment rate for older workers (55-64). This rule generally applies within a single country as well as in international comparisons. However, in all OECD countries the employment rate of persons older than 50 or 55 is lower than the overall employment rate with the discrepancy between the rates differing across countries and varying over time. Therefore we have to ask which factors determine the labour market position of older workers relative to other groups of the labour force or the average employment situation (see also Commission 2004a).

Employment opportunities of older workers are negatively affected by high labour costs and positively driven by high productivity. Relative labour costs will be higher for older workers when there is a seniority element in wage formation. Productivity may be lower if individual work capacities decrease with age. This in turn is influenced by working conditions. Physical or emotional strain over the working life tends to affect health negatively. Monotonous work has been identified as a major contributing factor to stress-related diseases. But individual productivity also depends on human capital. Skills of older workers have to keep pace with technological progress and changing work organisation in order to remain competitive compared to younger workers. Thus, a crucial factor is lifelong learning. The life phase between 40 and 50 seems to be decisive for upgrading skills for the later years of the working life.

The major institutional factor affecting labour market participation of older workers is the social security system, especially the design of public pension schemes, unemployment insurance and occupational disability benefits. These provisions can give financial incentives for workers and employers to the extent that they offer pre- or early retirement opportunities as a pathway out of the labour market. In many European countries the political debate on active ageing focuses on removing these disincentives to further labour market participation. They were introduced as a reaction to economic stagnation in the 1970s and 80s in order to keep open unemployment low and „redistribute” available work to younger cohorts (Ebbinghaus 2002, 2003). In addition, employment protection legislation matters in this context. Strict employment protection may diminish (re)employment opportunities for older workers once they lose their jobs (OECD 2004c).

The factors described above may be classified as „hard” factors. They interact with „soft” factors, i.e. the age culture of a society (de Vroom 2004). It includes beliefs, attitudes and social norms concerning the employment of older persons. As regards the exit culture of an economy we can distinguish between late exit cultures with a broadly accepted social norm that older persons have the right or even the duty to work and early exit cultures based on the principle that older workers have the right or duty to retire early in order to “cede” their jobs to younger workers. An early exit culture may lead to age discrimination via negative societal and employer-related attitudes towards older workers. But early exit culture also reflects the desire of many employees to enjoy more leisure in the later years of their lives or to be engaged in unpaid voluntary work.

These factors can be put into the context of comparative welfare state research referring to Esping-Andersen’s (1990) well-known typology of welfare states. Empirical evidence shows a particularly low employment for older workers in ‘corporatist’ welfare states ‘without work’ in continental European countries such as Germany, France, but also in the Netherlands (Esping-Andersen 1996), whereas in ‘liberal’ (the UK) and ‘social-democratic’ welfare states (e.g. Denmark) shedding of older workers through early retirement was never a prominent feature in strategies to keep (open) unemployment low. Finland, however, was a notable exception from the positive situation in the Scandinavian countries in the early nineties (Hemerijck 2002, Ebbinghaus 2002). Hence, the need for policy reversal is much greater in continental Europe than it is in Scandinavian or Anglo-Saxon welfare states.

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