IZA World of Labor
key topic

Future of Europe

Last year’s Brexit result sent shockwaves through the European Union. 2017 could also be a year of upheaval with important elections in France, Germany, and now also the UK, as well as the start of the Brexit negotiations. Perhaps the results of the Dutch elections indicate that much of the storm has passed, but perhaps not.

The Global Financial Crisis caused a recession across Europe, the effects of which are still being felt today, largely in Southern European countries. Many of those countries are suffering or recovering from high youth unemployment. This, along with anti-migrant/anti-refugee feelings, has caused some to turn to populist movements. Furthermore, Southern European countries with high youth unemployment have very low birth rates which will impact productivity and pensions as their populations age. What are the long-term effects of recessions and what can be done to prevent the growth of populist sentiment?

  • Do firms’ wage-setting powers increase during recessions?

    Monopsony models question the classic view of wage-setting and reveal a new reason why wages may decrease during recessions

    Todd Sorensen, April 2017
    Traditional models of the labor market typically assume that wages are set by the market, not the firm. However, over the last 15 years, a growing body of empirical research has provided evidence against this assumption. Recent studies suggest that a monopsonistic model, where individual firms and not the market set wages, may be more appropriate. This model attributes more wage-setting power to firms, particularly during economic downturns, which helps explain why wages decrease during recessions. This holds important implications for policymakers attempting to combat lost worker income during economic downturns.
  • Wage coordination in new and old EU member states

    Stronger wage coordination and higher union density are associated with lower unemployment and higher inflation

    Riccardo Rovelli, January 2016
    Aside from employment protection laws, which have been converging, other labor market institutions in new and old EU member states, such as wage bargaining coordination and labor union density, still differ considerably. These labor market institutions also differ among the new EU member states, with the Baltic countries being much more liberal than the others. Research that pools data on old and new EU member states shows that wage coordination mechanisms can improve a country’s macroeconomic performance. Stronger wage coordination and higher union density reduce the response of inflation to the business cycle.
  • Setting policy on asylum: Has the EU got it right?

    Harmonizing asylum policies, a noble goal, does not produce the best outcomes for refugees or host country populations

    Tim Hatton, February 2015
    Policy toward asylum-seekers has been controversial. Since the late 1990s, the EU has been developing a Common European Asylum System, but without clearly identifying the basis for cooperation. Providing a safe haven for refugees can be seen as a public good and this provides the rationale for policy coordination between governments. But where the volume of applications differs widely across countries, policy harmonization is not sufficient. Burden-sharing measures are needed as well, in order to achieve an optimal distribution of refugees across member states. Such policies are economically desirable and are more politically feasible than is sometimes believed.