Labour Supply and Incentives to Work in Europe, by Ramon Gomez-Salvador, Ana Lamo, Barbara Petrongolo, Melanie Ward and Etienne Wasmer (eds.)

Edward Elgar Publishing, 2005, 412 pages, hb, 1 84542 129 9, £75 Order this book

Most of Labour Supply and Incentives to Work in Europe consists of a collection of articles dealing with specific aspects of labour market participation and labour market institutions. Resulting from a workshop put together by the European Central Bank and the Centre for Economic Policy Research, the analyses presented in a book take (as one would expect) a mostly neoclassical approach to these issues. The book is divided in four parts, with the first three consisting of the aforementioned articles on specific issues of labour supply in Europe and the last part devoted to a panel discussion of labour markets in the enlarged European Union.

The theme of incentives to work is the focus of Part I. Bridgen and Thomas put forward a matching model of the labour market that distinguishes between high effort job searchers (which are ‘unemployed’ when they do not have a job) and low effort job searchers (which are simply ‘inactive’ when non-employed). Each group of individuals is then modeled as having different but interdependent wage rates (resulting from the assumption that firms can identify and discriminate between the two types of agents). Some interesting conclusions are derived from this model, namely on the significant relevance of unemployment and inactivity benefits. These results may have important implications for basic income proposals, as a substantial increase in benefits available to low effort job searchers (not covered by unemployment benefits but which would obviously be covered by a universal basic income) could have a very significant impact on their labour market participation, with the consequent macroeconomic impact.

Also interesting is the assessment of the effects of taxation on work activity, industry mix and shadow economy activities carried out by Davis and Henrekson. They find a strong and persistent relation between higher tax rates (on consumption and labour income) and a smaller proportion of time dedicated to market activities. They also find that higher taxes are associated with larger shadow economies and smaller value added and employment shares of low wage industries. The general direction of the results is unsurprising since it would be expected from economic theory that higher tax rates negatively impact on participation rates and low wage industries and provide an incentive to the growth of the underground economy, but the magnitude of some effects is noteworthy (e.g. ‘a unit standard deviation tax hike of 12.8 percentage points leads to (…) a 4.9 percentage point drop in the employment-population ratio’ [p. 89]). Although those relations would possibly be harder to measure it would be interesting to study the effects of higher capital taxes on the same output variables. By reducing the expected after-tax returns on investment, higher rates on capital tend to discourage capital accumulation and, consequently, reduce the demand for labour. Most importantly for patterns of labour market participation, higher taxes on capital may slow down the creation of higher-paying and more attractive jobs. This issue is also central for active labour market policies (ALMPs), such as the Italian tax credit analysed in Chapter 6. Unless such measures are financed by a reduction of public expenditure in other areas they will require higher taxation in other sectors. Consequently, even if ALMPs are considered effective means of increasing labour participation (as Cipollone et al argue in the Italian tax credits case study), their overall impact also includes the (supposedly negative) effects on the sectors where the costs are imposed. What is seen (the increase in participation of eligible individuals) must be balanced with that which is not seen (the negative effects on the sectors which are subjected to increased taxation).

The second part of the book (where the aforementioned Chapter 6 is included) deals with several specific factors affecting labour market participation. Two chapters are devoted to the evolution and determinants of labour supply by women while Chapter 5 (Genre et al) analyses labour market participation by employing a wide range of economic and institutional factors as variables at country-level. Of particular interest may be the finding that labour market rigidity negatively affects the participation rate of most groups with the significant exception of men aged 25 to 54, who supposedly have the greatest power in shaping those rigid institutions.

The expansion of part-time, temporary and other alternative forms of employment has been a response to changing economic, social and technological conditions in Europe since the mid-1970s, as well as a way to circumvent rigid regulation of permanent contracts. The two articles in the third part of the book deal with these new forms of employment relationships, focusing specifically on the advantages and risks of part-time and fixed-term contracts.
One important question that remains unaddressed is that of arguing why the labour participation objectives set in the Lisbon Agenda are worthy goals in the first place. Why is it necessarily ‘progress’ to converge to a 70 per cent employment rate (60 percent for women and 50 percent for older workers)? There are of course obvious financial reasons related to the sustainability of social security systems and economic reasons related to growth, but the question is a relevant one if we consider that increasing participation rates are not the only potential solution to these problems. Since leisure is presumably valued positively by individuals and non-market activities can also be ‘productive’ in a broader sense, it would be advisable to have some in-depth discussion of the defensibility of the participation rate goals that underlie most of the analyses carried out in the book. One alternative would be simply to present the Lisbon objectives as politically determined external goals to which labour market policies should adjust, but that appears to be a quite limiting perspective for a global understanding of the issues involved.

Overall, while competently delivered and offering useful insights on the effects of specific factors on labour supply, the articles are somewhat limited by the neoclassical approach adopted. The advantages in terms of clarity for the analysis of specific relations in given contexts are counter-balanced by the lack of an overall perspective that goes beyond the neoclassical labour economics approach, an issue that even the more general discussion in the fourth part (dealing mainly with the effects of monetary integration and EU enlargement) also fails to address. It is perhaps unfair to point out as a fault in a book on labour economics that it fails to go beyond the boundaries of labour economics, but one cannot help feeling that all the analyses conducted are left to some extent in a vacuum due to the lack of a more comprehensive framing in terms of political economy.

The book contains several good exercises in neoclassical analysis of labour markets as well as a range of useful data. However, many important questions necessarily cannot be tackled by this sort of approach and while the articles contain many worthwhile insights, a more integrated and interdisciplinary approach would appear to be required for a better overall understanding of the issues involved.
Andre Alves