"Social" or "economic" reforms?

NPR's Emily Harris reported on what Linda Wertheimer calls "unpopular social reforms" in her introduction. I'd call them economic reforms. Harris reported

Unemployment across Germany has been above 10 percent for more than five years. Jobs are less of an immediate worry in Sindelfingen since a new labor agreement with DaimlerChrysler guarantees several thousand manufacturing positions at the local plant for the next eight years. But that deal also reflects the growing pressures in Germany. Employees agreed to longer hours after the company threatened to move the work to other plants, including overseas.

She really needs to read the Economist to put those longer hours in context. The Economist reports Daimler had sought an increase from Germany's standard 35-hour working week to a 40-hour week, but did not even get that. Even French Socialist Party officials admit

putting the 35-hour week into law was a mistake. It is holding back economic growth and the competitiveness of French firms, scaring off foreign investors and killing job creation.

In Germany the 35-hour week, introduced in the decade before 1995, is one of many factors that have raised labour costs to levels that have stifled growth and dulled productivity.

Why is the 35-hour week such a bad idea? Because

Symbolically significant as it became in its own terms, the 35-hour week was also part of a wider European approach to sclerotic labour markets that can now be seen to have comprehensively failed. In many countries besides France, the cure for high unemployment has been sought in the encouragement of shorter working hours. Another common response to growing insecurity about jobs has been to increase job protection and make it harder to fire people. And a widespread reaction to growing global competition that has lowered pay at the bottom end of the market has been to entrench high minimum wages.

As many pointed out at the time, these measures made little sense. The notion that there is a fixed amount of work to be shared out, so that shorter hours for all must mean more jobs, is widely derided by economists as the “lump of labour” fallacy. Making it harder to fire people serves mainly to discourage hiring them in the first place. And high minimum wages translate not into better-paid workers but into more people without jobs. These observations are no longer just matters of theory: the recent experience of France, Germany and other continental European countries shows that they apply in practice too. As the OECD's recent Employment Outlook noted, the empirical evidence points to a clear correlation between high levels of job protection and high levels of unemployment.

Belatedly, Europe's governments are realising this, and coming round to the need to free up their labour markets, not tie them down in even more red tape. Indeed, they have begun to grasp that excessive regulation of labour markets, far from being a sensible response to slower growth, is actually a significant cause of it. Deregulating labour markets need not mean sacrificing all the protections of Europe's social model: countries such as Denmark, Finland and the Netherlands have shown that generous welfare systems and a strong safety net can be preserved even while allowing market forces to play more freely in the demand and supply of labour.

Harris also states that "Unemployment benefits have also been cut," but offers no figures. Germany's welfare system

has become a giant insurance policy, designed to cushion living standards. It has proved costly and counter-productive: a large chunk of the unemployment rate reflects the fact that the jobless have little reason to return to work.

Even compared with those in other generous countries...out-of-work Germans are well protected. People who lose their jobs get unemployment benefit of 60% of their previous earnings (or 67% if they have children) for up to 32 months. After that, payments drop to between 53% and 57%, but have no time limit.

Earlier, they presented this Long-term unemployment chart



And they explained:

When Americans become unemployed, relatively few stay jobless for long. That is not the case in several European countries such as Italy and Germany. This is one reason why their labour markets are malfunctioning. The longer that people are out of work, the less effectively they compete with those in employment, so overall unemployment has to be higher in order to keep wage inflation under control.

Perhaps someone's going to concede that even it's an economic reform, there are social costs. The trouble is, current policy also has a social cost. Yes, I know the people who established the 35-hour week did not intend to raise the unemployment rate, but that's what they did.