Egon Sohmen Foundation                           Salzburg Manifesto     Fighting Europe's Unemployment in the 1990s   This manifesto has been issued by a group of economists brought together by the Egon-Sohmen-Foundation in Salzburg in late August 1994. The meeting was chaired by Professor Herbert Giersch, a former head of the Kiel institute of World Economics and Founding Member of the German Council of Economic Advisers (1964-1970). The economists taking part covered a wide range of political spectrum and came from a variety of personal and professional backgrounds. The manifesto has been drawn up on the initiative of Professor Giersch. Most of those present accepted it, but are not committed to every detail. (September 1994)   Fighting unemployment is imperative for economic as well as humanitarian reasons. Europe could offer gainful work opportunities to millions of people now on the dole and produce more valuable goods and services. Discouraged job seekers, notably among older and young people, would find a new perspective on life, instead of seeing themselves separated from society. Once labour is again in high demand, people will welcome rather than discriminate against new entrants to the labour force whether from inside the country concerned or abroad. With the unemployed back at work, Europe could enlarge its tax base and thus make progress on its fiscal problems. Higher employment would thus contribute to European prosperity as well as social cohesion and co-operation among the EU countries as well as with other states.   All markets work with some stock or reserves. Present unemployment rates in Europe are however abnormally high, whether judged by comparison with other periods or other parts of the industrialised world, such as the US or Japan. There is no need for such high rates. Labour, like other resources, is fundamentally scarce in view of vast potential demands for its use. There is still a mass of unsatisfied human wants, even in the industrial West. Environmental requirements make extra claims on resources and provide an additional reason for available human labour to be fully and efficiently used. Yet a substantial part of the labour force is not engaged in meeting this demand (outside the black economy).   The choice between take home pay and leisure is one for workers and employers to make on a voluntary basis in the light of preferences and opportunities. Make-work measures such as compulsory reductions in working hours, job-sharing or enforced early retirement tend to impoverish the whole economy and merely tinker with unemployment statistics.   Present unemployment has three proximate roots: pay and associated labour costs which price workers out of jobs; intermittent periods of low demand growth; and capacity shortages which emerge in many countries during each economic recovery while unemployment is still high. These elements are interrelated. If labour is too expensive to employ it will not pay businesses to make capital-widening investments. Insufficient capacity itself results in inflationary bottlenecks when employment is still unsatisfactory. Demand squeezes - whether in response to inflation, exogenous shocks or simple policy errors - lead to longer spells of unemployment and, thus, to workers becoming less easily re-employable (the so-called hysteresis effect). The most fundamental obstacles are, however, in the labour market; other remedies will not work unless pay costs move nearer market-clearing levels.   The amount of different kinds of labour that it pays to employ depends on their prices, which include both wages and additional non-wage costs. The problem is that pay is not only a price for the employer. It also provides most people with their main source of livelihood.   There have been forces, such as globalisation and technical change, which have depressed the market value of many kinds of labour, especially unskilled workers. In the USA they have led to severe pressure on the living standards of the lowest paid workers. In Europe they have shown themselves in obstinately high rates of long-duration unemployment. Neither outcome is satisfactory.   Under present European conditions the public interest largely coincides with the interest of unemployed persons who are being priced out or work. If market-clearing pay for some workers is below a tolerable minimum, their fellow citizens should use the tax and transfer system to top up their income by direct payments. This is a way of tackling the problems of the least well paid, far superior to restrictive devices which prevent pay from reaching market clearing levels, or to restrictions to keep out imports from poor countries. In contrast to prevailing protectionist sentiments, we want to express a strong commitment to an open trading system which enhances the welfare of both the rich and the poor countries.                 A 9-Point Agenda    Appropriate macroeconomic policy can provide a helpful background for stable growth. Inflationary dashes for growth should be strictly avoided. Once inflation is at low levels monetary authorities have as much responsibility for avoiding nominal demand deficiency as inflationary excess. In practice the responsibility for achieving this must be largely that of central banks. Thus we recommended that the European Monetary Institute should monitor the development of nominal GDP at an EU level. This is entirely consistent with its anti-inflationary responsibilities and will be worth pursuing irrespective of whether a European currency is established. The key to more jobs lies in following the signals given by rapid changes in relative prices and sales conditions which reflect underlying changes in relative scarcity and opportunities both for workers and for products. Collective bargaining still prices workers out of jobs in many parts of Europe. In the years to come, the level of contractual minimum wages should not rise in real terms so that productivity growth can be translated into an expansion of employment. A growing proportion of the pay packet should be determined by local labour market conditions and differentiated according to skill, region, district and place of operation. The practice of uniform pay increases, or legislation which generalises collective bargaining settlements to employers and workers who wish to remain outside, should be reexamined. The power of workers already employed (insiders) to preserve customary pay scales will not disappear overnight. Under present conditions the principle of "equal pay for equal work" stands in the way of full employment in an economy with fast growth and structural change. It is desirable to pay newly-hired persons less - or occasionally more- than those already in employment, depending upon whether their skills are ample or in tight supply in the places and regions where they are needed. The wage dispersion required for high employment in an advanced economy must be sufficiently wide to encompass the full range of skills and of relative scarcities. With the move towards an integrated world economy where unskilled workers are abundant, the market incomes of such workers in the West will tend to move nearer those in developing countries. This is not a cause for panic. First of all, pay scales in developing countries are already rising and will rise further. Secondly, the real national income in advanced countries will benefit from the gains from trade which should provide a surplus to channel towards those most hard hit by economic change. Ultimately, the best way of reversing the present widening of market wage disparities is investment in human capital. The formation of human capital by education and training should bring its own rewards. But we should avoid the trap of "credentialism", that is of inventing more and more paper qualifications which may have little relevance to future skill requirements. We are doubtful whether education or training bureaucrats have a better sense of future labour market requirements than young people themselves. Intervention in the training market could take the form of credit vouchers (to be used for training on the job or in institutions chosen by the applicant) preferably repayable on concessionary terms along the lines of student loans. Such credits should also be available later in adult life, obviously on a strictly monitored basis. The restoration of high employment will require physical investment as well. We do not recommend generalised fiscal subsidies which have frequently encouraged the wrong kind of investment, notably capital intensive projects. Public policies should be directed towards removing any existing barriers to capital formation and the establishment of new firms. The best contribution that governments could make to encourage capital formation would be to reduce their own structural budget deficits, especially by curbing expenditure. No individual European government can decisively affect world real interest rates, but the collectivity of European governments is large enough to have an impact. We would note that the Japanese current account surplus - provided it is not achieved at the expense of a depressed economy - is a contribution to world savings. Support for poorer workers in wealthy countries, provided for reasons of equity or social cohesion, should be given to them as citizens rather than as employees. There should be a shift in the emphasis of the welfare state from dole payments for non-workers to top-up payments for low-income households. (This of course implies means tests.) As incomes rise, these top-up payments should decrease, but by less than income increases. Recipients who cannot work should receive a larger transfer than those who are able to work. (The UK Family Credit scheme is of this type and worth investigating.) Another useful safety net would be a fiscal rule providing temporary tax relief for people returning from spells of unemployment. To the extent that long-term unemployment support is not based on insurance principles but is financed by general taxes, the link between unemployment benefit and previous earnings is an undesirable feature of dubious equity, which increases the minimum reservation wage below which people will not take jobs. It should be abolished, as it was in the UK in the 1980s without any political outcry. Legitimate social concerns motivated the Social Chapter of the Maastricht Treaty, but there are risks that the measures adopted will limit employment and should be watched carefully in that respect. Some of the proposed rules, e.g. limiting working hours, are derived from controversial pre-Maastricht decisions; so the issue goes well beyond the Treaty itself   Conclusion   We put forward these suggestions in the knowledge that it can take a long time for measures on the supply-side of the economy to work in reducing unemployment. We therefore urge their prompt adoption along with supportive non-inflationary demand policies. If such a balanced approach is soon adopted there will be a reasonable chance of reducing unemployment in Europe.   Samuel Brittan, UK Michael C. Burda, Germany Richard N. Cooper, USA Herbert Giersch, Germany Patrick Minford, UK Karl-Heinz Paqué, Germany Wolfgang Rieke, Germany Roland Vaubel, Germany Charles Wyplosz, France