Niccolo Fantini // 10 September 2020

The regulation of labour and employment lies at the heart of any debate on economic freedom. State intervention into the labour market, and especially so-called ‘hiring and firing laws’, are crucial in shaping the degree to which employment can adjust to changing environments and react to crisis. Labour flexibility is generally recognised as a prerequisite for growth, since it allows employers and firms to maintain efficiency and competitivity. The 2008 Financial Crisis triggered important political and economic realignments in Europe and elsewhere, in which labour market reforms took the front seat. Findings from the Economic Freedom of the World: 2020 Annual Report suggest that the 2008 downturn was best managed by countries which opted for flexibility of the job market and effective safety nets, such as Denmark.

When it comes to the European Union, there are substantial differences across member states in labour regulation policies. The report highlights a ‘default’ strict regulatory environment for Western European countries, and especially for Southern member states. The 2020 Employment Flexibility Index confirms this reality, placing the UK, Denmark and Ireland at the top of the list for a flexible labour environment. France, Luxembourg and Portugal come instead at the bottom end of the list, scoring very low on flexibility indicators.

If the general takeaway from the 2020 report is that economic freedom is increasing around the world, this trend is also true for labour regulations in Europe. From the outset of the 2008 crisis, most European governments have reacted to rising unemployment with deregulation and amendments to job protection laws. These changes were however not substantial. For instance, the Hiring and Firing Regulation sub-component for Italy, on a scale from 0 to 10, has risen from 2.45 in 2009 to 3.24 in 2017, while the more general Regulation component went from 6.30 to 6.81 during the same period. A key reform in this direction was the Jobs Act, pushed through by the social-democratic majority headed by Matteo Renzi between 2014 and 2015, which included, among other things, the relaxation of hiring and firing regulations and the strengthening of safety net provisions. These reforms followed on the path already set by the previous, technocratic government of Mario Monti, who has been often accredited with ‘saving Italy from the brink’ by passing liberalising and deregulatory reforms.

Greece, as the epicentre of the EU sovereign debt crisis, also records a rise from 3.22 to 4.16 in the Hiring & Firing Regulation sub-component. The Greek government notably rolled out a package of liberalising reforms, also under pressure from international financial institutions and the EU. These reforms eased labour protections by extending the duration of temporary contracts and decentralising collective bargaining further towards businesses. Analyses of the Greek case have delivered mixed results. While structural reforms have been seen as crucial in taking Greece out of the crisis and bringing its unemployment relatively under control, others lament the rapid increase in precarious work, fuelled by the diffusion of short-term contracts.

With Covid-19, we should be wary of assuming a steady development of these trends in economic freedom for the immediate future. In the aftermath of the health emergency, strong growth will be key in supporting struggling economies. We can conclude that the EU clearly does not present a homogenous labour policy environment. If policy-makers are aiming at recovering their economies from the Covid-shock, they should embrace flexibilisation of labour regulations, while at the same time creating effective safety nets for the unemployed that promote re-integration and training development.

This blog is the first part of a series covering issues linked to the 2020 edition of the Fraser Economic Freedom of the World Index.