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Rigidity, The Enemy of Economic Health

July 1, 1985 -

In the period since World War II period, Western Europe has developed an extensive set of welfare state provisions. The positive side of this development is the protection it provides against economic insecurity and hardship. However, not only are these benefits generally taken for granted today, but they also have produced a plethora of state regulations and bureaucracies, which have in turn blocked healthy economic development. A German economist coined the term "Eurosclerosis" to describe the burdensome network of labour laws, welfare programs and governmental controls now the hallmark of all European democracies.

Many details pertaining to the operation of a business, such as the hiring and firing of employees, wages, and fringe benefits are subject to government regulation. The resulting rigidity hampers management decision making and company viability. Even socialist economies, including that of Mitterand in France, are realizing that government control of the economy does not work. The lack of growth and job creation in the European economies is directly related to their internal rigidity. While Europe suffered a net loss of 185 million jobs over the last decade, the United states created some 15 million new jobs. One significant factor is that because European workers are virtually guaranteed lifetime incomes, they are reluctant to retrain for other jobs. Another is that European manufacturers face payroll taxes of up to 70 per cent of wages, compared with about 28 per cent in the United states. Instead of creating new jobs, European corporations have preferred to invest in labour-saving technology.

While European labour relations are not the only obstacle to regaining economic health, there is a growing consensus developing that the deregulation of labour markets is essential to the economic recuperation of the European economy. (See, for example, Paul Lewis, "Europe's Tougher Labour Policies," The New York Times, April 28, 1985).