Page 68 - ASEAN-EU Dialogue 2018: Regional and Inter-Regional Economic Cooperation: Identifying Priorities for ASEAN and the EU

Chapter Twelve
Fundamental Characteristics of Asian and European Labour Markets
Fumitaka Furuoka, Aida Idris, Beatrice Lim and Rostika Petrus Boroh

Introduction
This chapter examines the main characteristics of labour market in Asia and Europe. The main
feature of Europe is that unemployment rates are persistently high. In Europe, unemployment
rates tend to increase when a country faces an economic crisis and will reduce when the
economy recovers from the crisis. However, the level of reduction often does not reach pre-
crisis rates. This appears to be mainly due to provisions of generous unemployment benefits in
Europe, where policymakers often have to make a paradoxical balance between labour market
flexibility and employment protection.

By contrast, the main feature of Asian unemployment is that unemployment rates are quite
stable, whereas for Europe they are persistently high. In Europe, unemployment rates tend to
increase when a country faces an economic crisis and will reduce when the economy recovers
from the crisis. However, the level of reduction often does not reach pre-crisis rates. In Asian
countries, unemployment rates do not seem to be affected by economic conditions. Some
possible factors contributing to this trend include a weaker unemployment protection
mechanism, a strong existence of an informal sector and a prevailing culture of self-help in the
region.

Main Characteristics of Labour Market in Europe
Persistently high unemployment rates among European countries have been a well-known fact
among economists since the 1980s. Some of the leading researchers who have debated on this
issue include two American economists, Olivier Blanchard of Massachusetts Institute of
Technology and Lawrence Summers of Harvard University. They argue that, particularly in
the 1980s, unemployment rates in Europe would increase during economic crisis but would not
decrease to original levels even after the end of the crisis. This interesting phenomenon in the
European labour market is called “unemployment hysteresis” (Blanchard and Summers, 1986).

In the European labour market, employment protection mechanisms, such as unemployment
insurance, is seen as a potential cause of persistently high unemployment rates. It has been
argued that the strong existence of employment protection in the region can prevent the labour
market from becoming flexible enough to absorb negative shocks in the labour market.

There is an on-going debate on the relationship between worker protection provided by labour
market institutions and the flexibility of labour market. This debate is known as the labour
market flexibility debate. Some economists who believe in the importance of flexibility argue
against employment protection. These neoclassical economists promote the importance of
natural rates of unemployment, the efficiency wage theory and the job search theory to explain
the market equilibrium of labour supply and demand. According to this school of thought,
unemployment insurance can be seen as a “social wage” which contributes to high
unemployment. This line of argument is promoted by some international organisations, such
as the Organisation for Economic Cooperation and Development (OECD) and the International
Monetary Fund (IMF). Thus, this economic thought is also known as the OECD-IMF
orthodoxy for the labour market. For example, the OECD has proposed the OECD Jobs
Strategy for all its member countries. Under this policy recommendation, the OECD suggests
that all member countries should promote higher flexibility of the labour market and

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