Unemployment, the new economy and EU economic performance

Transcription

1 Industrial Relations Journal 33:5 ISSN Unemployment, the new economy and EU economic performance Steve Bradley Introduction In this paper we review the recent performance of the European economy, focusing upon the Eurozone area, but also draw comparisons with the performance of the UK, US and other OECD economies. The prospects of recovery from the recent recession are considered and so too is the medium-term growth performance of the European economy. Two features of the European economy are likely to affect the future performance of the European economy. The first is the threat to economic performance of an inflexible, or inefficient, labour market. Unlike the US and the UK, many countries within the EU have suffered from persistently high unemployment rates, and so we consider the sources of this persistence. Also, since the UK is regarded as something of a miracle with respect to its unemployment performance, we take a detailed look at the policies that have been introduced and evaluate their effectiveness. The econometric evidence on the causes of unemployment is also reviewed. Second, we examine the potential opportunities that the so-called new economy may offer. Falling transport and communication costs and improvements in information and communication technology (ICT) could have a major positive effect on the growth of the European economy. These changes have led to claims of a so-called new economy, which may have social and political consequences as well as economic effects on the European economy. We therefore review the impact of the ICT sector on the Eurozone and other economies. In the next section we focus attention on the short and medium-term performance of the European economy. This provides the context for the next two sections. Section III analyses the European unemployment and labour market inflexibility problem, whereas Section IV reviews the impact of the ICT sector on GDP growth. Section V contains our concluding comments. Steve Bradley is Professor of Economics, The Management School, University of Lancaster. Blackwell Publishers Ltd. 2002, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main St., Malden, MA 02148, USA. 392 Industrial Relations Journal

2 EU and Eurozone economic performance The green shoots of recovery There are clear signs of a return to growth albeit uneven. In the US, productivity and production are rising, attributable in part to the run down of inventories and the maintenance of consumer demand, signalling rising profits. Industrial and consumer confidence are rising in the Eurozone area, however manufacturing performance remains poor, threatening economic growth. In contrast, the UK economy has weathered the economic downturn very well (Economic Outlook, 2002). GDP growth in 2001 was in line with its long-term sustainable trend and, according to some forecasters, UK growth will exceed that of the US and the Eurozone in A major reason for this difference in the fortunes of the US, the UK and Eurozone economies is to do with the conduct of policy. It is estimated that a loose monetary policy and fiscal expansion in the UK will boost growth by more than 2 percentage points in 2002 because this may sustain the consumer boom. A similar policy stance has been adopted in the US, whereas the Eurozone s poor economic performance is due to policy mismanagement. Interest rates have not fallen sufficiently and a fiscal stimulus is constrained by the Stability and Growth Pact (Economic Outlook, 2002). The causes of recession The slowdown of the world economy had its origins in the US, which went into recession in March In the US very high productivity gains arising from the widespread application of information and communications technology, created strong growth, which was accompanied by low inflation. This led to expectations of higher corporate earnings growth, resulting in a rapid increase in equity prices, especially in the high tech sector. Business investment and consumer demand both increased. Consequently, the private sector went into financial deficit and there was an inflow of direct and portfolio investment, causing the exchange rate to appreciate. As export growth slowed, the US economy also slowed, the effects of which have been felt worldwide. Table 1 shows the growth rates of the EU, the Eurozone and several national economies. A recent OECD (2001) report stated that, although economic growth in many industrialised economies was expected to slow down in 2000, it had been anticipated that the causes of weaker growth would dissipate in the latter part of The rate of economic growth in the EU and the Eurozone did drop to 2.6% in 2001 from their Table 1: Changes in output (real GDP), (Percent change on previous year) UK France Germany US Japan EU Euro area OECD Source: UNCTAD, 2001; OECD Economic Outlook No. 69, May 2001 and National Institute Economic Review No 176 April Notes: projections for and annual averages for and Blackwell Publishers Ltd EU economic performance 393

3 Table 2: Changes in total domestic demand (Percent change on previous year) UK France Germany US Japan Euro area Source: National Institute Economic Review, April peak of approximately 3.4% in 2000, and are expected to rise slightly in The growth performance of the EU and the Eurozone economies also outstripped that of the US, Japan and the OECD in 2001, whereas in all but the Japanese case it is anticipated that this situation will be reversed in As suggested earlier, the reasons for the dissipation in the causes of weaker growth lie in the recent reductions in interest rates in the UK and US, for instance, falling oil prices, although this trend has reversed, and the decrease in taxes in several countries. All of these factors should stimulate aggregate demand and economic growth. Table 2 shows that the stimulus to domestic demand is expected to be particularly strong in the UK and the Eurozone economies. The production sectors in several European economies, such as Britain, have experienced difficulties bearing the brunt of the recession. In Britain, industrial production fell in the first quarter of 2001, compared to the same quarter in the previous year, but the fall was less than that of Germany and the US. The British export sector, especially those competing in the euro area, has been struggling for some time because of the strong pound. However, other indicators of economic performance are more favourable. Although the labour market is tight, wage and earnings growth has been modest, and so the rate of inflation in Britain (2.1%) is lower than that in Germany (3.1%) and the US (3.2%). Eurozone inflation is expected to rise from 2.4% in February 2002 to 2.5% in March The rate of unemployment in the EU and the Eurozone economies has been persistently high, in contrast to Britain where the rate of unemployment has fallen to levels not seen since the 1970s. For instance, in 2001 the unemployment rate in Britain was only 5.2% and is expected to rise to 5.5% in 2002, whereas in the EU and the Eurozone economies the equivalent figures for 2002 are much higher at 7.7% and 8.3%, respectively (see Table 3). The lowest unemployment rates in February 2002 were in the Netherlands (2.3%), Luxembourg (2.6%), Table 3: Standardised unemployment rates (%) UK France Germany US Japan Euro area EU OECD Source: OECD Economic Outlook No 69 and National Institute Economic Review No Industrial Relations Journal Blackwell Publishers Ltd

4 Austria (3.9%), Ireland (4.3%) and Portugal (4.3%) whereas Spain remained the highest (12.9%). Furthermore, it is expected that unemployment in the Eurozone will start to rise again in the near future, especially in Ireland, Austria and Portugal (Economic Outlook, 2002). Medium-term performance Over the medium term actual and trend growth in the OECD was lower in the 1990s compared with the 1970s and the 1980s, continuing the well documented decline in the growth rate (Elmeskov and Scarpetta, 2000). In more recent years this trend has been reversed, especially in the US, Australia, Ireland, Netherlands, Norway and several EU countries. The main cause of the growth rate differences, it is argued, is rising labour productivity, which accounted for over 50% of the GDP per capita growth in these countries in the 1990s. The increase in labour productivity has, in turn, been caused by improvements in human capital and by the impact of ICT. Labour utilisation (i.e. employment rates combined with hours worked) and demographic factors, such as the growth in the workforce, have had less of an effect. However, comparing the EU and the US, lower labour utilisation accounts for three quarters of the gap in their levels of GDP per capita. It is worth noting the slow down in the performance of the Japanese economy, which is apparent in Table 1, because in many ways it is reminiscent of the eurozone economies and may offer some lessons for the future. There are two competing explanations for the recent performance of the Japanese economy (Wilson, 2000). First, the monetary perspective, or liquidity trap argument, whereby conventional monetary policy, such as cutting interest rates, has little effect in stimulating the economy. A demand stimulus may therefore be required. Second, structural problems related to the real side of the economy, including a high dependency ratio coupled with low nominal interest rates. 1 Unemployment and labour market flexibility In the previous section we alluded to the European unemployment problem, which is often characterised as being rooted in the problem of inflexible labour markets. Here we examine this problem in greater depth, documenting performance and reviewing the available econometric evidence on its causes. We examine the case of Britain in some detail, since it is claimed we have experienced an unemployment miracle. The reader is left to judge whether our EU partners can learn from the British experience. Unemployment performance varies dramatically between Eurozone members. Elmeskov, Martin and Scarpetta (1998) classify countries according to their unemployment experience. The UK and the Netherlands, together with Denmark and Ireland, are amongst the successful OECD countries that have reduced unemployment. In contrast, Belgium, Finland, France, Germany, Italy and Sweden are amongst those countries that have been unsuccessful. Nickell et al. (2001) have investigated shifts in the so-called Beveridge curve, the relationship between the vacancy rate and the unemployment rate, to see whether the efficiency of OECD labour markets has deteriorated or improved over the period They show that almost all EU economies experienced a decline in the efficiency of the labour market, in terms of its ability to match workers and firms, up to the mid-1980s. However, whereas many EU and OECD countries experienced a further decline in labour market efficiency in the 1990s, improvements have been observed for Britain, Ireland and the Netherlands, for instance. This was reflected in a decline in their unemployment rates. In the UK case, the unemployment rate was 12% in 1986, 8.2% in 1996 and is just over 1 The dependency ratio refers to the proportion of the population who are economically inactive (i.e. retired or in school) who must be supported by the economically active. Blackwell Publishers Ltd EU economic performance 395

5 5% today. The performance of the Netherlands is even more dramatic 12.2% in 1984, 6.3% in 1996 and just over 2% today. This variation in unemployment performance in Europe, and more generally in the OECD, has led to several econometric investigations of their causes. According to Belot and van Ours (1999) these developments raise the question of why unemployment performance should vary? The focus is upon the role of institutions since... labour market functioning is influenced by a set of regulations, bodies and processes [which] vary across countries and time. Many countries have introduced reforms to their labour market institutions, such as the introduction of Active Labour Market Policies, anti-union legislation and changes in employment protection, all with a view to creating greater labour market flexibility, or increasing labour market efficiency. Clearly, as the discussion above suggests, not all countries have been successful. Britain, however, can legitimately be regarded as a success story. Unemployment in Britain and the policy response Figures 1 and 2 compare the unemployment and inflation performance of the UK with several other major industrialised countries. Nickell and van Ours (2000) discuss the UK unemployment experience in some detail. Unemployment in Britain fell below the EU average in Prior to this, the unemployment rate rose in the 1970s because of the oil price shocks, exploding after the second shock in Thereafter, it declined, apart from during the recession of Of greater importance, however, are changes in the equilibrium unemployment rate. The equilibrium unemployment rate is that rate consistent with non-accelerating inflation, and it is claimed that this started to rise in the 1970s as a result of stronger unions. In the 1980s, after the second oil price shock, unemployment rose to 10%, which was above the equilibrium rate of 7.5%, and was accompanied by falling inflation and a balance of payments surplus. Since then the equilibrium unemployment rate has fallen and is now close to the actual unemployment rate. Several causes of Britain s relatively poor performance with respect to unemployment, labour productivity, inflation and economic growth have been identified. These range from the effect of de-industrialisation to the problems caused by the nexus of Figure 1: Comparative inflation performance, Industrial Relations Journal Blackwell Publishers Ltd

6 Figure 2: Comparative unemployment performance, institutional arrangements and incentives that existed in the British labour market (Bean and Crafts, 1996; Crafts, 1993, 1999). Of particular importance here are the systems of industrial relations and human capital accumulation, which adversely affected productivity performance and unemployment. Crafts emphasises social capability, or incentive structures, as of key importance to economic growth and lower unemployment rather than technological innovation. We therefore examine the systems of industrial relations and human capital accumulation in greater depth. Human capital accumulation It has been argued that the deficiencies of Britain s vocational education and training (VET) system have led to comparatively poor labour productivity performance and economic growth. A poorly trained workforce may also increase the equilibrium unemployment rate. In this section we discuss the deficiencies of the VET system in Britain and explore what improvements have been made over the last 20 years as a result of changes in government policy. Keep and Mayhew (1988) and Prais (1995) provide a clear assessment of the deficiencies of Britain s VET system up to the late 1980s. Compared to our major international competitors, the British system suffered in several ways. First, our relatively poor system of compulsory education produced a significant proportion of school leavers who were unqualified, and who lacked basic literacy and numeracy skills. Second, a lower staying on rate beyond the compulsory school-leaving age, and a narrow apprenticeship system, focused almost entirely on engineering and construction trades, which had been in long-term decline. Third, there was a lack of training for young people who did not enter apprenticeships, a situation that was often contrasted with Germany where the dual apprenticeship system provided vocational training in a wide range of occupations, including those in the service sector. Fourth, British employers were often criticised for not providing adult training to upgrade the skills of their workforce, and management training was regarded as poor. The net effect of these deficiencies was that Britain suffered from having too few workers with intermediate, or craft level, skills compared to our competitors. Britain Blackwell Publishers Ltd EU economic performance 397

7 therefore had a very high proportion of low skilled workers, and, although this share fell from 65% of the workforce in 1985 to 52% in 1996, this is still considerably higher than the benchmark case, Germany, with only 25% low skill workers (Murray and Steedman, 1998). Some commentators have gone further, claiming that Britain was trapped in a so-called low-skills equilibrium, wherein a low skilled workforce produces low value added goods (Finegold and Soskice, 1988). This left Britain open to competition from developing and emerging economies, which have the advantage of abundant low wage labour to produce these products. The election of the Conservative Government in 1979 led to a supply-side revolution in economic policy making and reforms to the VET system were numerous. These included the reform of the education system, the introduction of publicly funded youth training programmes, and the devolution of responsibility for training provision from the Manpower Services Commission to employer-led Training and Enterprise Councils. Have these reforms improved the quality of the workforce and hence contributed to the decline in the unemployment rate in Britain? The Education Reform Act (1988) introduced major reforms to the secondary education sector, and sought to create a quasi-market in education. By increasing parental choice of school and stimulating competition between schools for pupils, it was hoped that educational standards would rise. Bradley et al. (2000) show that the secondary education sector does operate like a quasi-market, and that competition between schools has raised performance in GCSE exams in the 1990s. Teacher productivity, measured by the number of high grade GCSE exam passes per teacher, has also risen over the period (Bradley and Taylor, 2002). Partly as a result of the increase in exam performance, the proportion of young people staying on beyond the compulsory school leaving age has risen to over 70% of the age group. Educational standards, when measured by success in GCSE exams, do appear to have been raised by the educational reforms. On the downside, Britain continues to lag behind Germany in terms of the number of workers with A-level equivalent qualifications and is even behind France with respect to good GCSE qualifications (Layard, McIntosh and Vignoles, 2000). The recession of the early 1980s precipitated a dramatic rise in youth unemployment and the collapse of the apprenticeship system. The Government response was to reform the Youth Opportunities Programme, which was replaced by the Youth Training Scheme (YTS). By 1983 the YTS had become a 2-year programme of planned off-the-job-training and work experience available for all year olds. Later, with the introduction of National Vocational Qualifications in 1988, the YTS offered certificated training across a wide range of occupations. The YTS has been amended several times, changing its name to Youth Training in 1990, and more recently being transformed into Modern Apprenticeships and Training for Skills. Have these programmes of youth training been a success? The consensus from micro-econometric studies of the impact of training programmes on employment and wage outcomes suggests that they have not been that successful. Participation on a youth training programme has had a small impact on employment prospects, but there is no appreciable increase in wages compared to non-participants. The quality of the training provided by government programmes is therefore questionable. With respect to adult training, there have been attempts to encourage employers to provide more, and better quality, training. Reforms began with the dismantling of the Industrial Training Boards, which was replaced by the Manpower Services Commission (subsequently the Training Agency), so reducing the role of the private sector. The inability of the Training Agency to stimulate adult training, led to the introduction in 1990 of the Training and Enterprise Councils (TECs). Recently, the TECs have been replaced by Skills Councils, which have responsibility for workbased training and further education. Have these changes been a success? According to Keep and Mayhew (1999), the most useful development in the last 20 years in the field of adult training has been the creation of Investors in People, a kite-mark signifying good practice in company training provision. The volume of work-base adult training has remained constant (Felstead, Green and Mayhew, 1997). 398 Industrial Relations Journal Blackwell Publishers Ltd

8 The net outcome of these reforms seems to be that Britain still lags behind its main international competitors in terms of intermediate skills. Therefore, it could be argued that there is little that other EU countries could learn from Britain s experience with respect to training. One exception may be the reforms to compulsory education, which do appear to have raised educational performance. Industrial relations system and financial incentives The British system of industrial relations and the system of work and benefit-related financial incentives that existed up to the late 1980s have been cited as major contributors to the creation of an inflexible labour market. Several questions arise. First, how does the system of industrial relations and financial incentives affect inflation and unemployment? Second, what reforms have been introduced in Britain over the last 20 years? Third, have these reforms been successful in terms of generating less inflationary pressure and lower unemployment rates? Union power and our system of industrial relations were seen as causes of rising inflation because they pushed up firms costs. As these costs rise, firms were forced to reduce the size of the workforce and so unemployment rises (Blanchflower, 1996). Union density increased in the 1970s, but declined thereafter, and union coverage has fallen dramatically from 70% in 1980 to 47% in This is unique within the OECD and has arisen primarily because of the implementation of employment legislation in the 1980s, which has had the effect of reducing union bargaining power (Nickell and van Ours, 2000). The outcome of these changes is that there has been a substantial reduction in inflationary pressures and a decrease in the equilibrium unemployment rate. Financial work incentives also affect the equilibrium unemployment rate through their impact on labour supply. Generous benefit levels, or more accurately a high replacement ratio, indefinite benefit payment and less rigorous policing of the unemployed raise the equilibrium unemployment rate because they undermine the incentive to work. The replacement ratio, that is the proportion of income replaced by benefits if a person becomes unemployed, has fallen since the 1960s and policing of the unemployed is now much tougher since the introduction of the Restart programme. Dolton and O Neill (1996) show that the Restart programme has had positive employment effects. Consequently, the equilibrium unemployment rate has fallen. However, the indefinite payment of benefits is a source of weakness for Britain and encourages long-term unemployment. To counteract long-term unemployment, the Labour Government has introduced New Deal, which is a system of welfare-towork policies. Despite increased spending on Active Labour Market Policies over the last thirty years, it appears that they have had only a small part to play in the reduction of inflation and unemployment of the 1990s (Nickell and van Ours, 2000; Robinson, 2000). Other factors have increased labour market inflexibility, such as excessive employment protection and skill mismatches. The latter reflects a relative demand shift in favour of skilled workers (Machin, 1996; Machin and van Reenan, 1998). Advances in technology have led to an increase in demand for more highly skilled workforce, which Britain s VET system has been unable to deliver. Employment protection has also been reduced in Britain compared to some of our EU partners. In sum, there has been a very real improvement in the British labour market during the 1990s, with a fall in the equilibrium unemployment rate. This is a real phenomenon and not just a result of a statistical redistribution of non-employed workers from unemployment to other categories. In contrast with most other EU countries, there is something of a miracle here (Nickell and van Ours, 2000). The main reasons for this fall are the reduction of union power in wage negotiations, and the impact of changes in financial incentives described earlier. ALMPs have been less successful. 2 2 However, multi-country studies do show that ALMPs can reduce unemployment, especially those policies focusing on job search assistance. Training programmes, as the British experience suggests, Blackwell Publishers Ltd EU economic performance 399

9 The impact of institutions on unemployment: econometric evidence There is some dispute about the impact of labour market institutions on unemployment performance and the flexibility, or efficiency, of the labour markets in the EU and the OECD. Solow (2000) argues that high and persistent unemployment in Europe cannot simply be due to institutions causing labour markets to become less efficient, because the evidence for France and Germany is that there has been no deterioration in their efficiency. Similarly, Blanchard and Wolfers (2000) argue that labour market institutions cannot be the sole cause of persistently high unemployment in Europe because many of these institutions were present when unemployment was low. These views have, however, been challenged by two recent econometric investigations of unemployment conducted by Belot and van Ours (1999) and Nickell et al. (2001). The novelty of the Belot and van Ours (1999) study is that it investigates the impact of a large number of institutional variables on the change in unemployment using panel data techniques, and also analyses how the interaction between those variables affect unemployment. They find that high employment taxes and replacement rates raise unemployment, whereas the change in inflation had a negative effect. Countries with high levels of co-ordinated pay bargaining have lower unemployment rates, as do those countries with higher union density. The latter finding is possibly counterintuitive unless it reflects union concern for the employment, as opposed to the wages, of their members. High union coverage raises unemployment. Interestingly, Belot and van Ours (1999) also find evidence of interaction effects: where bargaining systems are less centralised, the effect of employment taxes has less of an effect on unemployment. The reverse holds where pay bargaining is highly centralised. The replacement rate and employment taxes are reinforcing where tax rates are high the replacement ratio has a much large effect than where the tax rate is low. One may conclude from this kind of analysis that governments should seek to change the nexus of institutional arrangements in the labour market if they want to reduce unemployment, rather than simply focusing upon a single feature of the institutional environment. Nickell et al. (2001) obtain similar results, although they include a larger number of institutional variables, in addition to shock variables, and also explicitly investigate the determinants of labour market efficiency as well as unemployment over the period The duration of benefit payments, union density and the proportion of the housing stock that is owner occupied shift the Beveridge Curve to he right, hence reducing labour market efficiency. Employment protection legislation shifts it left, and it is speculated that this may be because of an increase in the efficiency of the personnel function. However, excessive employment protection, higher employment taxes, generous benefits (levels and duration) raise unemployment. They conclude that... it appears that, overall, changing labour market institutions provide a reasonably satisfactory explanation of the broad pattern of unemployment shifts in the OECD countries... (p. 17) This conclusion, they claim, applies particularly in the following countries: Australia, Belgium, Denmark, Finland, France, Italy, the Netherlands, Norway, Spain, Switzerland and the UK. They explain very little of the German experience. Quantitatively, the most important cause of increases in unemployment over the period were generous benefits, increases in employment taxes, and shifts in union power and employment protection legislation. The new economy and economic performance In a recent report the OECD have claimed that ICT has the potential to transform economic and social activity, and has caused more rapid economic growth (and unemployment reductions) in those countries with a stable economy (OECD, 2000). Some commentators go further and suggest that ICT will be as important for econhave to be properly designed if they are to prove effective (Nickell et al., 2001; Martin, 2000). 400 Industrial Relations Journal Blackwell Publishers Ltd

10 omic growth in the future as innovations such as, electricity or the combustion engine were in the past. This view may be a little extreme, however, there is evidence that the deteriorating performance of the ICT sector may be a major contributor to the recent slowdown in the world economy, challenging the conventional wisdom that the recession began in the US and then had a ripple effect worldwide (Economic Outlook, 2002). Elmeskov and Scarpetta (2000) argue that ICT can affect growth through three main channels. First, the acceleration of productivity in the ICT sector, making it more important for the entire economy. Second, rising growth in investment in ICT leads to capital deepening throughout the economy. Capital deepening has been stimulated by a large fall in the quality-adjusted price of ICT equipment, leading to the substitution of other assets for ICT and greater overall investment. The outcome is an increase in labour productivity. In Britain, for instance, investment in nonresidential IT equipment rose from 5.2% in 1985 to 11.7% in 1996 compared to 6.3% and 13.4% in the US. This growth rate has risen considerably in the US in the latter half of the 1990s. It has been estimated that the ICT capital stock contributed 14% of total output growth in the 1990s, with a surge in the latter half of the 1990s (Elmeskov and Scarpetta, 2000). It has also been estimated that the use of ICT has raised labour productivity growth in the US business sector by percentage points between 1995 and Black and Lynch provide microeconomic evidence of the positive impact of ICT on productivity at the firm level (Black and Lynch, 1997, 2000). Third, the use of ICT creates spillover effects on productivity, leading to changes in company organisation, which affect the efficiency with which capital and labour are used in production. One example of the spillover effects arises from improved communication and access to information through the Internet, which gives rise to different and more efficient ways of organising production and sales. The growth of the ICT sector has contributed to differences in trend growth in GDP per capita between the 1980s and 1990s, increasing in several countries, such as Australia, Ireland, Netherlands and particularly in the US. Table 5 also reports actual and forecast GDP growth and the contribution of the ICT sector (manufacturing and services) for the period In the year 2000 the ICT sector made a substantial, positive, contribution to GDP growth in the Eurozone, but this was lower than in the US and the UK. By 2002 it was expected that the decline of the ICT sector would have its most severe effect in the US, reducing GDP growth by 0.71%, followed by the UK ( 0.51%) and the Eurozone ( 0.44%). Nevertheless, the UK economy is still expected to experience higher rates of economic growth. It would therefore appear to be the case that ICT has had a substantial effect on Table 4: Growth performance in OECD countries, (Percent change on previous year) Growth of GDP per capita Trend growth of GDP per person employed Country UK France Germany US Japan EU OECD Source: Extracted from Table A1 Elmeskov and Scarpetta (2000) Blackwell Publishers Ltd EU economic performance 401

11 Table 5: The contribution of ICT to GDP growth GDP ICT GDP ICT GDP ICT UK Eurozone US Japan Source: Derived from Economic Outlook (2002). Figures are percentages. growth rates in a number of OECD economies and especially in the US. However, ICT has had less of an impact in Britain compared to the US, possibly because of the insufficient supply of knowledge intensive workers, such as scientists, engineers and ICT specialists, or because the competitive environment is not right. Both would appear to be pre-requisites for the effective utilisation of ICT. Work practices are also important for the effective use of ICT, and in this respect Britain and Sweden are at the forefront. Both exhibit a greater propensity to implement new practices, such as teamwork, job rotation, employee involvement schemes and flatter management. Thus, although there is a view that ICT has led to the creation of a new economy in some countries, its impact has been variable. The OECD argue that the growth of ICT should be encouraged and the way to achieve this is to remove barriers to new business start-ups, provide financial incentives, de-regulate the telecom market and create a stable macro environment. Conclusion In this paper we have reviewed the economic performance of the European economy in the short and medium term. There are clear signs of economic recovery in the US and the UK has weathered the storm of recession very well. In the Eurozone, economic performance is still patchy, and this difference has been attributed to policy mismanagement in the EU. The EU has persistently high unemployment rates, the causes of which have been investigated. The British experience, together with the econometric evidence, suggests that unemployment in the EU can be reduced through institutional reform. Two points should be borne in mind, however. First, it is important that policymakers consider the nexus, or combinations, of institutions and regulations rather than focus on one aspect of the institutional environment. Second, the institutions of particular importance are unemployment benefit systems, employment taxes, the role of unions and the stringency of employment protection. The British experience of union reform and reductions in benefit generosity, together with more stringent policing of claimants, does appear to have proven successful. However, the quality of the VET system and the effectiveness of ALMPs remains a cause for concern, and may hinder future growth and unemployment performance. The importance of ICT is clear, judging from its impact on GDP growth, however, a properly educated and trained workforce could be regarded as prerequisites if its full economic potential is to be harnessed. Corresponding author: Steve Bradley, Department of Economics, The Management School, University of Lancaster, Lancaster LA1 4YX. s.bradley@lancaster.ac.uk 402 Industrial Relations Journal Blackwell Publishers Ltd

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13 Robinson, P. (2000), Active Labour Market Policies: A Case of Evidence-based Policy-making?, Oxford Review of Economic Policy, Solow R. (2000), Unemployment in the United States and in Europe: A Contrast and the Reasons, CES ifo Forum, Spring. Wilson, D. (2000), Japan s Slow-down: Monetary Versus Real Explanations, Oxford Review of Economic Policy, Industrial Relations Journal Blackwell Publishers Ltd