In their new WSF Working Paper, Hassan Molana, Catia Montagna and George E. Onwordi from project GlobLabWS examine how labour market and welfare state reforms in the direction of flexicurity affect long-run unemployment and the dynamic response to international shocks of an economy characterised by a liberal welfare state regime.

The working paper makes a relevant contribution to contemporary debates around international economic shocks and their effects on labour markets outcomes and GDP. It also complements the nascent interest in distributional impacts of international shocks and welfare-based tax-and-benefit policies by tracing changes in shares of household income.

Flexicurity denotes a combination of relatively low degrees of employment protection with generous unemployment support accompanied by the adoption of active labour market policies (ALMPs) aimed at increasing workers’ employability. The notion of flexicurity has been widely embraced as a guideline for welfare state reforms capable of reconciling the rationale for labour market deregulation and welfare state retrenchments on the one hand and growing insecurity and a greater demand for social safety nets on the other.

The team considers an economy such as the UK, a liberal welfare system characterised by high flexibility and low unemployment insurance, and examines the effects of implementing reforms packages in the direction of the flexicurity system of Denmark – which would entail reducing the flexibility of the labour market and increasing unemployment insurance. Contrary to conventional wisdom, the paper finds that higher employment protection and unemployment insurance do not provide a greater buffer against adverse shocks. Instead, reforms towards flexicurity result in a higher volatility in unemployment and GDP in response to exogenous foreign shocks.

However, the analysis shows that when they combine greater income support for the unemployed and stronger firing restrictions with active labour market policies that enhance employability and job creation, such reforms can improve labour market outcomes and increase the level of economic activity in the long-run.
More info and working paper for download at www.welfarestatefutures.org