Between new Keynesianism and deregulation: Employment policy in the European union

Abstract

There is widespread concern about the relative poor performance of the European labour market. A particular worry is the high and persistent levels of unemployment in the region. Perhaps the two most influential approaches to remedying Europe's labour market problems are New Keynesianism and the deregulation perspective. New Keynesianism, as the label suggests, has its origins in macroeconomic thinking. This view argues that European economies require more co‐ordinated forms of wage bargaining, more active policies to reduce the skills mismatch between the unemployed and vacancies, and more targeted measures to reduce long‐term unemployment and the high levels of joblessness. On the other hand, the deregulation perspective suggests that the unemployment problem in Europe is caused by labour markets being blighted with rigidities caused by too much government intervention and over‐powerful trade unions. Thus this approach argues that a range of flexibility measures designed to weaken legal rules in the labour market is necessary before the job generation process can begin again. This article examines how influential these contrasting perspectives are inside the European Union. It suggests that most member states pursue an untidy mixture of the two approaches.