Transitional labour markets: experiences from Europe and Germany (1).

Abstract

Currently, women and men faced with increasingly work-related critical events are experiencing risks that are not fully covered by unemployment insurance. Transitional labour markets (TLMs) aim to navigate risky transitions between various employment relationships or between 'inactivity' and employment over the life course through various forms of income insurance, training and employment support. This paper outlines the concept of TLM and provides examples from Europe, especially from Germany, by discussing the conditions for 'good practice' performance.

Introduction

The idea of transitional labour markets (TLMs) is attracting increasing attention in Germany as well as in Europe (European Commission 2003/04). However, not only is the concept of TLM and its scientific and political applications evolving (and being theoretically and analytically underpinned), it is still relatively unknown outside Europe, although commonalities in recent social and labour market policy research between the continents cannot be ignored. Excellent examples are the interim papers from the Transitional Labour Markets project of the Centre for Public Policy at the University of Melbourne (Howe et al. 2005; Ziguras et al. 2004) and the Conference on Transitions & Risks: New Directions of Social Policy also organised by the Centre in February 2005 in Melbourne, with over 100 papers and about 400 participants, including some researchers from Europe. Thus, the exchange of conceptual ideas is making a promising start where countries can learn from each other.

This article tries to make a specific contribution to this mutual learning process. It provides a brief recapitulation of the basic concept of TLM and then a description of some good but also some less convincing practices in Germany and in other European countries. The challenges to which TLMs respond are described and the criteria for successful institutional arrangements are developed against which the emerging policies towards TLMs have to be assessed.

1. The Concept of Transitional Labour Markets

Transitional labour markets (TLMs) offer conceptual guidelines for managing employment-related risks during the life-course. (3) These risks are currently changing for a variety of reasons--increasing participation of women in the workforce, changing work organisation and technologies, an ageing workforce, increasing international competition and so on. Moreover, the borders between gainful employment and other productive activities are becoming increasingly blurred. The 'standard labour contract' is eroding or at least changing in character. People transit more and more between different employment statuses: between part-time and full-time employment, paid employment and self-employment, unemployment and employment, education or training and work, unpaid family and gainful labour market work, work and retirement. (4)

As an analytical concept, TLMs emphasise the dynamics of labour markets by focusing the analysis on flows rather than stocks and by applying methodologies that attempt to detect, compare and explain patterns in the myriad of individual transitions. Some of these transitions are critical in the sense that they can lead to downward spirals in work careers ending in recurrent unemployment or (finally) in long-term unemployment, poverty and subsequently a discouraged state of inactivity or even violent protest. In line with the concept of social risk management (Schmid 2006), the TLM approach measures probabilities or (preferably) frequencies of risks during the life-course, for instance the risk of becoming unemployed, getting trapped in fixed-term contracts or low-paid jobs, or to moving downward in career after shifting from full-time to part-time work.

As a normative concept, the TLM approach envisages new kinds of arrangements to prevent labour transitions from becoming trapdoors to social exclusion and to instead transform them into gateways that open up a wide range of opportunities or capabilities for the employed as well as for 'inactive' or unemployed people. TLMs aim at 'making transitions pay' through institutional arrangements that enhance the employability and flexibility of both the inactive or unemployed (integrative transitions) as well as the employed (maintenance transitions) through a differentiated set of negotiated mobility options, entitlements and income insurance not only in the case of unemployment but also in cases of income variations related to risky transitions. TLMs focus therefore on preventative measures to avoid open unemployment or 'exclusionary transitions'. They support the development of career paths by the combination of paid and unpaid activity (including especially education and training), facilitating job re-entry or two-way mobility and gradual retirement.

In sum, TLMs aim to navigate the transitions between various employment relationships or between 'inactivity' and employment over the lifecourse. The aim is both to protect against the associated income risks and to encourage individuals to take chances and make risky transitions as well as companies to be inventive in adjusting their human resources management policies to meet this challenge. By means of the appropriate institutional arrangements (of a financial, legal and organisational nature), TLMs intend to provide 'bridges' at critical junctures in individuals' working lives, as they move between education and work, between dependent employment and self-employment, between unemployment and employment or between being able to do paid work or not due to incapacity or retirement. TLMs assume that the probability of critical events requiring transitions is increasing. Consequently, the need for such transitions to be socially protected is also increasingly pertinent. On the supply side, the burden associated with work, family and education during the life-course has to be reconciled in some way. On the demand side, technical progress or the international division of labour require changes in occupation or the acquisition of new skills and qualifications. Last but not least, preferences change over the course of the working life related to job dissatisfaction, physical or mental illness, changes in personal circumstances (divorce) or regional mobility required to bring the spheres of work and life together in an acceptable work-life balance.

TLMs, therefore, are institutional arrangements that provide flexibility and security during a life-course. (5) By safeguarding against losses of earnings and status, not only during periods of unemployment, but also during transitions between different employment forms, TLMs extend the principle of unemployment insurance, transforming it into employment or work-life insurance. They act as 'employment bridges', preparing the ground for the transition from one employment relationship to another, to enable the combination of several jobs ('pluriactivity') or work and education. In the parlance of social risk management, therefore, the establishment of such 'bridges' is a form of risk prevention and risk reduction. The TLM approach, thus, is a device for extending the range of 'active' or 'preventive' labour market policies considerably. Its implementation requires complex institutional arrangements that follow four principles in one way or the other:

* The organisational principle: A flexible work organisation that enables employers and employees to adapt to the challenges of the changing environment in terms of quantity (especially working time), quality (especially skills), and prices (especially wages). (6)

* The empowerment principle: Social rights or entitlements that empower individuals to act as autonomous agents, and especially to allow choices between different employment status according to shifting preferences and circumstances during the life-course (7)

* The co-financing principle: Financial provisions that support cost sharing between public and private actors reflecting the risk structure and allowing multiple usages of insurance funds and private insurance schemes, especially the (preventive) usage of work-life-insurance for financing measures that enhance employability

* The co-operation principle: Public-private-partnerships in the provision of employment services that focus not only on the unemployed but also on the employed in risk of unemployment or in need of or desire of risky transitions during their lifecourse, and also support firms in their endeavour to enhance employability

To briefly summarise, the TLM approach aims at establishing institutional arrangements that support both flexibility and security ('flexicurity') in order to provide stepping stones to move from precarious to stable jobs or establishing bridges to overcome discontinuities during the lifecourse

2. Transitional Labour Markets in Practice

The TLM-framework identifies five areas for which institutional arrangements have to be developed in relation to five main critical periods during a life-course. First, developing, maintaining and enhancing income capacity (known also as 'employability') for successful transitions between education and employment and during transitions between (continuous) training and employment. Second, guaranteeing income security during critical transitions between various employment relationships, especially between part-time and full-time work, between dependent employment and self-employment, and--increasingly important--between high- and low-wage jobs, Third, providing income support during phases in the life-course in which work capacity is reduced due to social obligations such as the care for children or other dependent persons. Fourth, securing income maintenance during transitions between employment and unemployment that allows effective job search. Fifth, providing income replacement in case of disability or retirement, i.e. in phases when employability is severely reduced or lacking completely.

2.1 Managing Transitions Between Education, Training and Employment

In our so-called knowledge society of which there is so much talk, the fundamental problem of risk management in relation to investing in training and education can be stated quite simply: it is increasingly the case that choices made with regard to training and education exert a decisive influence on future employment and earnings opportunities. Some facts about Germany will quickly reveal how great the challenges for social risk management are. They also apply to a greater or lesser extent to other EU member states. (8)

* In Germany, the risk of unemployment and poverty among those with low levels of qualification is approximately five to six times higher than among university graduates. In 2002, the unemployment rate among economically active individuals without a vocational qualification was 19.8 per cent (in the old Lander plus West Berlin) and 49.1 per cent (new Lander plus East Berlin), while for university graduates this was 3.3 per cent (in the old Lander plus West Berlin) and 5.5 per cent (new Lander plus East Berlin) (Reinberg & Schreyer 2003, p. 2).

* The poverty rate (defined as an income below 60 per cent of the median net income) among those aged over 17 with the lowest level of secondary-school leaving certificate and no further qualifications was 22.8 per cent, while that for university graduates was 4.7 per cent (Goebel, Habich & Krause 2004, p. 632, Table 5a).

* Educational opportunities are unevenly distributed. Of every 100 young people aged between 19 and 24 years, 22 have a father with the highest level secondary school leaving certificate (Abitur) and of these 18 go to university. In contrast, 45 have a father with the lowest level secondary-school leaving certificate and of these only nine go on to partake in higher education. In other words, the proportion of young people going to university with a parent who has had higher secondary education is much higher (82 per cent) than the proportion of young people with a parent with low secondary education (20 per cent) (Bundesministerium for Bildung und Forschung 2004, p. 113).

* Opportunities for further training are also unevenly distributed. Virtually every eighth person (13 per cent) of working age has never taken part in a further training program. The risk of nonparticipation in further training is higher if the level of initial training or the household income is lower (Expertenkommission Finanzierung 2004, p. 123).

This is in stark contrast with the view now widely accepted in social policy circles that young people's educational opportunities and adults' ability to take advantage of further training programs in the course of their working lives should not be determined by parental income or occupational status. This raises the question of how the risks associated with decisions about investments in education and training can be 'managed' in a socially better way.

This question, which has filled books and fuelled discussion evenings galore, cannot of course be extensively answered here. However, transitional labour market theory offers a structuring aid. In the following, are some good practices for managing the risks of educational or training decisions in the light of TML principles.

1. Apprenticeship systems (widespread especially in the German-speaking countries) embody the four principles of TLM mentioned above in almost ideal-typical form. The apprenticeship system fits in with the organisational principle described above especially because it combines practical and theoretical training; the empowerment principle is upheld because the system (not de jure but de facto) ensures entitlement to a training place. Likewise, the co-financing principle applies because there is cost sharing between individuals, firms and the state, and finally the co-operation principle is upheld because it is a public-private-partnership form of education and training that involves employees, trainees, vocational training schools and firms organised along occupational or industrial lines.

Apprenticeship systems still provide an effective bridge from school to work, as the relatively low youth-unemployment rates in countries with such systems (e.g. Germany, Austria and Switzerland) show. Even though these countries are much in need of reform for various reasons, (9) exploring whether the basic principles listed above can be applied to adults, at least in part, remains pertinent.

The system could be particularly appropriate for mature adults (without any or only low-level vocational qualifications) who are at risk of long-term unemployment with virtually no chance of finding alternative employment. In this case, for example, the burden of costs and risks could be shared by converting the worker's acquired right to unemployment benefit into training vouchers; alternatively, collective agreements could make provision for the establishment of jointly financed training funds. Many collective agreements in the Netherlands have already taken initial steps in this direction. Likewise, in Denmark they have developed a job rotation program, which encourages the recruitment of unemployed workers to replace employees who are on further training courses. This concept has now been adopted in many EU member states. Other examples are the Austrian work foundations (institutionalised transitional employment for the purpose of further training with a prospect of eventual placement) and the Swedish government's vast adult education initiative that ran between 1997 and 2002 (Oschmiansky, Schmid & Uhrig 2001, p. 41 ff.).

2. In terms of Dworkin's (2000) theory of justice, state-supported individual training or learning accounts can be seen as instruments for the periodic redistribution of resources in favour of educationally disadvantaged groups. They could prove to be effective tools, particularly for the funding and promotion of lifelong learning.

* In the original concept, employees save a proportion of their income in a real training account in order to fund further training if required. For every Euro saved, the state makes a matching contribution. However, this 'pure form' is rarely encountered in Europe and currently applies only to still pending plans in Sweden and pilot projects in the Netherlands.

* In Great Britain, virtual accounts, known as individual learning accounts, were set up with a special agency set up for the purpose: the Learning Account Centre. These accounts could be used to pay for courses with registered learning providers. The program proved very popular but was shut down just over a year after it was launched because of abuse and the potential for fraud and theft. Wales (in 2003) and Scotland (in 2004) took it up again targeting low-skilled workers in particular.

* In Austria, the costs of further training are reimbursed retrospectively and on a pro-rata basis. In addition, the Austrian government encourages employers to invest in training by enabling them to write-off 120 per cent of the costs.

* The Swiss variant (Geneva canton), which involves an actual training voucher that can be redeemed without any further contribution from the individual worker, is exceptional. However, the same underlying idea applies: workers with inadequate qualifications seeking to protect themselves against risks by taking part in individual further training measures are assisted by a financial contribution from the state. (10)

3. The German Federal Labour Agency's current use of training vouchers makes clear that a mere redistribution of resources is by no means the end of the matter. The problems that emerge during implementation demonstrate that Sen's capability approach (Sen 2001) has a thoroughly practical significance. The ability to convert available resources into individual income-capacity-increasing activities is unevenly distributed throughout society. Workers who have received little training are not able to make as effective use of vouchers as those with greater experience of training programs. Moreover, despite the availability of resources, a lack of transparency in training schemes, regional provider cartels or inadequate provision in some regions, as well as poor quality control, further restrict the trainees' 'consumer sovereignty'. Both individual responsibility (e.g. private savings for future training needs) and individual solidarity (e.g. a willingness to take part in further training) are clearly limited in the event of market failure. For this reason, the social risk management of (further) training needs to be built on solidarity (e.g. training advice and counselling) and collective responsibility (e.g. state guarantee of nationwide provision of (further) training)--in short public-private partnerships of various kinds at local, regional and national level. (11)

4. These criteria also apply to another form of risk management, namely minimising the risks of training decisions both ex post and ex ante through forecasting future skill requirements. The power of the new information technologies to gather and process information is currently under-utilised. Furthermore, the provision of information of relevance to training decisions requires good communication between the important regional actors, since only they have at their disposal the highly valuable but unquantifiable information, acquired through long experience, on both the available and required regional training stock. Investment decisions determine future skill requirements, but at the same time they are also dependent on the capacity to react quickly to training-shortfalls at a regional level. This too, illustrates to what extent risk management is a joint venture of regional networks or public-private partnerships (Neugart & Schomann 2002; Hilbert & Mytzek 2002).

5. Another challenge is that many occupations are associated with particular risks, so that the necessary training investment may never take place. In this regard, Robert Shiller (2003) suggests to cover training risks by private insurance systems and to adapt the management techniques used in financial markets to the risk management of labour markets. It is as yet impossible to assess such speculative ideas. The problems associated with private insurance schemes cannot simply be ignored. Shiller seems to underestimate the problems of individual privacy protection that arise in connection with gathering the information required to avoid opportunistic behaviour or unwanted choices. For this reason, and given the current state of affairs, it seems more promising to rely on hybrid combinations of public and private arrangements in the risk management of training. In addition, trade unions could offer occupational income maintenance policies that use financing techniques similar to those in financial markets, for example swap contracts to insure against the wage risks associated with certain occupations (or sectors or regions). (12)

6. The Australian system of student finance, the so-called HECS (Higher Education Contribution System), constitutes one possible model for a forward-looking system for insuring against education or training risks in the high-skill area. The state offers income contingent loans to students, which means loans at low interest rates, which do not have to be paid back until a certain earnings threshold is reached ($36,184 in 2005-06). A system of this kind creates a more level playing-field for initial decisions on education, it supports risky educational choices that might not lead to the expected high income and indirectly evens out the vagaries of the market, for which individuals cannot be held responsible. Also the costs to families who support their children in education are often underestimated in analyses of disincentives to further education.

Practically speaking, however, the system seems to have also some snags (Buchanan 2004). After a few years, it became for instance clear that the Australian government was using the existence of the fund for student fees as an argument for cutting government spending on higher education, so that the overall level of expenditure was in fact not rising as expected or desired. Although HECS was introduced with the explicit aim to improve the share of students from poor family backgrounds, it had no discernable effect on this target group. It may have contributed to increase overall participation, but it made only the middle class (and maybe women) better off but without making the poor worse off (Chapman & Ryan 2005). A problematic feature of HECS from the lifecourse perspective is that it shifts the burden of cost from the beginning (education) of the working life to the thirty or so years of paid employment. However, this could perhaps delay the ability to save for home purchase and prevent accumulation of other assets such as cars and white goods, and thus ultimately be a disincentive for lifelong training (Ziguras et al. 2004, p. 9). Another problem of the Australian scheme is the political discretion involved in setting the earnings threshold above which the debt has to be repaid. After a relatively generous threshold fixed by the labour government in 1988, the conservative government set the threshold at a much lower level thereby reducing the implicit subsidy of the loans considerably. This discretion was probably the main reason for the mediocre success of the program since it engenders uncertainties that deter the most risk-averse students--and these are often students from poor background--to take up such income contingent loans.

In the light of these experiences, it would seem that the study account model (which has now been introduced in several Lander of Germany) is a serious alternative to the tuition fee model, at least for a first degree. It promises to create an effective combination of individual and collective responsibility in the complex constellation of diverse and sometimes conflicting interests around education and training risks. It provides de facto funding for higher education by means of publicly funded education vouchers but requires students to exercise self-discipline, since anyone taking longer than the normal period of study to complete a degree has to pay tuition fees. For their part, the universities are required to be more focussed and resolute in terms of the courses they offer and their quality control. Governments can link university funding to the effective functioning of the accounting system at the universities. In this model, those who are lucky enough to enjoy high returns on their educational investment will not be called on to display individual solidarity by paying back into the scheme directly. With public funding, however, individual solidarity can be implemented through a progressive income tax in an indirect and probably more effective way than income contingent loans.

2.2 Managing Transitions Between Various Employment Relationships

Successful adjustment processes to increase competition often involve high job turnover and labour mobility. Firms tend to manage these processes by segmenting their staff into a stable and unstable workforce. This demand-driven feature of precarious employment relations is often complemented by supply driven discontinuities related to family formation, changes of preferences or health status. Both trends together increase the risk of instable income streams during the lifecourse. (13) This raises the question how income security related to risky transitions between different jobs or risky combinations of different employment statuses can be managed. Again, this essay can only provide some hints.

1. One strategy is pooling precarious jobs to a virtually 'normal' full-time job. For instance, we find in France or Italy that multiple employment relationships are seen for taxation purposes as one normal job, and--especially in the Netherlands--we find more and more multiple part-time jobs or combinations of part-time self-employment and part-time dependent employment. In Germany, provisions have been developed to maintain full unemployment insurance benefits for an extended period for those who attempt but fail at being self-employed. Since 1983, artists as well as journalists are protected by a special social insurance.

2. Another strategy is to enhance internal flexibility. An example is 'concession bargaining', which means the exchange of wage flexibility against employment protection. Intermittent working time reduction without (full) wage compensation and complemented by training (e.g. the VW agreement 1994) are other ways to bridge employment risks avoiding open unemployment. Work-sharing arrangements that pool preferences of (intermittent) work-time reductions and unemployment risks are still underdeveloped, but good practices are available. (14) With the 5,000 x 5,000 agreement in 2001, Volkswagen provided another model of (flexible) performance-oriented wages combined with training measures and cost sharing of training to enhance sustainable employability.

3. The trend is to develop some kind of mobility insurance, or--in other words--the transformation of 'passive' to 'active' employment protection. Severance pay law in Austria ('Abfertigungsrecht'), which changed recently in January 2003 initiated by the social partners(!), is an interesting example. Guided by the principle of 'flexicurity', it refers explicitly to the increasing mobility and instability of jobs. In case of dismissal, every employee receives severance even after only a short period of employment (or after resigning voluntarily). The size of the severance increases in relation to the number of years employed. After three years, for example, workers are entitled to two months salary and after 25 years, this goes up to 12 months salary. Financing comes from employers' contributions which amount to 1.53 per cent of salary. Payment of severance is excluded as long as contributions do not exceed three years, in case of dismissal for personal failure or voluntary quitting. However, also in these cases, the entitlement remains virtually on the account, so long as it comes to a legitimate claim of payment. A special 'Employee Accounting Office' (Mitarbeiterversorgung, MV-Kasse) administrates the fund. The claim, therefore, is directed to the MV-account and not to the individual employer! The employees have the choice of cash payment or of additional premium to the pension fund.

The Netherlands has also sector-specific severance funds ('Wachtgeld') financed by employers and incorporated in its unemployment insurance system (from 0.07 per cent contributions of wages in the insurance economy to 2.78 per cent in cultural services).

The Danish employment system provides a functional equivalent to mobility insurance by combining a low level of job protection with a high level of transfer payments in case of unemployment for low- and medium-income earners (Breedgard, Larsen & Madsen 2005).

4. Finally, new risk-management techniques or the adaptation of already established instruments of financial markets open up the possibility for individual insurance schemes to reduce the risks of income volatility or supporting mobility (Shiller 2003). For instance, in the United States there are already venture-capital firms that help young start-up companies by insuring salaries, thereby protecting employees from the increased income volatility that is connected with such companies. In this way, risk-adverse workers are stimulated to take on such jobs and will so eventually reap the potential rewards associated with higher risk businesses. In addition, and by analogy to financial markets, individuals could buy financial swaps of average incomes in their region (as measured by a regional income index), thereby reducing the risk of wages falling through foreign competition. It will also be possible to create home-equity insurance contracts that protect individuals against a decline in the market value of their homes, thus reducing regional mobility barriers.

In this vein, it would also be possible to create contracts for individuals that provide incentives for them to advance their own individual careers. An individual may then choose to pursue a more risky personal career, which often means investing in acquiring specialised skills that could prove to be extremely useful but may turn out to be a waste of time. Such individual contracts could be a vitally important stimulus for the economy, if they are successful in protecting people from career risks while encouraging them to be more adventurous in all aspects of their careers. Career insurances combined with career services could release enormous reserves of individual creativity and diversity.

2.3 Managing the Transitions Between Unpaid Family Work and Employment

How can income support related to transitions between paid and unpaid work be managed more efficiently and equitably allowing both men and women to combine family work and labour market work? As risk analyses have repeatedly revealed, the family (paradoxically) changes from a risk-absorbing institution to a risk-generating institution. Founding and raising a family increases the risk of volatile income streams, the risk of career breaks, the risk of mobility for one partner, and the risk of having to care for parents or grandparents. (15)

1. Sweden comes closest to meeting the criteria for smooth labour transitions. It has partly individualised the right to parental leave by introducing a one-month 'papa sabbatical'. The 30 'father days', which was extended to 60 days in 2002, are deducted from the 450 days of joint parental leave. Sweden's regulations also allow flexible take-up of parental leave which means that the 450 days can be used up until the child is 8 years old. According to the empowerment criteria described above (enhancing individual choice), this entitlement has been transformed into the entitlement to a time-account that can be used flexibly, for instance by taking part-time work of both parents for six years or by reducing working-time of both parents to six hours a day (30 hours a week) for 12 years.

2. Sweden also has an excellent co-operative infrastructure for individual empowerment. In contrast, Germany provided (in 2002) nursery places for only nine per cent of children under 3 years of age. France (32 per cent), Belgium (28 per cent) and Denmark (68 per cent) were much better equipped in this respect. Compared to many other OECD countries, Germany still lacks schools that hold classes the whole day.

3. Sweden, finally, pays wage-related benefits during parental leave, thus covering 'parental risks' with a kind of wage insurance. Of the 450 days covered by this paid parental leave, 360 days are paid at a rate of 75 per cent of the wage earned before, and 90 days are paid at a flat rate. Treating childcare as an income maintenance risk and not only as an income support problem is a logical step in terms of social risk management. As a rule of thumb, the income penalty after 5 years' leave amounts to 1.5-2.0 percentage points yearly, being reduced to 0.5 percentage points in case of part-time work (Esping-Andersen 2002, p. 115). The present mainstream solution, to compensate partly for the childcare through a lump-sum payment and to provide for generous leave schemes, can be questioned. It seems to be more logical to compensate for these 'opportunity costs'.

When it comes to paid maternity leave, Australia seems to be behind many of its trading partners. Less than 25 per cent of Australia's businesses offer paid maternity leave, and the average period of leave is only eight weeks. The ACTU is campaigning for a minimum standard of 14 weeks. Only 38 per cent of women in Australia receive paid maternity leave. The women who received paid leave also tend to be highly skilled and highly paid. A universal scheme for parental leave does not seem to be available. Many employers, however, fund paid maternity leave and the larger the company the more likely the organisation is to have a paid scheme in place. Their incentive to do it is to keep highly skilled labour and to avoid high fluctuation costs. The declining birth rate from 3.6 in 1961 to 1.7 at present (2005) has raised concerns about the level of support provided to navigate the transition between work and family. The conservative government introduced a baby-bonus-system that privileges single-income families with two or more children. A refundable tax offset of A$2,500 a year is paid for five years following the birth of a child, where the primary carer gives up or reduces paid employment. The Australian Federal Sex Discrimination Commissioner, Pru Goward comments critically on this policy: 'Government funded maternity benefits currently available through allowances and tax benefits are a means of assisting parents in general with the care of children, rather than directly assisting women to take time off work' (quoted in Vane-Tempest 2003, p. 225). She refers to practices in Europe as a better solution, especially that in Sweden.

2.4 Managing Transitions Between Unemployment and Employment

If people have to retrench due to intermediate cuts in working time or become involuntarily unemployed, then it is fair, first to guarantee their income maintenance to some extent enabling them to search efficiently for an appropriate new job. Second, it is also fair then to help them to integrate as soon as possible back into the labour market. Under the concept of TLM, the 'work first' approach, however, has to be qualified in the sense that the new job has to be sustainable or at least a stepping-stone to a sustainable job. Again, the following 'good practices' are only selections of possibilities to manage this transition effectively.

1. Established good practices of partial unemployment benefits are lay-off, recall and short-time compensation schemes. (16) A generic part-time unemployment benefit scheme, to my knowledge, has only been introduced in Finland; Sweden pays also partial unemployment benefits in case of involuntary part-time work.

2. The most prominent and efficient forms of job-to-job-insurance are 'employment companies' or 'transition agencies' providing temporary work, training and placement for the unemployed or employees in danger of dismissal (17), shift of social plan measures to 'job-to-job placement' (Germany), and transforming unemployment benefits into vouchers to support start-ups.

Two schemes to activate ('passive') benefit entitlements into ('active') self-employment benefits have been introduced in Germany. The first was the 'Bridging Allowance' (Uberbruckungsgeld) scheme set up in the 1980s. To unemployed people who are entitled to unemployment benefits, it offers a capitalised subsidy equal to the amount of 6 months benefits if they can produce a viable business plan. The second was a supplementary scheme introduced in 2003 as part of the Hartz-reforms celled the 'Ich-AG' (in official terms 'start-up-allowance'). This scheme was designed to facilitate the transition from unemployment to self-employment as a new, effective exit from the unemployment trap by reducing the bureaucratic red-tape and opening up the possibility to return to unemployment benefit in case of failure. The new scheme provides a monthly allowance of 600 [euro] in the first year, 360 [euro] in the second, and 240 [euro] in the third year, provided that the yearly income does not exceed 25,000 [euro]. The choice between Bridging Allowance or Ich-AG allowance depends on the expected income and on the level of social insurance contributions. The Ich-AG allowance is especially suited to those who only have low unemployment insurance entitlements. In contrast to regular self-employment, social security contributions are obligatory and health insurance is possible under favourable conditions. The take-up of the 'Ich-AG' has been much higher than expected, and it did not replace the 'bridge allowance' as first feared. In terms of stock figures, in June 2005, 87,102 people were on 'bridge allowance', 238,236 on 'Ich-AG allowance' (about 0.8 per cent of the active labour force).

It is too early to assess the new scheme against the criteria for good TLM. One problematic feature of the scheme was the lack of control at the beginning. Business plans were not examined which meant that speculative risk-taking was encouraged, and this resulted in poorer employment chances if people fell back into unemployment, often after having accumulated debts. This problem has since been solved (interestingly with a remarkable decline in take-up). The scheme still has some shortcomings with regard to security in that the sustainability of these new forms of self-employment is not supported through counselling, training, coaching or--of special importance--networking.

3. A new innovation to move unemployment insurance in the direction of a work-life insurance system is the concept of wage insurance. (18) At present, only three versions of this innovation exist, one (a good practice case) in Switzerland, one (a not so good practice case) in Germany, and one in the USA which is still in its infancy. The main aim and the problems related to this concept, however, have been best described in the USA by Kletzer and Litan (2001).

According to their proposal, the US wage insurance would pay to eligible workers a proportion of their wage reduction, which varies according to age and tenure of the worker, for up to two years following the initial date of job loss, but payments would only begin once the worker had found a new job. The payments would be administered through the state unemployment insurance system. Cost estimates assume that the average payment is 50 per cent of the earnings loss, and it is provided only for workers whose previous and new jobs were full-time. Benefits, however, could be extended to workers reemployed in part-time jobs, with payments adapted to hourly rates. For example, a displaced worker who once earned $40,000 and found a new job paying just $30,000 would receive $5,000 (in quarterly payments) for up to two years after the initial layoff; annual payments could be capped at, for example, $10,000. The original plan was available to all qualifying displaced workers, not just to those displaced by trade. It was even recommended to replace TAA (Trade Adjustment Assistance, since 1974) and NAFTA-TAA (North American Free Trade Agreement Transitional Adjustment Assistance, since 1993) since they were considered as ineffective, especially in that they prolonged spells of unemployment for displaced workers without solving the problem of wage risks for consecutive jobs.

The authors present a debate with the arguments for and against such a scheme that are valuable in general for the concept or design of wage insurance. Arguments in favour are, first, there is a real need as older workers especially suffer income losses of up to 30 per cent, on average 17 per cent; second, restricting the scheme to two years from the beginning of the job loss introduces an incentive to accept new jobs more quickly from a wider range of options than is often the case now; third, the scheme subsidises training on the job which is much more effective than embarking on a training program after which reemployment prospects are uncertain; fourth, the scheme reduces workers' opposition to trade liberalisation and globalisation etc. which, according to surveys, would be high if there is no assistance. Estimated costs of about $4 billion are a tiny fraction of the $500 billion in estimated benefits for the USA from freer trade. Arguments against the scheme are the moral hazards for employers who may be seduced into paying a new employee less if they know that a worker will be partially compensated by the Federal government. This possible effect is not likely to be significant given the large numbers of new entrants into the labour force who do not receive these benefits, coupled with unemployed workers who do not qualify for the program.

The proposal has not been taken up as suggested but was integrated into the current system of TAA in August 2003. The statute provides an option for workers older than 50 either to rely on conventional TAA-assistance or to apply for wage replacement in case they take up a new job which pays less within six months. Half of the difference between the new and old wage for up to two years will then be paid with a $10,000 cap. However, the program got off to a slow start because of poor publicity and lack of enthusiasm in the Labour Department. (19)

The Swiss scheme of 'Zwischengeld' (compensatory benefit) works as follows: If a job is accepted that pays less than a person's unemployment compensation (ALE), the unemployment insurance fund pays a compensatory benefit so that this and the earnings from that 'temporary' job together exceed the ALE. For example:

Insured wage:        SFr. 5,000
ALE:                 SFr. 4,000 (80 per cent of insured wage)
Zwischenverdienst:   SFr. 3,000 (less than ALE)
Compensation:        SFr. 1,600 (insured wage--Zwischenverdienst) x
                     benefit rate 80 per cent)

The entitlement to the 'Zwischenverdienst' is limited to the first 12 months of such employment. For insured persons supporting children and insured persons over 45 years old, the maximum period is two years. The times during which 'Zwischenverdienst' is earned constitute new contribution periods counting towards the qualifying period. A study evaluating the methods and suitability of data gave this scheme high score in terms of efficiency and effectiveness (Lechner, Frolich & Steiger 2004). The main reasons for this were, first, that all workers entitled to unemployment benefits are also entitled to wage insurance; second, the replacement rates of the Swiss 'Zwischenverdienst' are quite generous, especially for mature adults with dependent family members; and, third, the requirement to accept decent jobs albeit with lower income is strictly adhered to.

The German scheme, introduced as an element of the Hartz reforms, is a supplement of the unemployment insurance system. It replaces 50 per cent of the wage deficit between the previous job and the new job for up to two years if an unemployed person aged 50 or older takes up a lower paid job subject to social insurance. The benefit may be accumulated with wage cost subsidies for the employer. The scheme, however, is not balanced with respect to flexibility and security. Wage compensation is only paid for the remaining time of unemployment benefit entitlements and only if this entitlement covers at least 180 days. If an unemployed person has used up their benefits for this period, he or she will not receive compensation. Since most unemployed mature adults--especially in East Germany--have exhausted their entitlement to ordinary Unemployment Benefit through long-term unemployment, the wage insurance incentive has had a very limited impact. In fact, in 2004 only 4,596 received this benefit, and the scheme will be abolished altogether in 2006.

2.5 Managing Transitions Between Work and Retirement

Finally, if people lose the capacity to do any work at all, through disability or (possible) mandatory retirement, it is only fair to make provision for income replacement in a way that allows a gradual (freely chosen) retirement or a combination of reduced work income and transfer payments. How can income replacement be better managed in cases of reduced work capacity or retirement? How can we avoid the costs of early retirements, and how can we boost the employment of mature workers? The European Commission estimates that about 50 per cent of the 15 million net jobs that have to be created to reach the Lisbon goal of full employment--i.e. an employment rate of 70 per cent in the year 2010--will need to be filled by people aged 55 to 64. Here again, I briefly summarise only a synthesis report (Kok et al. 2004; Schmid 2002b, pp. 417-24) and draw attention to some recent trends.

1. First, all incentives for early retirement should be removed, and incentives or support for gradual retirement should be introduced. One possibility would be to support the transition to suitable areas of employment for mature workers, for example work in retailing, care work, financial advice or counselling. Such 'bridging jobs' complemented with in-work-benefits or tax credits as practised in the USA and Japan are one possibility. Comprehensive approaches for 'active ageing', as implemented for instance in Finland and Sweden, should be preferred.

Sweden, in particular, seems to be an example of 'good practice'. Sweden's high employment rate (69 per cent) of mature workers aged 55 to 64 is explained by at least four institutional arrangements that fit perfectly with the TLM-framework. They have intensive training also for mature workers, they have dismantled monetary incentives for early retirement, third they have established 'work-adjustment-groups' in firms with more than 50 employees that are focussed on relocating or rehabilitating mature workers if they experience reduced income or work capacities. Finally, gender-related differences in mandatory retirement (and probably the institution of mandatory retirement at all) are obsolete. Women should accumulate pension rights independent from the working career of their ('breadwinning') spouse, as it has already been established for instance in Sweden and in Switzerland.

2. Second, the risk of discontinuous work-lifecourses could be integrated into the financing rules of pensions. One example is the so-called 'flexible entitlements' discussed in Germany that would cover the income losses due to, for instance, intermittent part-time work or the failure of a 'self-employment' experiment during work-life.

One example, applying to the management of transitions between work and retirement and including other critical transitions during the lifecourse, is the lifecourse-saving plan introduced recently in the Netherlands. On 6 November 2004, the Dutch government reached an agreement with the employers' and workers' organisations. The accord contained agreements about life-course plans, flexible pensions, occupational disability insurance, unemployment benefits and wage development. The agreement has made further trade union actions unnecessary. The new accord contains an expansion of the original life-course plan, which provided workers with the possibility of saving a maximum of 12 per cent of their annual income tax free. They were able to use the balance to finance unpaid leave during their career or for early retirement. The maximum amount a worker could save corresponded to 2.1 years of leave with 70 per cent of the last gross wage. According to the new plan, workers can now save a larger amount, 210 per cent of their annual salary instead of 150 per cent, and they are eligible for an extra tax cut when they take a leave-of-absence. This means that after saving 17.5 years at 12 per cent, the maximum saving account is reached (17.5 x 12 = 210 per cent). This way, workers can finance three years unpaid leave at 70 per cent of their usual wage. The social partners can make collective arrangements with banks or insurance companies in the Collective Labour Agreements (CAOs) which will not be mandatory for workers. (20)

The Dutch life-course plan, however, is not without critics and has some flaws from a TLM point of view, despite its bold and simple principle. In the present design of income contingent tax incentives, high-paid workers are favoured, and there is no provision to support the use of leave for continuous training or support to upgrade low-skill levels. It is to be expected that the present scheme will be taken up mainly to compensate for loss of income due to early retirement.

3. Third, unemployment insurance entitlements could be transferred into wage replacement vouchers for gradual early retirement. In addition, private or collective wage insurance could be the functional equivalent for seniority wages and permanent employment contracts in internal labour markets. There is already some evidence that such institutional equivalents are evolving. As mentioned above, wage insurance as an age specific complement to the Unemployment Insurance has been introduced in the USA as well as in Germany where the scheme was combined with recruitment subsidies and with a reduction of employers' social security contributions for mature workers.

Conclusion

This paper argues that TLMs can modify the traditional full employment goal in two ways. On the one hand, TLMs temper the drive for full employment by widening the concept of work and by valuing non-market categories of work as meaningful productive activities. On the other hand, TLMs increase the ambition for full employment by extending the range of job opportunities people are able to choose during their life-course. Full employment will not only provide freedom from want but also freedom to act.

With respect to the functioning of labour markets, the TLM approach acknowledges the power of markets and therefore focuses on strategies that 'make workers fit for the market.' However, TLM also acknowledges the problems of market failure and the risk to workers of reduced working capacity during their lifecourse for various reasons (disability, care obligations), which in turn also necessitates 'making the market fit for workers (Grazier 2003)'. (21)

To sum up, the goal of TLM is to encourage more flexibility while maintaining sufficient levels of security. However, this does not mean a simple flexibility security trade-off based on a 'balance between flexibility and security'. The aims of TLMs are more ambitious: they are about encouraging a complementary relationship between flexibility and security. Transitional labour markets should ensure transitional employment relations based on 'stepping stones' or 'building bridges' to overcome critical events during a lifecourse while reducing the chance of being trapped by lack of solidarity in taking over more risks. Only such 'active social securities' will encourage workers to make the risky decisions that are the preconditions for creativity and productivity enhancing flexibility.

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Endnotes

(1) I am grateful to the Centre for Public Policy (CPP) at the University of Melbourne for inviting me as honorary fellow, as well as for the opportunity to attend its important conference on 'Transitions and Risks: New Directions of Social Policy', 23-25 February 2005. Most of this paper was written during my stay at CPP, and I wish to thank Andrew Burbidge, Mark Considine, Brain Howe and Peter Stricker for the stimulating talks during my visit at their Centre. Many thanks go also to Linda Hancock (Deakin University) and Dorit Griga (WZB) for valuable comments and for their help on improving the final manuscript. Finally, I much appreciate the hospitality of the Netherlands Institute for Advanced Studies (NIAS) for giving me the opportunity to finish the manuscript and the helpful final language editing assistance by Petry Kievit-Tyson.

(2) Gunther Schmid is Director of the Labour Market Policy and Employment Research Unit at the Social Science Research Centre Berlin (WZB) and Professor of Political Economy at the Free University of Berlin. Email address: [e-mail].

(3) Regarding the concept as well as applications of TLM see O'Reilly, Cebrian & Lallement. (2000), de Koning & Mosley (2001), Schmid (2002a), Schmid & Gazier (2002), Schomann & O'Connell (2003) [??date in Refs is 2002], Mosley, O'Reilly & Schomann (2002), Wilthagen (2002) and Muffels, Wilthagen & van de Heuvel (2002).

(4) The fact that international research finds no remarkable downward trends in job tenure (Auer & Cazes 2000) does not necessarily contradict this observation, since some of the transitions can be performed within a stable employment relationship, for instance the shift from full-time to part-time work or parental leave, or the combination of part-time work with off-the-job training.

(5) The Dutch have coined for this marriage of flexibility and security the neologism 'flexicurity' (Wilthagen 2002).

(6) To the complementarities or functional equivalents of adjustment dimensions cf. especially Gazier (2002); an equivalent to nominal wage flexibility is, for instance, the possibility of combining wages with other income sources such as transfers, equity shares or savings.

(7) See, in this vein, also the concept of 'drawing rights' by Alain Supiot (2001).

(8) For excellent surveys on challenges and policies related to education and training see also the OECD series 'Education at a Glance.'

(9) From a German perspective see, for example, Reinberg & Hummel (2001), for example, for an international comparative perspective see, among others, Ryan (2001).

(10) cf. Schmid & Bruttel (2003) and also Expertenkommission Finanzierung (2004: 226 ff.).

(11) For a discussion of the normative basis of risk sharing and the corresponding terminology see Schmid (2005).

(12) There are reportedly already financial institutions in the USA that sell such swaps.

(13) See for Europe, among others, Schomann, Rogowski & Kruppe (1998); with an emphasis on Canada and the USA Mangan (2000); and for Australia Watson et al. (2003).

(14) For example, the agreement in the metal industry of Lower Saxony (Schmid 2002b, p. 406).

(15) This complex and complicated field cannot be dealt with sufficiently in such a short essay; I have to restrict therefore my comments to good practices in Sweden, contrasted to some extent with Germany and Australia. For a summary of the discussion and proposals from a TLM-policy point of view see Schmid (2002b, pp. 408-12); see also several contributions in Mosley, O'Reilly & Schomann (2002); and from a transatlantic view see Appelbaum (2000).

(16) Studies in Austria, Denmark and Sweden found that up to 40 per cent of the unemployed return to their former employer. Cross-subsidisation between branches or firms implied in these schemes, however, can distort markets and induce moral hazard. In Austria, the tourism branch has gained in particular.

(17) For example the non-profit agency START in the Netherlands, the recently established PSA (personnel service agencies) in Germany, the work foundations ('Arbeitsstiftungen') in Austria, the 'entreprises d'insertion' in France and Belgium, 'job pools' in Denmark.

(18) In an extended version, e.g. not requiring the status of unemployment by transiting from one job to another (lower paid) jobs, the concept of wage insurance could also be related to the section of managing risks between different employment statuses.

(19) According to a report of the Wall Street Journal, 11 August 2005, 'Aid to Workers by Trade Comes in Trickle' (www.taacoalition.com/papers/wsj%2008-11.05.pdf) [??this is not in Refs list]

(20) cf. www.minszw.nl/english/life course, uploaded 09.03.2005.

(21) These terms have been coined by Bernard Gazier (2003).

Gunther Schmid, Labour Market Policy and Employment Research Unit, Social Science Research Centre Berlin (WZB) (2)