Flexibility no help to dole

August 16, 1996

Creating a more flexible labour market will not reduce unemployment in developed countries, new research has found.

In a paper published in the Economic Journal in July, Francis Teal, a member of Centre for the Study of African Economies at Oxford University, draws the conclusion by examining the wages and employment of manufacturing workers in Ghana.

The nation's measured unemployment has been about 5 per cent for more than 20 years and a flexible labour market was not responsible, the research found. Ghana has no welfare state.

Dr Teal said a close examination of the economy reveals that the way wages are determined does not differ greatly from European countries. In particular, more profitable firms seem to pay workers more rather than hire additional labour.

He found no evidence that the labour market in Ghana is more flexible than Britain's, which has higher levels of unemployment. "Flexibility may deliver some things, but it won't necessarily be a solution to unemployment," Dr Teal said.

It is often assumed that unemployment in Europe is higher than in the United States because of a more inflexible labour market. Developed countries believe that unemployment is caused by wages being too high, which Dr Teal said leads to the drive for flexibility - "code for lower real wages".

However, he pointed out that "the whole notion of flexibility may be much more complicated than doing away with institutions that prevent the fall of real wages".

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