It is possible to significantly reduce European unemployment without resorting to US-style job policies, according to two Nobel economics prize winners.
The manifesto from Mr Franco Modigliani and Mr Robert Solow, along with a group of other academic economists, is already being examined by the Tanaiste, Ms Harney, and by other European governments. Published at an international economic conference in Brescia, northern Italy last weekend, it is highly critical of the job creation strategy of EU governments and particularly the proposals outlined at Amsterdam and Luxembourg.
It is calling for a radical combination of demand measures, such as insisting the European Central Bank takes unemployment into account in setting policy and supply measures, and introducing negative tax credits. These would work in much the same way as Family Income Supplement but would be paid to everyone. They would mean that all those on a low wage would actually be given a rebate from the Revenue Commissioners rather than paying tax, making it far more attractive to work than remain on the dole.
According to the economists, the approach which European policymakers have so far adopted to tackling unemployment is one-sided and almost bound to fail. Unusually, they insist that both demand and supply side-measures are needed. In other words there is a role for policies which use interest rates to encourage investment, as well as tackling issues such as the minimum wage and job protection.
Although this approach sounds logical it is not the approach which European central bankers or indeed EU government policymakers have chosen to focus on over the past decade. The underlying idea is that it is much easier to encourage people to look for jobs if there are jobs to be found and it is much easier to encourage firms to offer more jobs if there are more people willing to accept them.
The key reforms need to be introduced together, rather than implemented on a case-by-case basis, according to the authors. One key policy approach is bringing about a rise in investment, either through increasing the amounts of structural funds or below-market interest rate loans through the European Investment Bank, as well as more public/private sector investment partnerships, or raising more money on the capital markets.
They also call for the ECB to be given a broader interpretation of its role to include keeping unemployment down, as well as its current goal of controlling inflation and managing the new euro currency. That is broadly the kind of wide economic brief given to the US Federal Reserve.
The authors also call for what they term a "substantial degree of flexibility" in the European labour and product markets, although they insist that liberalisation to the extent of the US or Japan is not advisable. And they say the reforms in this area should be postponed to a better time, say when the unemployment rate reaches 7 per cent.
Other innovative proposals include the idea that unemployment benefit could be made to depend on the ratio of vacancies to unemployed. Thus the greater the number of vacancies within a specific skill area, the lower the unemployment benefit would be. They also repeat calls for negative income taxes - these have many of the advantages and pitfalls of unemployment benefits but do at least mean that when a worker finds a job he only loses a fraction of his negative income tax benefits, compared with all his unemployment benefit.
Another radical proposal, which could well find favour with the Government here, is the benefit transfer programme. This would come in two forms: the recruitment voucher - redeemable by a firm when offering a job to an unemployed worker - and the larger training voucher - redeemable by the employer to set against training costs. The value of the voucher would depend on how long the person had been unemployed and the longer the time out of work, the more valuable the voucher.
The result is likely to be that employees end up receiving more than their unemployment support when they return to work while employers find themselves paying substantially less than the prevailing wages. On top of that, if designed properly it costs the Government nothing.
The authors also argue that regions of high unemployment would become areas containing workers with a high proportion of training vouchers, providing an incentive for companies to move there and provide the appropriate training.
The authors list most of the excuses usually trotted out to explain unemployment - and dismiss them in turn. Those on the right often argue that unemployment can be explained by the absence of specific skills or that many of the long-term unemployed lack the motivation to seek jobs, or that taxes impose too heavy a burden.
But the authors insist that a large share of long-term unemployment is more the effect than the cause of high and persisting unemployment. Taxes in the EU are broadly the same as in the US, if you discount taxes raised to pay for social security levies, which are in effect compulsory savings. They do not cover the costs of a more expensive Government, rather they are an explicit choice for saving, although compulsory. On the left, unemployment is variously portrayed as a crisis of capitalism, or the result of an excessively rapid rate of technological progress or competition with low-wage economies.
The authors counter these theories with the observation that if true, they would produce the same high rate of unemployment in all developed countries. But in fact the unemployment rate in almost all other OECD countries is below the EU average.
They also dismiss the idea that the problems are an intrinsic part of the move to monetary union and the general consensus about social support systems in Europe. This theory implies that governments have to choose between "flexible" labour markets with wide income disparities, or "inflexible" labour markets crippled by unemployment.
The authors also debunk this theory and insist that unemployment is almost totally the result of policy errors. One of the most serious of these, they argue, is the higher-than-necessary levels of interest rates across most of Europe, as countries have struggled to qualify for monetary union. The opposite - low interest rates - in our case may actually be one reason for the declining level of unemployment here.
Overall, the paper is extremely well argued and it can only be a good thing if our Government as well as others across Europe take it seriously. After all, despite the fall in the Live Register, the greatest problem of our economic success story is the continuing large number of people still unemployed.
