The myth of employment enhancing flexible labour markets

This paper argues against the notion that when unemployment is low, additional government expenditures will add to inflationary pressure and hence harm the economy. The underlying reasoning ignores fundamental shifts in the labour market during the last three decades. There is a tendency towards increased flexibility in terms of the shift from permanent to temporary work and more flexibility in hours worked. Our view is that recessions allow employers to intensify the underlying shifts that are occurring as a result of decreased union power and increased globalisation. We set up a simple model to derive hypotheses in this regard, and test these using data for the Netherlands. We find evidence that employers create their own internal slack (in terms of part time employment) which may be exploited in more prosperous times. This finding is important because it defies the Philips curve relationship between unemployment rates and inflation.