widely interpreted as a signal that the EU was taking economic reform seriously. (Even then, however, it was noted that this might damage the credibility of similar exercises were the targets to be missed by a wide margin.)
Two clear advantages of the Lisbon strategy, and especially the employment rate targets, are often overlooked in these discussions. First, the commitment to raising employment rates (ie raising labour force participation as well as reducing unemployment) represents a clear rejection of an idea that has been one of the great weaknesses of European employment policy in recent decades, namely that high unemployment can be cured by discouraging labour supply. If this seems obvious today, it is not so long ago in some countries that married women were discouraged from working, while older workers were actively encouraged to quit the labour market through early retirement schemes, partly in response to high unemployment. Even more recently, governments in some EU Member States were entertaining a similar notion - that employment in persons might be boosted by means of regulatory restrictions on hours worked.
Secondly, the Lisbon strategy embodies the idea that structural improvements in the functioning of markets are required for a sustained increase in employment rates and higher productivity growth. Clearly, at any given moment, output and (un-) employment are determined by real demand in the economy. However, over the longer term, real demand will generally tend towards a level consistent with stable inflation, this level being determined by overall supply conditions in the economy. By focusing on the functioning of labour, product and capital markets, as well as investments in R & D and human capital, the Lisbon strategy seeks to raise employment and growth potential in a sustainable manner.
In addition, while one may ask whether the employment rate is the ideal variable to target, there is no doubt that low employment rates in several EU Member States are a symptom of poor labour market performance, and that improving labour market performance would lead both to higher employment rates and to greater economic welfare. The benefits of higher employment rates for the sustainability of the public finances (at least in the short-to-medium term) were also noted.
Against this background, this paper focuses on a crucial question for the strategy of 'more and better jobs': whether and in what sense there are trade-offs between employment growth and productivity growth. Concern has been raised in some quarters that raising the employment rate in the EU will result in lower productivity growth. Indeed, there is a grain of truth in this: a rising employment rate implies that productivity growth will be temporarily below full potential, simply because the number of workers per unit of capital is increasing. In addition, those who move from unemployment or inactivity into employment ar...
