The Twin Follies of Wage Restraint and Coercive Active Labour Market Policy

From before the Crisis of 2008 policy elites in Europe have been attracted to the twin competitive strategies of aggregate wage restraint and coercive, recommodifying labour market/welfare reforms. Both of these policies are demonstrably unsuccessful for achieving economic growth, low under/unemployment and social inclusion in the medium or long run. Wage-led, full employment targeting macroeconomic policies and a more decommodified notion of labour market policy would yield economic robustness and social externalities. This paper analyses how and why the neoliberal logic endures in European political economic spheres. A reconsideration of Marxian theory of the state and the market and Kaleckian approach to the political economy of full employment form the central pillars of the argument. The paper will outline how despite the obvious failure of neoliberal economic system, it endures and how the state plays a key role in this. Secondly, we present two empirical case studies to illustrate the destabilizing nature of austerity, illiberal welfare reforms and wage restraint: i) the case of active labour market policy – or ‘workfare’ – illustrates continued, pernicious faith in markets. ii) the case of policies that create wage restraint (labour market policies such as workfare programmes that generate a low wage sector as well as other institutional reforms, and macroeconomic policies such as welfare state retrenchment, tight monetary and fiscal policy), which led to deficiency in demand and a realization problem for capitalism, which is temporarily resolved by fragile growth models based on reliance on household debt-led or export demand.