The Imprudence of Labour Market Flexibilization in a Fiscally Austere World

This paper assesses the effects of combining fiscal austerity with flexibilization policies aimed at reducing labour costs and increasing competitiveness. Core to our analysis is a global perspective where the aggregation problem is fully taken into account. We derive a stylized macroeconomic framework of distributive and demand dynamics. We show that even in export-led regimes, after considering global feedbacks, flexibilization policies do not lead to higher income and employment. Rather, the end result is contractionary. Over time, the world economy is essentially wage-led and responds positively to coordinated Keynesian stimuli.