Edited by Roger Sugden, Rita Hartung Cheng and G. Richard Meadows
Chapter 4: Economic activity, market structure and public policy
Johan Willner* 1. INTRODUCTION This chapter deals with the relationship between important dimensions of social welfare and economic activity, when higher welfare for some groups means lower profits. I shall argue that the view that there is always a trade-off between, for example, enterprise formation and equality or job security is oversimplified. Consequently, there is at least some scope for an industrial policy that promotes economic activity without dismantling what is usually understood as the welfare state. High direct and indirect labour costs, regulation and a large public sector have often been blamed for lower growth and higher unemployment in Europe than in the US. For example, Stan Siebert argues in Chapter 5 in this volume that higher economic activity requires greater labour market flexibility, and that the so-called new economy reinforces the stark choice between wages and labour standards on the one hand and employment on the other. However, a brief overview of recent research and a model, which incorporates some important aspects of the debate, will suggest that this view is too simplistic. Many authors have emphasised access to credit as a barrier to entry, and this will be included in the formal analysis, which also deals with the impact of wages (and indirectly taxes) and job security. When a trade-off exists at all, it can be shifted, for example through the presence of public and/or cooperative ownership. This not only increases the number of competitors but also affects the behaviour of private firms. It will turn out...
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