The European Journal of Comparative Economics Vol. 14, n. 1, pp. 89-107 ISSN 1824-2979 Available online at http://eaces.liuc.it Flexible Labour, Flexible Production and Innovation- by-Agreement: International Comparisons Contesting the Lindbeck-Snower Insider-Outsider Thesis and 'Structural Reforms' in the European Union Teresa Carla Oliveira * , Stuart Holland ** Abstract This paper critiques the case for flexibilisation of labour markets. It evidences that influential claims for this in terms of an insider-outsider thesis by former Nobel economics committee member Assar Lindbeck and the British economist Dennis Snower were purely theoretical without offering any evidence, or recognising contrary evidence. It cites a recent admission by the IMF that there is no basis for claiming that protection of employee rights inhibits economic efficiency and cites also a questioning of structural reforms and an obsession with competitiveness by Benoît Cœuré, an Executive Director of the ECB. It illustrates that the achievement of some of the most competitive companies in the world, in Japan, has been based on reinforcing insider rights through commitment to lifetime employment for core employees and how this has enabled high levels of efficiency and process innovation through continuous improvement. It relates this to theories of psychological and social contracts, and evidences the influence of this flexible production rather than flexible labour market model on the recommendation of innovation-by-agreement in the 2000 Lisbon Agenda of the European Council including the right to work-life balance which has not been integral to flexible production in Japan. It then summarises some implications. JEL: D20, E24, J24, J41. Keywords: Flexibility, Continuous Improvement, Psychological and Social Contracts, Innovation-by-Agreement, Work-Life Balance. Introduction Since the onset of the financial crisis of 2007-08, ‘structural reforms’ to achieve more flexible labour markets have been demanded by the ‘Troikas’ of the IMF, the European Central Bank and the European Commission of weaker and mainly peripheral EU member states. This paper submits that the case for them is unfounded. It does so first by citing rethinking by the IMF in a study that finds no link between employment protection and inefficiency. Also a questioning of structural reforms by Benoît Cœuré, a member of the executive board of the ECB. It then critiques the insider-outsider theory forwarded by former Nobel economics committee member Assar Lindbeck and the British economist Denis Snower on the grounds that their flexible labour market case, though influencing claims for structural reforms, was entirely theoretical, with no supporting evidence. It contrasts this with the flexible production model in Japan, where failures in flexible labour markets in the early 20 th century gave rise to lifetime employment for core workers, and illustrates how this enabled the kaizen of continuous improvement and achievement of some of the most competitive companies in the world. It relates this to western theories of psychological contract and social contract and. demonstrates that recommendation of * Faculty of Economics University of Coimbra ** Faculty of Economics University of Coimbra and Institute for Advanced Studies Köszeg.