Businessweek Archives

Why Europe Is Drowning In Joblessness


Economic Viewpoint

WHY EUROPE IS DROWNING IN JOBLESSNESS

Many intellectuals in the U.S. and Asia believe that European social welfare policies should be a blueprint for action in their own countries. But those policies, financed by high taxes and costly mandates on business, are mainly responsible for the enormous increase in European unemployment during the past decade and a half. This "European disease" is hardly a model for other nations.

I recently attended a conference in Paris convened by some French economists interested in promoting policies to reduce unemployment in France. In the late 1970s, unemployment was under 5% in France, Germany, and most other Western European nations. It is now closer to 12% in France and Germany and about 20% in Spain. The average rate for those under age 25 exceeds 20% in almost all European Union nations. In contrast, unemployment in the U.S. has not increased during the past 15 years, is only 5.5% at present, and is about 12% for young workers.

America's experience shows that the growth in European unemployment is not due simply to greater competition from the less developed world nor to other forces that have affected all advanced countries equally. The rapid growth of labor costs throughout Europe appears to have been a principal cause of the explosion in unemployment.

About half of Germany's and France's average labor cost results from social security, health, unemployment compensation, disability, and other taxes; other European nations have similar shares. Regulations that restrict layoffs and mandate numerous vacation days and other paid leaves also raise the cost of labor markedly.

OFF THE BOOKS. Government-imposed burdens have spurred the growth of the underground economy: Crude estimates suggest that 25% of all Italian and Spanish workers earn at least some income off the books, as do 10% of those in Belgium, France, Germany, and Sweden.

When labor is expensive and firing employees is difficult, companies are reluctant either to replace departing workers or to expand employment when the economy picks up. This is why it now takes much longer than it did a decade ago to find a job in Europe if you are a young job-seeker, a mother returning to work after childbirth, or an immigrant. Those out of work for more than a year now account for one-third of the unemployed. Furthermore, private employment in the EU has barely increased during the past two decades: The public sector accounts for almost all employment growth. By contrast, in Japan and the U.S., private employment has surged while government employment has grown little.

The long-term unemployed, youths who have never had a steady job, temporary employees, and underground workers have little opportunity to invest in job skills and training. The sharp growth in these categories means that fewer European workers are being trained. This inadequate training makes it still harder for workers to find satisfactory long-term jobs.

Teenagers, high school dropouts, and immigrants frequently find jobs in small establishments, especially fast-food chains and other retail operations. Increasing the minimum wage puts some of them out of work, because their productivity is too low to justify the cost to employers.

FOOLISH. Yet some European governments, in misguided attempts to raise incomes and spending, have foolishly increased their minimum wages--the conservative French government last summer raised the minimum by 4% to more than $7.25 an hour. Even those American economists who advocate slightly raising the U.S. minimum wage--now at $4.25 an hour--would probably agree that a $7.25-per-hour minimum wage would sharply curtail opportunities for teenagers and others with few skills.

Government regulations and old-age benefits, not company needs, also explain the drastic fall in European labor-force participation rates of men aged 60 to 65--from about 80% in the 1960s to under 50% in many countries now. Relaxation of eligibility requirements for disability pay and generous social security benefits induced many workers to retire early. Why keep working if you can get almost as much income by retiring and collecting a pension from the government?

Taxes and death may be inevitable, but not the degree of taxation and regulation prevailing in Europe. A large dent will not be made in their disgracefully high unemployment rates until European policies are recognized for what they are: A serious disease that badly infects their labor markets.BY GARY S. BECKER


American Apparel's Future
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus