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Saturday, August 2, 2003

THE JOB MARKET AND UNEMPLOYMENT IN THE EU AND US: A BIG GAP GETTING BIGGER

What follows is really a series of observations that the buggy prof posted yesterday evening at another web site in the comments pop-up section, the site itself dedicated to a fairly serious exchange on economics and finance: http://www.janegalt.net/ It was prompted by a reference, left July 31st, on the big gap between the US and the French labor-market participation ratio --- the percentage of the adult population (usually 18-65) that happens to be actively working over a period of time, say a decade or two to average out the ups-and-downs of the business cycle. More generally, as the buggy comments here note, a similar gap exists throughout the EU save for Britain and Ireland and to an extent parts of Scandinavia and Holland.

These comments should be read against the background of some earlier articles published on this site in the winter of this year. In particular, [1] "Are EU Workers More Productive than US Workers?", and [2] "Follow-Up on the EU, US, Economics and Power"


1) When the big divide in post WWII economic growth occurred in the mid-1970s --- reducing it by about 75% in Japan ever since, and in the EU by about 50% for the big economies (Germany, France, Italy, and for a while Britain) --- about a similar percentage of the eligible population (ages18-65) was employed on both sides of the Atlantic: roughly 65% in the US and EU. (The actual percentages will vary according to the ages chosen. Some studies will lower the minimum to 16 years. And some studies will separate full-time employment from part-time job-holders, some of whom are voluntary, others (especially in the EU countries) wanting full-time jobs.)

2) Since then, the US has created about 60 million new jobs, most of them well-paying compared to the average job in the mid-1970s (adjusted for 2001 dollars). Simultaneously, the influx of women and new immigrants into the job market raised the US job-participation ratio from 63% to around 73%. In the EU, by contrast, a combination of harmful influences --- high minimum wages, high social security taxes (far worse in Germany than elsewhere), lack of entrepreneurial spirit, a growing aversion to risk-taking, rigid labor markets generally (better in Scandinavia, Holland, Ireland, and Britain by far), and slow economic growth --- have combined to reduce the participation ratio of the working population to under 60% in some years, with a slight rise in the somewhat faster-growing late 1990s (only to be sharply reversed after 2000 --- far more so than in the US). In places like Austria, it's even below 50%! For a good chart plotting these trends, including comparisons with Japan, see the EU Competitiveness Report 2001

 

3) The result in the EU is permanent structural unemployment --- long-term and almost always 50% higher than US unemployment (which is largely short-term, less than a two to three months), and sometimes double or triple it, which hits the young especially hard . . . as well as immigrant minorities, increasingly stuck in ghetto-like conditions, alienated, attracted to Islamist fundamentalism and even crime and support for terrorism. (Believe it or not, UN stats prepared by careful surveys of crime-victims at a Dutch university every 4-5 years --- again, see the buggy prof site here --- show that violent crime is much higher in most of the EU than in the US. The US, to put it bluntly, ranks about 13th among 20 or so industrial countries, far behind Australia, Britain, and lots of Continental countries on this score; and you are 6 times more likely to be mugged on the streets of London these days than you are in New York. The US population also shows the least worries about going out into public spaces of all the industrial countries, and the most confidence in our police. We do stand out in homicides as the worst offender. (For a trio of earlier gordon-newpost articles on the International Crimes Victimization Surveys and findings, which are published every four years, see gordon-newspost 1, gordon-newsspost 2, and gordon-newspost 3)

4) A professor of political science at UC Santa Barbara --- with a Ph.D. as well in economics --- I taught at a French university in the mid-1970s, and even in those days, my students were discouraged by the job market. These days, unemployment in the roughly 17-30 years category is probably in the 25-30% range, and maybe higher: it's hard to tell, what with disguised unemployment, such as government-sponsored makeshift jobs for a few months that go nowhere and end abrutply or endless enrollments in graduate programs that are fraudulent. (Even in the mid-1970s, to illustrate, there were more Ph.D. students in France --- a country of fewer than 60 million --- than in the US, with four to five times that population.) In Germany, the age students now get their FIRST degree averages 29 years! At this rate, in a couple of decades or so, you'll get your first degree at one end of the podium at graduation and sign up for social security at the other.

5) Along with Britain, Australia, New Zealand, and Ireland, the US is the only industrial country to have improved its growth of GDP and productivity since the watershed years of the mid-1970s. (To an extent, this is true of Canada too.) The dynamism of the US labor market is without parallel. True, the current job market has performed poorly since the end of the recession in the fall 2001 . . . actually worsening for a variety of reasons right through the spring of this year (since which time it has stabilized). The reasons are sorted out in a series on the US economy's short-term prospects that you can find at the buggy prof site. So far, four fairly long articles have appeared. Two or three more are planned.

6) That's the short-run. In the long-run, the rising trends in US labor productivity --- which has more than doubled since the lackluster days of the 1975-1995 period (when, however, new jobs boomed and offset this dismal trend) --- bode very favorable for the future of the US economy. In the short-run, as the buggy articles note, it's allowed US firms with so-so sales so far to get by exploiting the greater labor efficiency and not hiring back laid-off workers or creating new jobs. That, however, will likely change soon.

7) Those who think the US is unique in having women work are wrong. The percentage working in the EU, France included, is about the same as here. The difference? Much higher unemployment generally, which hits both women and men and especially young ones.

8) One other cause of the rigid labor markets in the EU: essentially, insider-outsider differences, compounded by trade unions, high minimum wages, and the high social security taxes mentioned earlier (some of which are being reduced on the Continent, and which are much lower in Britain and Ireland). Essentially, if you have a public-service job or a private job protected by unions, and have much seniority, you have a fairly cushy guarantee of holding a job, long vacations, and a good pension. The costs are then passed on to outsiders --- the young looking to start a career, immigrants, single mothers suddenly divorced and in need of a job etc --- who can't get jobs easily, if at all.

9) Unfortunately for the EU unemployed, GDP growth last year and as projected throughout 2003 has been way below 1.0% --- in short, somewhere around a third or a quarter of the US rate for last year and the one likely to materialize this year. As for 2004, the EU level is projected to increase its rate of GDP growth to around 1.7 - 1.8% . . . way too low to prevent unemployment from continuing to rise. By contrast, US growth will likely be noticeably above 3.0% next year. For a graph, including projections (the one for the US for in 2003 seems low, given the pace of growth in the second quarter that is likely to accelerate this summer and into the fall), see The Economist.

10) One further observation, which complicates the US job market right now: the growing adverse impact of Chinese imports, artificially boosted by the Yuan being tied to the dollar and hence way overvalued. (The same is true of Japan, despite the floating nature of the Yen: the Japanese government has spent over $70 billion in Yen to buy dollars and keep the Yen cheap). In the long-run, a prosperous China will help the US economy: we have huge advantages in high-tech products, whether manufactured goods or services. In the short-run, the problems of the import surges from China and the rest of Asia are causing a big backlash here, and you'll find an article at the buggy prof site on this . . . a lengthy exchange with a visitor on this problem and what can be done about it other than outright protectionism. (I've also posted a lengthy message on it, about the same length as this one, in the latest article at Arnold Kling's very good site.)