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Don't Let Tyrone Off So Easily

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Arnold writes:

I think that policies like the minimum wage or the laws to force Wal-Mart to pay more in health care benefits are issues where the economic impact is small relative to the emotional activation. People on the left get really mad at what they perceive as injustice, and those of us on the right get really mad at what we perceive as economic ignorance, but in the end there probably is not much impact one way or the other from these policies.

Maybe not in places like the U.S. where these policies are not strict - or at least keep a lot of safety valves open. But we should never forget how awfully these policies have worked in much of Europe for the past three decades. (And if you don't believe me, how about Krugman?)


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COMMENTS (5 to date)
conchis writes:

Bryan,

You're perhaps guilty of overstating the evidence on both the extent and the causes of European unemployment. Just because you and Krugman both think something, doesn't mean it's the consensus position amongst economists, particularly non-American ones.

(1) To begin with, a majority of European countries have had lower unemployment than the US in recent times, including Austria, Denmark, Ireland, the Netherlands, Norway, Portugal, Switzerland and the UK. (See Nickell et al. (2005). Any theory of the causes of unemployment needs to account for this.

(2) Moreover, to the extent that higher unemployment is a characteristic of European economies, there's less consensus on it's causes than you imply. A couple of examples:

(a) Blanchard and Wolfers (2000) argue that because most of the European instititutions usually implicated in the high unemployment story were in place well before high unemployment set in, such institutions can't be the whole story.

(b) More importantly, it seems important to distinguish between different types of labour market "rigidity". As Nickell (1997) argues, there are many "so-called rigidities that do not cause high unemployment, and indeed, may serve a useful purpose. So it is important to know which features of the labor market cause high unemployment and which do not." One might think this is particularly relevant in the case of the minimum wage debate.

Randy writes:

conchis,

Reference item 2b. I think its a common mistake among advocates of minimum wage, mandated insurance, etc., to think that because the market cannot adapt immediately that it will not adapt in time.

John Pertz writes:

conchis

Here is my reply to some of your points

1.Many of the nations that you cite are fairly liberal in terms of economic policy and small in relative size. France, Germany, and Italy are larger European economies whose degree of regulation is on the whole far greater than the nations that you cite. Therefore, I do not think that your point needs to be acounted for due to the fact that Germany, France, and Italy are all suffering from chronicaly high unemployment combined with a high degree of labor market regulation by European standards.

2a. The only point that I could offer is possibly time lags. The people of the large European economies may have been more enthusiastic about the institutions in the begining or businesses figured out new ways to cope with the regulation, such as replacing human labor with more mechanization. I tend to think that this may be the case seeing as France now has one of the highest rates of unemployment, by rich nation standards, and at the same time has maybe the highest labor productivity figures in the world.

2b. Agreed

conchis writes:

John,

Many thanks for the responses. A couple of further comments...

1. I would actually argue that 1 supports 2b. For example, the Scandinavian countries tend to have very generous welfare payments (something often implicated as a cause of the European malaise), but otherwise reasonably flexible labor markets. This system of "flexicurity" seems to work pretty well. It's also worth noting that "fairly liberal" is typically still rather more regulated than the US, so there's perhaps still something left to explain here.

2a. I would suspect the explanation here is a combination of 2b, and interaction between macroeconomic shocks and labor market institutions. The lags to me seem too long. However, I confess I'm not sure the data support this hypothesis.

P.S. It may simply be that France's high productivity figures are an artefact of having the least productive members of society out of the workforce, and therefore not counted.

John Pertz writes:

Conchis, I think we are getting closer to an agreement on this issue.

1. I would agree that the scandanavian model, specificaly Norway, is a bit different than the one that is being used in Germany, Italy, and France. Flexiscurity, as I guess it is called, seems to be a far more reasonable form of interventionism than the labor market regulation model that is being practiced in France and Germany. However, I have to ask if this is a worthy policy proposal for the United States? The operation of the public sector in Scandanavia is the gold standard, again specificaly in Norway. The operation of the public sector in the United States obviously is not on the same level. In fact when one considers how the public sector in the U.S operates, it would be down right laughable to argue that the U.S could ever emulate Norway.

2a. I still believe that if Germany or France have any desire to relieve their chronicaly high unemployment then they are going to have to liberalize. It may be against what they believe in but the status quo cannot remain. I am pessimistic that Germany or France will ever get back on track economicaly due to the inflexibilty of their political markets. See this article-
http://news.bbc.co.uk/1/hi/world/europe/4802964.stm

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