Bryan Caplan  

The Nuances of EU Unemployment

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When I compare U.S. and European unemployment, critics often object that Europe is heterogeneous.  Fair enough, but you can make the same objection to any generalization.  The U.S. is diverse, too.  How often can you silence critics of the U.S. by pointing out American diversity?

Still, I'm happy to be more nuanced.  The EU-15 is Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.  According to my stereotypes, the countries with less regulated labor markets will have relatively low unemployment during normal times, but sparker spikes during crises.  This table shows unemployment now versus a year ago.  What's going on?

1.  High-population France, Germany, Italy nicely fit my stereotypes.  So do Belgium, Greece, and Portugal.  They've all got high unemployment during normal times, but relatively small spikes.

2. A year ago, the EU-15 countries best-known for lower labor market regulation - the UK, the Netherlands, and Denmark - had unemployment well below European norms.  The increase in unemployment in the UK and Denmark - but not the Netherlands - has been unusually sharp. Ireland - also known for its relatively free-market policies, looks just like the UK and Denmark - low unemployment a year ago, and a sharp spike since.

3. The outliers: Austria, Finland, Luxembourg, Spain, and Sweden.  Austria and Luxembourg were low and only rose a little; Finland and especially Sweden started low-moderate and rose fairly sharply.  Spain had high unemployment a year ago, but a huge spike since then. 

The lesson I draw: Noting European diversity makes the case against stereotypical European labor market policy even stronger.  European countries that don't act like France, Germany, and Italy do much better.  While there are outliers, they're no reason for Euro-optimism: Spain, which manages to have high unemployment and a big unemployment spike, has a bigger population than all of the positive outliers put together.

Questions for people who know better than me: What's going on with Finland and especially Sweden?  Are their labor market policies closer to Denmark's than I've been led to believe?  And what's the deal with Spain?  Why do they have high regular unemployment and a big recession spike?


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COMMENTS (14 to date)
Eli writes:

If you believe this article, Sweden classifies some of its unemployed as mentally disabled so that they will not count in unemployment statistics. While that does not exactly explain the spike, it does suggest that we should be skeptical of their reported figures.

Icus writes:

Brian,

Some countries in Europe have extremely generous and poorly monitored state-run long term disability benefit programs. If a portion of these people would just be classified as "unemployed" the situation in those countries would be even worse.

This is not so much an argument against European labor markets, but highlights another problem with European welfare states.

An alternative measure for Europe might be to look at the ratio of active/non-active persons in the economy.

cjd writes:

Sweden, for one, and maybe Denmark and Finland too, pay some people to go through retraining when they become unemployed, but do not count them as unemployed, counting them as out of the labor market. In Denmark, the unions control the labor market, and people are not free to search any job they desire -- for example, if you're in the software engineering union, you're not allowed to look for a job as a photographer (true story from my bro-in-law).

Another thing: to compare the US with EU countries requires also to look at labor force participation rates, which are much higher in the US. In the EU, the rigidity of labor markets cause a discouraged worker phenomenon that lowers both the numerator and the denominator in unemployment statistics, but obviously the numerator proportionately more than the denominator. If you know you can't find a job, why search? Instead, they drop out, making unemployment rates lower. So, need to see what's happened to LF part rates over the last recession to get a better pic.

Also, need to look at age specific data on both unemployment rates and labor force participation rates. During its last crisis in the early 90s, Sweden, seemingly deliberately, pushed the young and the old out of the labor force, to protect unionized workers. It's not just a question of total UE rates, it's also about the fairness of the policies that drive the composition of the ranks of the unemployed, and of the workforce.

Bottom line: international UE rate comparisons are incomplete, much more so that inter-state comparisons inside the US.

Murraymises writes:

As Billy pointed out, Spain had a huge housing boom (think Arizona or Nevada). The low European-wide interest rates of the past few years designed to snap France and Germany out of their economic doldrums was the exact wrong policy for Spain.

In addition, the unions make it a unfriendly place to hire workers resulting in significant unemployment even during the best of times (though there are discussions underway now to finally address this). They wield tremendous power over PSOE, the governing socialist party. That drop in unemployment from 24 to 8 happened under the somewhat free market, conservative PP party.

Zac Gochenour writes:

Sweden (and Denmark) is often accused of juking the stats wrt unemployment by counting people with make-work jobs as employed. They call this "labor market political activities" (in Sweden, "AMS-åtgärder", and yes I had to look that one up).

So, this is related to the discussion of whether make-work jobs should count as employment in the sense of calculating unemployment rates. If you take the enlightened position of "of course not," the numbers aren't so complimentary to Sweden.

Kurbla writes:

The circumstances and methodologies are too complicated to make any conclusion.

hacs writes:

What are the conditions of an unemployed/employed in the US versus in EU?

That should ponder the discussion on unemployment/employment rates, hitherto comparison of counting merely.

Helder writes:

The Spanish case derives from the policies of the 80's (Spain came out of a dictatorship at 1975) where the economy's adjustment policies were followed through high unemployment, high produtivity, rapid and high growth. It took twenty years but they reached the EU average income and became an economic powerhouse, as their companies presence in Latin America or internationalization proves (see Ferrovial's bid for Heathrow). Unemployment went down from mid twenty % to about 8%. So the Spanish numbers might be distorted by those 80's option (Portuguese governments took the opposite option and thats why it's numbers are a lot more flat). Spain only reached "normality" (in the common sense) a couple of years ago.

happyjuggler0 writes:

What about The Netherlands outlier? How does a country start with a low unemployment rate going into a nasty global downturn, and keep the same damn low rate?

Enquiring minds want to know. They are the ones everyone should be investigating.

Philip writes:

Professor Caplan,

Is the methodology the same for all of these countries' unemployment statistics?

IWantCookieNow writes:

As it happens to be, I'm not in favor of the excessive labor market regulations that we have in Germany.

But one odd thing is that the unemployment rate varies extremely even within Germany. For example, Baden-Württemberg (more population than Denmark or Ireland!) has an unemployment rate of 5.1% (May 2009), while Berlin has 13.2% (April 2009).

Fortunately I live in Baden-Württemberg. :-)

IWantCookieNow writes:

Oh, I just notice that the range of unemployment rates is nearly the same in the USA as in Germany. (http://en.wikipedia.org/wiki/List_of_U.S._states_by_unemployment_rate):

4% (North Dakota!) to 12.9% (Michigan).

Maybe the labor market in Michigan isn't so flexible? :-)

himaginary writes:

In Japan, many people admire "work-sharing" in the Netherlands and "flexicurity" in Denmark, and say we should follow suit. It's interesting that both country are categorized as "known for lower labor market regulation" in this post, while Dr. Schmitt described them as "countries with large welfare states, extensive labor-market regulation, and strong union presence" here.

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