Bryan Caplan  

Unemployment: Do Europhiles Have Anything to Celebrate?

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"U.S. Unemployment Rate Now as High as Europe," gloats a new issue brief from the Center for Economic and Policy Research.  The subtext: Europe's heavy labor market regulation isn't so bad after all.  In fact, since the "case for the superiority of the U.S. model was always exaggerated," maybe the European model is better.  Let's take look at the brief's main graph:

europe4.jpg

Frankly, a Europhile would have to be demented to take comfort in this graph.   Can one year of parity wipe out a decade and a half of vastly inferior performance?  If you take a look at this graph from the JEP, you'll see that Europe's inferiority began long before Eurostat starting keeping tabs.  Europe has done worse than the U.S. for the last 25 years.  The U.S. recovered from the monetary and oil shocks of the 70s and 80s, but Europe has never been the same.

Now take another look at the CEPR graph.  During the dot-com bust, U.S. unemployment remained below Europe's, but it clearly rose faster.  Isn't this further evidence that the mainstream case against European labor market regulation is overstated?

On the contrary, this is precisely what the mainstream case predicts!  Europe makes it harder to get rid of workers, so it's only natural that when a big shock hits, U.S. unemployment rises more.  However, precisely because it is easier for American wages to adjust and American employers to change their minds, our labor market is also relatively quick to recover.

Unemployment is a terrible thing.  It's not just a waste of resources.  It also makes people miserable far more than an equivalent income loss.   When you read the history of the Great Depression, it's hard not to notice another horrible cost: Unemployment undermines support for a free society by robbing ordinary people of their independence and self-respect.  By this standard, the U.S. is temporarily doing poorly.  But it won't last.  In the U.S., unlike Europe, high unemployment is not a way of life.


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COMMENTS (14 to date)
Stan Greer writes:

At least judging by the press release, CEPR also ignores relative labor-force growth.

This is a critical issue. The U.S. labor force growth is far faster than that of the EU as a whole, and I expect faster than that of every individual country in the EU.

Given its more rapidly growing labor force, which, I posit, is only partly a result of greater job creation, if the U.S. had created jobs at the same pace as the EU average over the past 15 years are so, its unemployment rate would be much higher now than the EU's is.

Fabrice writes:

Implicitly, the post seems to assume that there is European model of labor market regulation.
Admitedely, the Welfare State is more developed in European countries, relative to the US. But, with regard to Labor market regulations, you have very differentiated situations. For instance, France has a system which is quite protective for a large part of the workfoce- not including temporary workers. Other countries like Great-Britain or Denmark are pretty flexible when it comes to fire workers (with not much safety nets for the fired workers in the UK and a lot more in Denmark).

Labor market regulation and the welfare state are two distinct issues.

Classical liberal writes:

Take a look at my country, Spain, with an unemployment rate above 17% and the least flexible labour market in Europe. The most curious thing: both big parties -progressive and conservative- agree on not changing labour law!

Kevin writes:

This is exactly the sort of thing Europeans celebrate. If you can't Eurocelebrate this, you can't Eurocelebrate anything.

The Eurocelebration is a good look at their cultural decadence.

hacs writes:

The point is not that. There exist a trade off between employment rate and social security.

A fair comparison would consider at least (1). unemployed, workers and retired, (2). natives and immigrants, (3). ethnicity, (4). singles and married, (5). number of dependents, (6). gender, (7). age group and (8). income group, from a well being standpoint, running away from the oversimplified association among larger income (GDP), larger well being (happiness).

There are very important individual/personal costs (health, family, behaviour, morality, etc) which should be considered, but they aren't. In fact, much of the wisdom is oriented to a non interdependent viewpoint of the individuals living in the US, but that is not the real root of American society where individualism and interdependence were fundamental principles.

Moreover, in an age where voters are irrational, government errors are not punished by them, and among those government errors they are protective actions directed to big business, as well as excessive influence of health industry, energy industry, farm and food industry, and financial industry lobbies between others, asking for protection and help, evading the market discipline, so the rightly punishment to their errors. Obviously, those unpunished errors are financed by the irrational voters, paying for their mistakes and irrationality (the errors of the government and the errors of the influential industries). So, in an age of irrational voters, there exist a factual immorality and an essential immorality. The first is the asymmetry between individuals and the other agents (government and influential industries) regarding to the error-punishment rule, and the second is the punishment of the irrationality (given it is inherent, what moral principle justifies its punishment?).

Obviously, many arguments in favor of the US could be mentioned too, so, the real differences between US and EU will always be ideological.

hacs writes:

A comment about the irrational voters society paragraph: paying by the errors of the government and influential industries, the free zealous individuals in the US need to be employed, working and producing more than the almost enslaved lazy European individuals (where everyone pay by errors of everyone).

??

Dan Weber writes:

with an unemployment rate above 17% and the least flexible labour market in Europe. The most curious thing: both big parties -progressive and conservative- agree on not changing labour law

Because 83% (of those who want jobs) are employed, and most of them are probably secure in that employment.

That's a huge lobby. In a democracy, you don't tell a super-majority that they will sacrifice to help a minority. You can tell them that some minority will suffer to help the majority, or some minority will suffer to help some other minority. But you can't do transfers away from the majority.

(I'm explaining, not defending.)

Steven Hill writes:

It's important to be clear about what exactly is being measured in the unemployment rate. For example, the unemployment rates typically don’t include prisoner populations. Since the U.S. has the highest incarceration rate in the world -- 2.3 million people behind bars, one in every 100 American adult, an astounding 7-10 times the incarceration rates in Europe -- not including prisoners in unemployment estimates artificially decreases the unemployment rate much more in the U.S. than elsewhere. Including prisoners would have the effect of increasing the US unemployment rate by about 1.4% and Europe’s by only about 0.2%, bringing European and US unemployment rates closer to parity even in the pre-crash years. It is reasonable to include prisoners in the unemployment rate because if those individuals were not in prison, jobs would have to be found for them. Moreover, people in prison tend to be individuals with the least amount of skills and are the most difficult to employ. So built into the way unemployment is measured is a distortion that ignores the fact that the United States has imprisoned many of its least employable people, artificially deflating the unemployment rate in the United States by about 1.4%, compared to 0.2% in Europe.

Daniel Lurker writes:

Are you accounting for the fact that the US excludes "discouraged workers" from the reported unemployment rate, which artificially reduces US employment? I doubt this is large enough to make you lose your bet, but it does give you a running start.

The Europeans are also more liberal in standards for collecting unemployment benefits, so one could pretend to be looking for a job but not willing to accept one. These "Andy Capps" may lead to an overstatement of the extent of Euro unemployment.

That said, I do think CEPR is silly, and that you will probably win your bet.

Jim Gannon writes:

I agree with your point but the area between these two curves has been fairly steadily decreasing. Is there any concise explanation for this?

IWantCookieNow writes:

"Europe's inferiority"

As a European, I do not like being told to be inferior. It makes me sad and slightly furious.

When it comes to labor, you can't aggregate Europe very well, because labor regulations vastly differ between each member country, say for example Spain and Denmark.

John Swanson writes:

Steven Hill:

Are you seriously arguing that the predicted unemployment rate for those in prison today is 100%, or close to that point? That stretches credulity. Yes, their unemployment rate would likely be high. But near 100%? Really? Keep in mind that we're talking about a hypothetical situation where the people in prison today would be out with no criminal records, so they wouldn't have that impediment to gaining employment.

Also, if the odds of gaining employment for a member the imprisoned population really are near 0, that would seem to imply that this population would be among the most likely to leave the labor force entirely and not even bother looking for a job. That would be another huge dampening effect on your predicted 1.4% increase. For example, if there's a 1.4% increase in people who can't find jobs, but 90% of them don't bother to actively look for jobs (recognizing that the odds of finding one are zero), the actual increase in the unemployment rate will be MUCH lower (0.14%, in fact), since only 10% of the formerly imprisoned population will be included in the labor force. This would be true in Europe as well as the United States.

David Lurker:

I'm pretty sure the term "unemployment rate" always refers to the percentage of the workforce--the population that is employed or actively looking for work--that is employed, whether one asks in Europe as well as in the US. So your first point, regarding discouraged workers, wouldn't make a difference, since the process is identical between Europe and the US.

-John

hacs writes:

What does somebody lose when he/she is unemployed in the US versus EU? In the first he/she is marginalized without even health care, but in the second there exist a myriad of social services and public goods accessible for everybody, inclusive to unemployed ones. That show us the most basic difference between the US and EU: the first is oriented to balanced periods, when the economy is working well, but its population crash in adverse times; the second is oriented to a balance between bad and good periods, trying to reduce the impact of depressive shocks on their citizens (in terms of well being, not only money, and well being not reduced to the present value of consumption utility flow). The European option has a cost in terms of economic growth, but their citizens have revealed a strong adherence to their system even when the possibility of an Americanization is opened. Obviously, the American option has its virtues too, easily measurable in good times, mainly in terms of economic growth and performance, but long term measures of convergence in OECD do not sanction its superiority, even in terms of economic growth. Perhaps, Americans are less risk averse than Europeans (why?), but that only implies adequacy of each system to their respective citizens.

On the other hand, a system of strong incentives in favor of to be employed as in the US (as I mentioned above, an unemployed American has more to lose than an European) implies strong popular support to policies promoting lesser unemployment rates, greater GDP, etc. But if all the options were on the table, inclusive the possibility of to turn the US more European in some sense (for me, the US in these days is not more the promise in former times, the Randian selfish subculture substituted the interdependent individualism of the rising liberal democracy presents in Tocqueville), what would be the choice of the American citizens (perhaps the Obama’s election answered at least partially that question)?

Sincerely, the rest is pure plutocracy.

Matthias Wasser writes:

John:

The point is not that prisoners WOULD be 100% unemployed IF they were free, but that they ARE 100% unemployed at the current moment. The US' prison population is more or less inseparable from the sort of welfare state it's chosen; while Europeans effectively pay those out of work not to disrupt the social order, Americans incarcerate them. It's welfare by other means.

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