David R. Henderson  

The Long and the Short Runs

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After noting how high payroll tax rates are in Europe, Arnold Kling comments:

I had not realized that these tax rates are so high. I find it hard to reconcile Germany's relatively low unemployment rate with this high payroll tax rate.

I don't find it hard to reconcile the two. The reason: Germany has had high payroll tax rates for a long time--for decades, actually. So real wages have had a long time to adjust.

If the government raises the payroll tax by a large percentage in a short time, then expect a big increase in the unemployment rate as employers lay people off and slow down hiring. But don't expect that increase in unemployment to persist for decades.

Note that this is separate from the issue of employment rates. The long-run supply of labor is probably upward-sloping. So, all other things equal, one would expect lower employment rates in those European countries than here.


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CATEGORIES: Labor Market , Taxation




COMMENTS (8 to date)
Nick writes:

Labor force participation in Germany is roughly comparable to the US, though. It looks to me like Germans work fewer hours despite lower productivity than the US, which might be a reason.

Floccina writes:

I would not expect payroll taxes to effect the unemployment rate, but would expect it effect the rate of participation in the taxed economy.

Floccina writes:

I would not expect payroll taxes to effect the unemployment rate, but would expect it effect the rate of participation in the taxed economy.

Shane L writes:

Am I reading this wrong? It seems to put the US around average in OECD for its employment rate, at 68.2% compared with an OECD average of 65.7%. Countries including Sweden, Germany, Denmark, Canada and Finland have higher employment rates than the US, unless I'm missing something.
https://data.oecd.org/emp/employment-rate.htm

Scott Sumner writes:

Nick is right, the effect shows up in fewer hours worked. Germany did have extremely high unemployment in the early 2000s, but labor market reforms made it harder to get welfare and subsidized employment.

Germans have a very strong incentive to work at least some hours. The new minimum wage may hurt employment---I'm told it's aimed at migrants from SE Europe who are snapping up low paid jobs.

John B writes:

Germany has corporatist government where cosy deals are made between employee representatives, business representatives and Government. Consumers are not invited to the table.

By agreement German workers have accepted wage stagnation for over a decade and employers are given payroll tax exemptions for employing young people and others at the low end.

Germany also, thanks to the euro which is undervalued for its economy, has high export activity within the EU particularly below the 'Olive Belt' whilst importing low value goods.

Germany is now running a trade surplus which is a sure sign that Germans are consuming less because of high taxes, wage erosion and inflation.

Consumption is supposed to be the purpose of production, so sayeth Adam Smith, not to create jobs and collect taxes.

European Governments are now obsessed with raking in ever more tax revenues and 'creating' and protecting jobs, many of which in non-productive Government service and make-work not needed infrastructure projects (see Greece, Spain, Ireland for example).

The wind of economic reality is blowing over the Socialist-lite 'mixed economies' and when the bough breaks down will come cradle, baby and all.

Shane L writes:

"European Governments are now obsessed with raking in ever more tax revenues and 'creating' and protecting jobs, many of which in non-productive Government service and make-work not needed infrastructure projects (see Greece, Spain, Ireland for example)."

I don't know about Spain and Greece, but capital expenditure in Ireland is not high, having fallen every consecutive year from 2008-2013. By 2013 it was only 38% of the high in 2008; it hasn't been this low since 1999.
http://www.per.gov.ie/expenditure-trends/

In terms of general government expenditure as a percentage of GDP, this has fallen in most EU member states between 2010 and 2014, including Ireland, Spain and Greece:
http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00023&plugin=1

Katie writes:

The main concern in Europe is overwhelming short-term perception of economic mechanism strengthened by 'troublemaking' EURO monetary unity. Since the introduction of Euro currency, the prices & taxes are getting higher and business mobility lower in all EU-members. Instead of admitting that introduction of Euro went wrong and doing something with it, European governments are creating new protectionism and bureaucracy and do not leave much space for improvement. They do not believe in 'creative destruction' and free economy, they believe more in the political measures and short-term statistics. In Germany, in place of one subsidy they create other subsidies or support the banks to run despite being less and less effective and the cost of living is quite high if you compare with the average pay. The same is in England where the salaries are at stagnation for already couple of years and cost of leaving are high, in France the unemployment rate, especially among young people is elevated and the government is very 'creative' in terms of taxes. The basis of this new modern thinking came after the World War II, where Europe wanted so much stability, prosperity and being protected and somewhere in the middle it has lost the common sense of keeping the business free and implied too much socio-political thinking in how they run the economy. I am still not sure if they do not see the weakness in keeping this perspective or just pretend they do not see it at all.

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