The Europeanization of the U.S. labor market

Public Interest, Fall, 1993 by David R. Henderson

IN NOVEMBER 1982, the United States was at the bottom of a severe recession in which the unemployment rate hit 10.6 percent. Although 101 million people were working, 11 million were looking for work. By the end of the 1980s, 119 million were working and the number of unemployed people had fallen to 7 million. Even as the U.S. labor force had grown by 14 million people, the U.S. economy had created 18 million jobs. Civilian employment as a percentage of the working-age population reached an all-time high in 1989. The U.S. economy in the 1980s was a virtual job machine.

The European labor market, on the other hand, was far less successful at creating jobs. Between 1980 and 1989, for example, West Germany's labor force grew by 0.7 percent per year, but over that same time, German employment grew by only 0.5 percent per year. That difference might seem slight. But over nine years, the cumulative difference was 2 percent. Thus the unemployment rate in West Germany was a full 2 percentage points higher than it would have been had the growth of employment equalled the growth of the labor force.

Similar stories hold for other major Western European countries over the same period. France's unemployment rate at the end of the 1980s was 2.8 percentage points higher than if the growth of employment had equalled labor force growth. For the United Kingdom, the labor force grew by 0.7 percent annually while employment grew by 0.6 percent. (The only major exception was Sweden, where annual labor force growth of 0.5 percent was less than the employment growth of 0.7 percent.) For the European Economic Community (EEC) as a whole, the labor force grew annually by 0.8 percent while employment grew by only 0.4 percent. Whereas before 1976, civilian employment as a percentage of the working-age population was less in the United States than in the United Kingdom, Germany, and France, it is now higher.

The good news is that the U.S. labor market has created so many jobs. The bad news is that governments in the U.S. are Europeanizing the U.S. labor market. Through legislation and court decisions, the U.S. is moving toward the kind of labor market restrictions that have so hampered job growth in Europe.

Eurosclerosis

European job growth has been so dismal that economists have coined a term for it: Eurosclerosis. The crudest measure of the phenomenon is the conventional unemployment rate, which is the number of unemployed people as a percentage of the civilian labor force. In 1989, unemployment rates in the EEC were as follows:

County                   Unemployment %
France                      10.9
West Germany                 5.8
Italy                        7.8
Netherlands                  8.8
United Kingdom               7.4

All had higher unemployment rates than the United States' 5.3 percent. And even West Germany, whose unemployment rate was only 0.5 percentage points above our own, had much higher unemployment than its average for the previous thirty years.

Unemployment is not a major problem if it lasts only a short while. Economists view short-term unemployment as a healthy looseness in the joints that helps dynamic economies adjust. When demand for some industries' products increases and demand for others' products declines, as inevitably happens in a healthy economy, some workers in the declining industries lose jobs and seek work in the expanding industries.

The problem comes when unemployment lasts a long time. And here is where Eurosclerosis is very apparent. The five major members of the EEC for which the data are available had, in 1989, much higher long-term unemployment than did the U.S. For the United States, as for Canada, Japan, and Sweden, the long-duration unemployment rate, which equals the percentage of the civilian labor force unemployed thirteen weeks or longer, was very small. Only 1.2 percent of people in the U.S. labor force were unemployed longer than thirteen weeks, compared with rates for the EEC countries that were four to seven times as high. As can be seen in figure 1 above, the difference is even more dramatic for longer-term unemployment. Only 0.3 percent of people in the U.S. labor force were unemployed for one year or more, while the EEC countries had rates of 3.0 to 5.6 percent. In the U.S., the number of people unemployed for twelve months or more was less than 6 percent of the number of people unemployed. In the EEC countries, the corresponding number ranged from a low of 49 percent for West Germany to a high of 72 percent for Italy. In other words, more than half of the people in the EEC countries who were unemployed were unemployed for a year or more, compared to only one in sixteen in the United States.

Blame the government

When a large fraction of unemployed people is out of work for more than one year, economists tend to suspect government as the primary culprit. The reason is simple. The long-term unemployed can be divided into two categories: those who don't want work and those who do. Those who don't want work but are just casually looking or insist on nothing less than the ideal job, will stay unemployed long-term only if they are independently wealthy or if the government subsidizes their unemployment. Those who want work will typically find it in much less than one year if government does not prevent them from finding it. So the culprits to look for to explain high long-term unemployment are government subsidies that discourage people from finding jobs and government regulations that discourage hiring. Both were abundant in the EEC economies in the 1980s and much less so in the United States.