Unemployment in the U.S. and Europe

Sanjay Paul
November 1995

A version of this article appeared as European, U.S. Labor Markets Strikingly Different in Business Forum, Green Bay Press-Gazette, November 25, 1995.

Which of the following countries has an unemployment rate under 10% - Belgium, Denmark, France, Italy, United States? Answer: United States.

While many countries in Europe grapple with the problem of stubbornly high unemployment, the unemployment rate in the U.S. has fallen steadily over the past three years and now stands at 5.6%. Recently the Labor Department reported that 120,000 new jobs were created in September.

Last year, the U.S. economy managed to add, on average, 300,000 jobs a month. In 1995, the pace has slackened a bit, though the monthly average is still fairly sizeable at 150,000. Especially when one contrasts it with the anemic performance of the labor markets in Europe.

At this point, two questions come to mind. First, how does one explain the starkly different experience of the labor markets in U.S. and Europe? Second, is the job growth in the U.S. a matter of unalloyed satisfaction?

A comparison of Europe and the U.S. reveals a startling difference in the degree of flexibility in the labor markets in the two economies. While the labor market in this country is largely unfettered by government dictates, thus permitting businesses to hire and fire employees with relative ease, European labor markets are quite rigid. European firms find it difficult to lay off workers even when conditions demand it; this makes them reluctant to hire additional workers when times are good. The relatively strong labor unions in Europe, by curtailing the ability of firms to adapt to changing business conditions, also serve to make the European labor market less flexible.

Another reason for Europe's high unemployment may be found in their unemployment benefits schemes. These schemes, which tend to be far more generous than their U.S. counterpart, have an adverse effect on incentives: for the unemployed, the urgency of finding a job is mitigated by the presence of the safety net. As a result, the unemployment rate in Europe remains stuck at high levels. In the U.S., on the other hand, the relatively spartan nature of the benefits encourages the unemployed to seek jobs with greater alacrity - leading to fairly quick drops in unemployment.

But wait. Doesn't the abbreviated duration of unemployment benefits in the U.S. force unemployed workers to accept the first job that comes along? Even one that pays considerably less than what they used to earn?

Ah, here we encounter the first stirrings of discontent with the performance of the U.S. labor market. Although the job growth in the U.S. has been quite robust in recent months, most of the growth has occurred in the service sector. And wages in this sector, for the most part, are not as high as those in the manufacturing sector (although the difference between the two is vastly exaggerated in the popular press). Thus, the growth of jobs has not been accompanied by a significant rise in workers' earnings.

Another cause for concern is the increase in the number of part-time jobs. Deterred by the prospect of a slowdown in the economy, businesses are wary of adding full-time, permanent workers to their payroll. As economic conditions improve, however, it seems likely that many of the part-time positions will be converted into full-time ones.

Another aspect about part-time jobs is often overlooked. These days, there is an increasingly large number of people who actually prefer to work part-time. Reasons for this vary. Many choose to accept temporary positions so that they may spend more time with their children. Some do so in order to take better care of their parents. So the phenomenon of part- time employment should not be viewed as an wholly undesirable development. Indeed, in the vernacular of today's virtue-laden politicians, part-time employment may serve to foster family values!

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