Blanchard: "European Unemployment: The Evolution of Facts and Ideas"

This is a timely paper on unemployment in Europe that, with the appropriate degree of humility, asks what we do and don't know about persistently high average unemployment rates in Europe:

European Unemployment: The Evolution of Facts and Ideas, by Olivier Blanchard, NBER WP 11750, November 2005: Abstract In the 1970s, European unemployment started increasing. It increased further in the 1980s, to reach a plateau in the 1990s. It is still high today, although the average unemployment rate hides a high degree of heterogeneity across countries. The focus of researchers and policy makers was initially on the role of shocks. As unemployment remained high, the focus has progressively shifted to institutions. This paper reviews the interaction of facts and theories, and gives a tentative assessment of what we know and what we still do not know. [free September Version] [free October version] See also "Explaining European Unemployment."

The paper is worth reading for more than this particular point, but given the increasing job insecurity arising from globalization and other forces, I want to highlight an important distinction Blanchard makes between protecting jobs and protecting workers:

6 Do We Know Enough to Give Advice? At the end of this tour, one may ask whether we know enough to give advice to policy makers about how to reduce unemployment. I believe we do—with the proper degree of humility. ...

6.1 A General Story Line Going back over the last thirty years, there is little question that the initial increase in unemployment in Europe was primarily due to adverse and largely common shocks, from oil price increases to the slowdown in productivity growth. There is not much question that different institutions led to different initial outcomes. ... There is not much question, ... that the increase in unemployment led... most countries.. to changes in institutions... to limit the increase in unemployment through employment protection, and to reduce the pain of unemployment through more generous unemployment insurance. There is not much question that, since the early 1980s... most governments have partly reversed the initial change in institutions. But this reversal has been partial, and sometimes perverse. The different paths chosen may well explain the differences in unemployment rates across European countries today. ...

6.2 Which Institutions? It is one thing to say that labor market institutions matter, and another to know exactly which ones and how. Humility is needed here, and there is no better reminder than the comparison between Portugal and Spain. Both experienced revolutions and wage explosions in the 1970s ... both have, at least on the surface, rather similar institutions, including high employment protection. Yet, Spanish unemployment has been very high, exceeding 20% in the mid–1990s, whereas Portuguese unemployment has remained low, with a high of 8.6% in the mid–1980s, and a decrease thereafter. Many researchers, including myself, have tried to trace the differences to differences in shocks or institutions ... I am not sure that our explanations are much more than ex-post rationalizations. ... Nevertheless, even if one cannot pretend to have much confidence about the optimal overall architecture, much has been learned ... We know much more about the incentive aspects of unemployment insurance on search intensity and unemployment duration... We know more about the effects of decreasing social contributions on low wages ... We know more about the effects of employment protection, ... From both the macro evidence and this body of micro–economic work, a large consensus—right or wrong—has emerged:

• It holds that modern economies need to constantly reallocate resources, including labor, from old to new products, from bad to good firms.
• At the same time, workers value security and insurance against major adverse professional events, job loss in particular. While there is a trade-off between efficiency and insurance, the experience of the successful European countries suggests it need not be very steep.
• What is important in essence is to protect workers, not jobs.
• This means providing unemployment insurance, generous in level, but conditional on the willingness of the unemployed to train for and accept jobs if available.
• This means employment protection, but in the form of financial costs to firms to make them internalize the social costs of unemployment, including unemployment insurance, rather than through a complex administrative and judicial process.
• This means dealing with the need to decrease the cost of low skilled labor through lower social contributions paid by firms at the low wage end, and the need to make work attractive to low skill workers through a negative income tax rather than a minimum wage.

This consensus underlies most recent reforms or reform proposals ... These measures are probably all desirable. If they were to be implemented, would they be enough to eliminate the European problem? I see ... reasons to worry. ... these reforms deal only with a subset of the institutions that govern the labor market. ...

Comments

[anne]

Excellent read. The unemployment difference between Spain and Portugal is intriguing, the cause not at all clear.

[anne]

Interestingly the Spanish housing boom has had less of an employment effect than I would have expected, though I would much like to find a sustained housing expansion in Germany. Also, as background the Spanish stock market has been far more robust than Portugal's for more than a decade. Spanish financial companies by the way are increasingly significant not just in South America but in Europe.

[Claus Vistesen]

An excellent post ...

The achilles heal of many European countries has been (or is) a strutural rate of unemployment of close to 10%.

The notion of protecting workers and not jobs is a good way to show that the labour market in many European countries; most notably France, Spain and to some extent Germany is too rigid.

But the question is tricky is my opnion - one of the main reasons that firms in for example France are not hiring is exactly because there are too many mandatory expenses involved.

[cm]

Claus: Is the principal reason not rather difficulties getting rid of staff when demand declines? Which is not to say social insurance type expenses are not an important consideration.

From a German perspective, the "flexibility" of extracting (mostly paid?) overtime may cost less than keeping idle staff. Also with phaseouts of social insurance taxation, esp. at higher incomes (e.g. engineers with college degrees), the marginal cost of extra work hours may well be below the marginal cost of a new worker, "losing" the social insurance phaseout.

Looks like a double whammy.

There are also lots of abuses with unpaid or nominally paid interns (often credentialed) replacing fulltime staff, "tryout" arrangements with unemployed candidates, and temp agencies and temp contracts. When I worked in Germany, there were upper limits on the duration and extension of temp contracts, and the practice of temp employees handed back & forth between temp agencies and "real" employers was quite common. People play the game as jobs are scarce.

On top of everything, there is rampant age discrimination. Before 2000 "not above 35" was a stated requirement in many ads for jobs requiring experience, and "not above 29" for entry level positions. I kid you not.

From the unemployed workers' side, benefits are significantly more generous than e.g. in the US (i.e. they allow maintaining a somewhat reduced lifestyle for a while), which tends to increase retention in the army of the unemployed, as people are not *that* desperate to accept any job immediately (which is kind of the point after all).

Also there is a different, more inclusive, standard for measuring unemployment. I would liken it in spirit to the U-6 rate in the US, which also is around 9%.

[cm]

And from a rather basic perspective, while in the aggregate enough people have to work (productively!) to maintain aggregate living standards, employment is only a proxy for living standard, not necessarily the thing itself. And I'd say the correlation becomes ever more tenuous.

[Claus Vistesen]

"Is the principal reason not rather difficulties getting rid of staff when demand declines?"

Good point. The crucial characteristic of European labour markets is the rigidness which abviously also follows from the fact that firms cannot be persuaded to hire because it would be too expensive to lay off workers should the demand decline.

The question is whether temporary staff vs. real staff is the right solution; when do you become "real" staff after all? That kind of contracting, as you report, is not necessarily the way to go.

[reason]

I find the consensus interesting because it is not what politicians are saying. And I would agree with all the points, but clearly it isn't enough.

But I'm sure I remember reading about a study that claimed that labour market rigidity was less important than product market rigidity in determining unemployment. How easy is it to bring innovative products on to the market, to grow new industries. Unfortunately, I think something often overlooked is how important urbanisation has been to development - if we are not just producing more of the same, but expanding into ever narrower niche markets then market size is crucial. Hello Jane Jacobs. Perhaps for example, the provincialism that makes Germany pleasant to live in, is in the end a disadvantage. Against that, the internet could be a great contervailing force.

(cm I live in Germany by the way, so I can confirm your points. One good point about globalisation is that it helps to break down discrimination).

[lise]

Reason:

"Unfortunately, I think something often overlooked is how important urbanisation has been to development - if we are not just producing more of the same, but expanding into ever narrower niche markets then market size is crucial. Hello Jane Jacobs."

Interesting, and time to again visit Jane Jacobs.

[anne]

http://www.nytimes.com/2005/10/09/weekinreview/09land.html?ex=1286510400&en=dec7836946e7a878&ei=5090&partner=rssuserland&emc=rss

October 9, 2005

Where to Be Jobless in Europe
By MARK LANDLER

FRANKFURT — EUROPEANS are famous for trying to take the sting out of unemployment, with generous and long-lasting jobless benefits. Even when political and business leaders have warned that their societies can no longer afford such largess, the European public has clung to these safety nets.

But even within Western Europe, some countries are more accommodating to those out of work than others. So it is tempting to ask: Where is it easiest to be unemployed?

The answer, predictably, can depend on an individual's situation: whether one is young or old, single or married, childless or with a family, recently out of work or chronically unemployed. But attitude also plays a role: Is the person eager to find another job or looking for a life of leisure? And is the country trying hard to get the employee back to work?

In Denmark, said David B. Grubb, an economist at the Organization for Economic Cooperation and Development, a typical unemployed person might get 80 percent of past income for four years. "But after the first year," he said, "you've got to spend a lot of your time in temporary jobs or training programs."

Europe's lush benefits are often blamed for helping to perpetuate its high unemployment, though it should be noted that Denmark, with perhaps the softest touch of all, has a jobless rate of 4.8 percent, roughly equivalent to the United States'. In addition to the emphasis on job seeking, Denmark has relatively weak job-protection rules, which make it easier for companies to fire workers in the first place, opening up the labor market....

[anne]

Though I do not properly understand what is happening in France, along with European unemployment there needs to be a questioning of the extent of social and economic isolation or alienation of population groups. What is happening is France must be carefully considered.

[anne]

What is ethnicity in Europe, what is class in Europe, how are immigrant households faring, adults and children, what does integration in Europe mean? I have the sense that there is a general satisfaction with life in Europe beyond economist's worries. Who then is satisfied? Who not, and why more precisely?

[anne]

What of the integration of African immigrants in Spain and Portugal? Is integration more significant for adults and children? Is there similar tension as in France, as in the Netherlands? What of Spanish unemployment and immigrant communities? Even if there are reasonably common unemployment levels among different ethnic groups in France or in Spain, is the employment at all comparable? Questions I wish to have answered.

[anne]

Statistics with an ethnic breakdown for France are not so easy to come by. Hmmm.... Time to read the French press.

[anne]

http://www.nytimes.com/2005/11/05/international/africa/05morocco.html?ex=1288846800&en=34c4e32db02979a0&ei=5090&partner=rssuserland&emc=rss

November 5, 2005

Spain's African Enclaves Are Migrants' Portals to Europe
By CRAIG S. SMITH

NADOR, Morocco - Zakaria Chouaib peered from his rocky perch on Mount Gourougou toward a stone and stucco settlement below. He had traveled overland about 2,000 miles from Ghana, largely on foot, to arrive within sight of his goal: an eightsquare-mile patch of Spanish territory on Africa's Mediterranean coast called Melilla.

Mr. Chouaib, 31, knew that if he could make it across the two razor-wire-topped cyclone fences separating Morocco from the enclave, he stood a good chance of being sent on to Spain and then disappearing into an increasingly borderless Europe.

But getting across the fences has become almost impossible. As the numbers of migrants increase, to an estimated 10,000 in Morocco and 20,000 more in neighboring Algeria, Moroccan and Spanish border guards have grown ever tougher.

Fourteen migrants have died since late September trying to enter Melilla and its sister enclave to the west, Ceuta. Thousands of others have been rounded up or chased down in the forests around the enclaves and in the immigrant neighborhoods of Casablanca and Rabat.

Even so, bands of men like Mr. Chouaib, shaken loose from their homes by war, famine and failed economies, say they are not about to turn back. "I'm not giving up," he said, staring at the Spanish enclave below. "Maybe there's an opportunity on the way - you never know."

Mr. Chouaib is part of a growing tide of young Africans, mostly men, who have crossed the Sahara and are pressing on Europe's southern shores. They live in the North African bush with little more than the clothes on their backs, surviving on handouts or meager savings. The AIDS epidemic sweeping their homelands is likely to swell the tide as it deprives their societies of leaders, education and jobs.

On a ledge above Melilla, Mr. Chouaib and a half-dozen other young men live among the stones, sleeping beneath the stars or taking shelter in caves when the rains come.

The Africans built up a shantytown in the forests of Mount Gourougou, complete with chapel and mosque, but the Moroccan authorities destroyed it earlier this year. Now the men live without any structure that police patrols might spot from afar....

[cm]

Claus: I don't remember all details, and the matter is much more complex than this, but there is a basic distinction between "termed" (befristet) and "indefinite" (unbefristet) work arrangements. A contract can be termed "by event" (e.g. the yet unknown end of a project) or "by time" (fixed end date). In the latter case the maximal duration of the arrangement is 2 years, and shorter arrangements may be extended at most 3 times up to 2 years. Termed arrangements cannot be "chained", that is you cannot keep somebody on with a succession of 2-year contracts, only by converting to an indefinite arrangement.

One of the rackets falling out of this is to hire somebody for up to 2 years, then let them go, and hire them back from a temp agency which will most conveniently have a position available. Once the temp agency runs out of the 2 years, you take the person back etc. Of course this is not a likeable arrangement, but people evaluate this against other choices, and to the extent they don't find something better, continue playing.

This is a rather obvious loophole, and perhaps it has been addressed. I knew a few cases of that sort. The problem is that even if it is borderline or straight illegal, you typically don't want to take the legal route to force your way into a proper arrangement, as it can easily burn the relationship.

And most people are not inclined to become legal experts and be very aggressive in pursuing non subject matter business aspects. At any rate, a labor market where hiring is sluggish and jobs are scarce is a buyers' market, and more abuses will be tolerated for the sake of a paycheck.

[anne]

There has been significant immigration to Europe these 25 years, so too for America, with large numbers of immigrants coming from the similar regions. But, I cannot imagine New York City experiencing the same problem that Paris has experienced. New York City has become remarkably more cohesive over 25 years. The city has become the safest of America's largest cities. Where are the differences with Paris?

[cm]

anne: The ex-colonial Middle-Eastern and African immigrants in France, and their descendents, are for the most part not economically and socially successful by anybody's standards. Living on a welfare check plus free healthcare (I suppose) gives you basic subsistence, but no sense of success or perspective. Racism, cultural/religious clashes, ostracism, and formation of homogeneous communities (from both sides) do their part.

In the US, immigrants may not integrate that well either, but there is probably more tolerance than in Europe, where "indigenous" populations are more homogeneous, and can lay claim to thousand+ years of residence and culture. Europe also accepts a higher proportion of humanitarian immigrants, and specifically restricts labor market/business access. Not sure the latter is a major phenomenon with the current rioters, but it definitely exacerbates the stereotype of immigrants being drawn by welfare checks and larger opportunity for crime. The marginalized accumulate in neglected mass housing and are mostly left to their own devices. Once a critical threshold is reached, whoever can will flee from the places, and ghettoization takes its course.

There are similar issues with Eastern and Southern immigrants in Germany, although things have not been simmering for that long and by appearances have not gotten as bad (yet?).

[nicolasroys]

on employment protection:
the consensus on the litterature is not that employement protection increase unemployment as some precedent comments seems to say. As comments suggest employment protection (roughly labor market rigidities) reduces job creation. But at the same time it reduces job destruction. So the overall impact on unemployment is ambiguous. Both theorical and empirical studies confirms this point (see the survey by Addison et Teixeira in Labor Economics, 2003).

on overtime working :
employment (in volume) is less reactive to business cycles in countries where employment protection is stricter. But it is less true if we consider the variation of overtime working. This shows that when it is difficult to hire and fire workers, firms find another way to respond to shocks : the variation of working time (see Hart in oxford university press 2004).

on Short Term Employment contract :
Firms also find flexibility in using actively short-employment contract to cope with demand fluctuations. This is in a sense a good things because the economy can better adjust to shocks. But at the same time it produces dualism : there is good jobs and bad jobs in the same economy and even in the same firms. So it increases inequality (see the special edition of the Economic Journal in 2002)

[anne]

http://www.nytimes.com/2005/11/08/opinion/08tue2.html?ex=1289106000&en=0d7db838f1d05775&ei=5090&partner=rssuserland&emc=rss

November 8, 2005

While Paris Burns

As shocking as the riots that have swept through the depressed outskirts of Paris and other French cities over the past two weeks has been the flailing response of President Jacques Chirac and his ministers. They appear to have no idea what to do and to whom to talk. Their floundering illustrates the deeper problems that underlie the current unrest: a failed approach to absorbing immigrants into society, an out-of-touch political elite and ministers more interested in a presidential election that's still nearly two years away than in coming up with answers for today's literally burning problems.

There can be no condoning the rioting, which seems to have grown both in extent and violence since it erupted on Oct. 27. In hundreds of towns and neighborhoods, French-Arab and French-African youths have burned cars, businesses and public buildings and fought with the police and firefighters. Bystanders have been beaten, and one has now died. This wave of criminal violence is likely to reinforce prejudices against France's five million to six million Muslims. It has already brought out shameful name-calling demagogy from Interior Minister Nicolas Sarkozy, a leading presidential candidate.

That is a particular shame because he's been one of the few French politicians willing to acknowledge that the republic's centuries-old ideal of integration, which ignores the ethnic and religious communities' existence and special problems, hasn't worked for years. Now Mr. Sarkozy, the one government leader who has dared to advocate American-style affirmative action methods, has chosen to inflame a dangerous situation and immolate his own hard-won credibility in immigrant communities.

The other leading government voice has come from the aloof and aristocratic prime minister, Dominique de Villepin, Mr. Sarkozy's chief rival for the presidential nomination of the governing center-right. Although Mr. Villepin seems unwilling to break from the failed integration model, he at least seems to recognize the importance of cultivating contacts with credible leaders in the immigrant suburbs. He also talks about addressing the pressure-cooker conditions of the seething outer suburbs, including crime-ridden housing projects, scandalously high unemployment rates and toxic tension between the police and the predominantly Arab and African residents. Unfortunately, he seems unprepared to offer any specifics at this time.

Meanwhile, the fires continue to burn.

[Mark Thoma]

Thanks nicolasroys. Here are the links (one extra on Portugal):

1. John T. Addison and Paulino Teixeira, Employment Adjustment in Portugal: Evidence from Aggregate and Firm Data.
2. John T. Addison and Paulino Teixeira, The Economics of Employment Protection (published in: Journal of Labor Research, 24 (1), 2003, 85-129).

3. The Economics of Overtime Working, by Robert Hart, Publisher: Cambridge University Press, 2005. ISBN: 0521805287, Paperback, Publisher's information and Amazon listing.

4. Economic Journal
Special Issue.

[anne]

http://www.nytimes.com/2005/10/26/business/worldbusiness/26labor.html?ex=1287979200&en=de3c08f14be19652&ei=5090&partner=rssuserland&emc=rss

October 26, 2005

German Labor's New Reality
By MARK LANDLER

HANOVER, Germany - Hartmut Meine's office here overlooks an old graveyard. It is a fitting view for a man who is waging a twilight battle to keep his 114-year-old labor union viable, as global competition threatens to undo half a century of rights and privileges won by millions of German workers.

In the last month, Mr. Meine's union, IG Metall, has reached three wage deals with Volkswagen. In each case, VW demanded - and won - significant concessions, partly by threatening to move the production of one car to Portugal, where hourly wages are less than a third of those in Germany.

"It has become much more difficult," said Mr. Meine, the chief negotiator for 103,000 Volkswagen workers in Germany. "But we've also learned how to deal with these more difficult conditions."

Just as the American auto industry and its workers are facing stark choices between reducing costs and preserving a social compact that has long provided generous wages and benefits, Germans are confronting the grim arithmetic of the global economy: most industrial workers here are paid far too much to compete with those in Eastern Europe and Asia.

German carmakers have not yet embarked on the wholesale job cuts and benefit givebacks that are now so prominently on the table in Detroit. But that day of reckoning will come before long, labor experts predict. Already, IG Metall has had to accept lower wages for some of its members, fewer work breaks and the likely loss of several thousand jobs at Volkswagen's flagship factory in Wolfsburg, not far from here.

Those cuts, which Mr. Meine said could be announced early next month, would be made through voluntary buyouts rather than forced layoffs. But tensions are building across German industry, fraying the relationship between workers and management, which over the years has been more harmonious than that in the United States.

By American standards, Germany remains a workers' paradise. It even stands out in labor-friendly Western Europe, with its unions still retaining significant power and its workers enjoying more time off than those in most other countries.

The average hourly cost of an auto worker in western Germany is the highest in the industry, at $40.80. That compares with $35.40 in Japan, $34.80 in the United States, $27.60 in France and $5.40 in Slovakia, where Volkswagen has an assembly plant.

Moreover, strict job-protection laws make it hard for companies to fire German employees, and those who are laid off receive substantial unemployment benefits. But now Volkswagen, Siemens, DaimlerChrysler and others are moving, or threatening to move, thousands of jobs out of the country....

[cm]

nicolasroys: Not ot disagree with any of your points. The underlying problem is always a lack of job creation, or breakdown of the mechanism matching qualified applicants to jobs.

My sense is that age discrimination in Germany has led to a situation where employers prefer to not consider "mature" workers (i.e. people in their 40s), but instead desperately seek younger workers with similar experience. Of course there is in the aggregate no such thing, and then we have "worker shortages" and need to outsource or import foreign, mostly indentured, workers. This hypocrisy is a major contributor to xenophobia.

[cm]

anne: The "problem" with most European economies is that there is a much tighter feedback loop between aggregate incomes and aggregate demand, as the debt culture is (a) not that much developed, because (b) there are no major external creditors facilitating this. E.g. Germany is suffering from a rather protracted weakness of internal demand, which is being/will be further exacerbated by layoffs and benefit cuts.

I have been tracking retail grocery prices on my visits back, and they are pretty much the same for staples, in cases down to the penny, Euro or not. The Euro effect works mostly through rouding effects to .99, .49 etc., which affects below 1 prices (previously in the DEM1-2 range) disproportionately. There is fierce competition in retail.

This is in stark contrast to my local groceries here in California, where I see hikes upwards of 5% annually. Generally retail appears to be dominated by much fewer and larger players than in Germany. I'm not sure why that is, as supposedly Germany is the place with all the regulations?

[anne]

Interesting comment to think about. There will be much more about this topic.

[reason]

cm
It is the regulations (zoning and trading hours especially) that keep the market fragmented. This is not hard to work out. I seem to remember that the US noticed the tendency to monopoly a long time ago and did something about it. It seems to have forgotten in the mean time.

[cm]

reason: I don't see the connection. Please elaborate. Perhaps I'm too blinded by my suburban setting. Many stores here are 9am-9pm (smaller stores close earlier). Unless you are making the case that people are working too long to shop in small stores which are closing when they leave work, I don't see the trading hours argument either. OTOH the large chains are 24/7.

I have a lot of stores in driving distance, but much is the same few chains. There are "specialty" stores like Longs, Trader Joe's & others which carry a limited range of items (and often limited volume!), usually cheaper than the one-stop-shop-carry-something-of-everything chains like Safeway, Albertsons, Nob Hill (and not much else).

In Germany there are many more chains. When I lived there (in the outer city, not a suburban area), the stores (and more chains!) were in *walking*, not *driving* distance though. I don't see how that would make the difference.

The cheaper chains (Aldi, Lidl, Plus, Real, ...) carry some variety, but it is limited. Kaiser, Extra, Reichelt, etc. are more comprehensive but also somewhat more expensive. There are many regional chains as well which I don't know.

But it is not like here where Safeway, Albertsons, Raley's, and their various subsidiaries are the places to go and that's it. Smart&Final and other "bulk" suppliers don't count as I have little use for units that serve 3+ families.

In the US, it looks like the smaller stores do exist, but have limited patronage and cannot supply enough volume (and have enough branches?) to seriously compete with the large chains. Even when they can offer at lower price, the volume is limited. Often enough I run into empty shelves.

Specifically where I live (SF Bay Area) there is large ethnic diversity, and thus diversity in grocery stores. I buy only basic staples from "mainstream" stores and specialty foods otherwise, which may perhaps bias my perspective.

Any idea?