Creating jobs in US – Lessons from Europe?

Recently Paul Krugman pointed to the differences in recovery of US and Germany. US is recovering with unemployment still rising and Germany recovering with hardly any increase in unemployment levels.

Jacob Funk Kirkegaard has a superb post in Peterson Institute’s Real Time Economics Issues Watch Blog. He compares the unemployment levels in Euro area economies and says:

While the US unemployment rate has more than doubled since early 2008 to 10.2 percent in October 2009, increases in Europe have so far been more muted. In France, supposedly the core eurozone country and labor market overregulator, unemployment has risen by only about 2 percentage points to 10.0 percent, according to the latest available data. Meanwhile, in Germany the essentially flat unemployment rate still at less than 8 percent really stands out, both among other EU countries and obviously when compared to the United States.

For the first time in decades therefore the unthinkable—at least among labor economists—has happened and US unemployment rates are today above those of the core eurozone countries. It is hard to imagine a better reason than that for the Obama administration to reconsider its domestic employment policy response to the crisis.

Superficially of course, it would seem that core-Europe’s labor markets have been far better able to cope with the economic crisis than the US labor market. However, one caveat must immediately be highlighted.

Any relatively better labor market performance in core Europe is countered by a collapse of eurozone labor productivity relative to the US, especially in manufacturing.

How did European economies manage this?

It is further important to realize that the benign recent core-European labor market trend represents an explicit social choice in the countries in question. Not only did France and Germany let their existing extensive social safety nets play their intended role as automatic stabilizers after the fall of 2008, but both countries have further moved aggressively to financially support temporary flexible working-time arrangements—the so-called “work sharing programs.” Increasing the flexibility of working hours for individual workers at the outset of the crisis, so that fluctuations in labor needs are distributed across all workers rather than selectively among them (which would have resulted in some layoffs) has clearly been instrumental in containing unemployment rates.7

In many ways, the core-European policy response is a welcome improvement on the disastrous European labor market policies of the 1980s where the “lump of labor fallacy” led governments to facilitate workers’ early retirement or other premature exits from the labor market in the false hope that more people leaving the workforce would free up additional job opportunities for younger workers. Similarly, it is clear that in core Europe’s generally still highly regulated labor market, attempts to combat hysteresis effects by maintaining people in employment even at reduced hours is likely to be a sensible policy, as many core-European workers would otherwise have invariably slipped into long-term unemployment.

So what are the policy options/choices for Obama?

With the US unemployment rate at 10.2 percent, it may be too late to expand “work sharing programs” from the current 17 state-level programs. Government-supported “work sharing programs” similar to those in core Europe work to preserve existing employment rather than to create new jobs. Hence such programs disproportionately benefit skilled workers, whom companies will prefer to “hoard,” as they are more likely to find employment elsewhere if laid off. This type of insider-outsider dynamic has been very prevalent in Europe during the crisis, where increases in unemployment despite work sharing programs have been heavily concentrated among people on temporary work contracts. Additional protection for “insiders” is clearly not what the US labor market needs at the moment.

Instead, in the short term, Congress should implement a temporary holiday for Social Security and Medicare payroll taxes for new hires. This could provide an urgently needed, powerful broad-based and immediately implementable job creation stimulus for the US labor market.

For the long term, Congress needs to get serious about multi-year funding for broad-based workforce skills improvement and retraining programs. The one-off funding for the Workforce Investment Act (WIA) included in the stimulus bill and the long-warranted expansion of Trade Adjustment Assistance (TAA) to services sector workers are welcome, but must be prolonged. Only sustained funding will insure that the relevant skills-enhancing programs are in place when US workers need them. With job losses in the current recession increasingly of a structural nature (meaning that workers will need to seek new jobs in a new industry), such programs will be more needed to avoid another jobless US recovery.

Interesting insights from European Labour markets and policies.

The times have changed. US  has always criticised Europe for its labor policies. Europe’s labor market has always been seen as a factor that has lowered the regions’ growth, productivity etc. Now, US might have to take some lessons from Europe’s  weakness.

One Response to “Creating jobs in US – Lessons from Europe?”

  1. Creating jobs in US – Lessons from Europe? « Mostly Economics Says:

    […] Creating jobs in US – Lessons from Europe? « Mostly Economics Related PostsGeneral Motors to cut about 9000 jobs in Europe antwerp belgium …Vauxhall Versus […]

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