The Vanishing US- EU Employment Gap

Is the title of this alarming post in NY Fed blog.

They point how the once US pride – its labor markets – is losing steam as well. The enployment to population ratio was always higher in US compared to Europe:

Between 1980 and 2000, the employment-to-population ratio was on average about 10 percentage points higher in the United States than in Europe. Part of this difference was attributable to higher labor taxes, higher minimum wages, and better benefits for unemployed and retired workers in Europe. In particular, higher labor taxes discourage people from working and higher minimum wages contribute to joblessness among unskilled and young workers. In addition, more comprehensive unemployment insurance discourages unemployed workers from accepting less desirable jobs, the lower cost of higher education reduces employment among student-age workers, and more generous pension systems encourage workers to retire earlier.

But this is no more the case.

However, as the chart below shows, the gap between the employment-to-population ratio in the United States and Europe (defined here as the fifteen countries in the European Union before the 2004 expansion into Eastern Europe) has declined significantly in recent years, narrowing from 10.5 percentage points of the population in 2000 to 4.8 percentage points in 2007. The gap narrowed further during the global financial crisis and recession and had almost vanished, at 1.7 percentage points, in 2009.

This decline is due to three factors:

In this post, we show that the narrowing employment gap is due to three factors: declining U.S. employment rates across almost all age-gender groups; more women working in Europe, particularly prime-age and older workers; and rising employment for older European men. We link most of these shifts to the influence of underlying trends (many reflecting changes in European social policies) and to differences in labor market performance during the Great Recession.

There could be some improvement in the ration whenever economy picks up but is largely a structural change. Hence, the difference between Europe and US may remain even when economies pick up…

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