Could the US learn from Europe how to tackle unemployment?

What alternate universe would that be…

Well, Europe as a whole is a rather diverse mix, but some countries do indeed provide useful lessons..

Has Europe got the answer?
Nov 5th 2009
From The Economist print edition

Not entirely. But America could still learn from some of the continent’s ideas for tackling unemployment.

AT FIRST sight, the idea that Europe has anything to teach America about tackling unemployment seems preposterous. America has some of the most flexible labour markets in the developed world, while continental Europe, in the popular imagination, is a sclerotic place with powerful unions, rigid labour markets and high entrenched joblessness. Over the past quarter-century America’s unemployment rate has averaged 5.8%, compared with 9.5% in France and 9.1% in Germany.

This picture may be changing. Although output in the euro area has fallen as much as in America, the unemployment rolls have not grown as much. The euro-wide jobless rate is up by less than a third, compared with a doubling across the Atlantic. At 9.7%, euro-area unemployment is high, but slightly lower than in America, where new figures due on November 6th were expected to show joblessness hitting double digits.

The policy divergence is even greater. The United States has put in place a hefty fiscal stimulus, but relatively little of that money has gone into labour-market policies—schemes to slow firing, boost hiring or support the jobless. Although America has extended its (meagre) unemployment benefits, and is likely to do so again, Congress’s main response to persistently high joblessness has been a host of ill-targeted new stimulus proposals. The extension of a homeowner’s tax credit is imminent and a $250 payment to old people is being discussed.

Europe’s policymakers, in contrast, appear to have a more coherent strategy: one which uses government money to subsidise a shortened work week, cuts labour costs and, in a few cases, offers tax subsidies to support new jobs. The OECD says 22 out of 29 of its member countries have extended support for workers on furlough, and 16 have cut payroll taxes and other social contributions. The countries doing these sorts of things are disproportionately in continental Europe (see article).

Europe’s combination of policies is undoubtedly a vast improvement on its reaction to joblessness in other deep recessions. In the 1980s, for instance, idleness became entrenched with misguided early-retirement schemes. This time around Europe’s governments have, rightly, focused on keeping people in work, thus avoiding the longstanding economic toll of high joblessness, as workers lose skills and become ever harder to re-employ. Unfortunately, having the right goal does not mean all Europe’s interventions are worth emulating.

Short-term sense, long-term problem

Consider the subsidising of shorter work weeks, continental Europe’s most dramatic innovation. By in effect paying firms to hoard workers, governments have slowed the rise in joblessness and helped prop up consumer confidence and demand. In a vicious temporary slump, driven by a credit crunch and the collapse of global spending, such subsidies make short-term sense. But they prop up demand by fossilising a country’s job structure and preventing the shift of workers from industries with excess capacity (like carmaking) to more promising ones. That ossification will surely come to haunt continental Europe. And in an economy like America’s, where the end of the debt-fuelled consumer-spending binge is forcing big structural shifts, it would be insane.

Rather than encourage labour hoarding, governments should promote hiring. Policies that do so span a broad spectrum. At one extreme lie public-work schemes of the kind introduced in the 1930s and now used on a massive scale in India (see article). A more modest and sensible approach for today’s rich economies is to increase firms’ incentives to hire new workers. That is why Europe’s governments are right to focus on waiving or reducing their high payroll taxes, especially for additional hires. And it is why American proposals to finance an extension of unemployment insurance with payroll taxes are misguided. Heavy labour taxes are one reason why Europe entered the downturn with far higher unemployment than America. Lightening that burden would do most to boost jobs—on both sides of the Atlantic.