Explaining higher unemployment in Europe

Compared to the United States, rigid labour markets in Europe make it expensive to hire workers and difficult to fire them. This and slow economic growth contributes to the high unemployment rate in Europe, say economists.

European economies will probably grow by only 0.5 percent this year on average, and unemployment is hovering around 8 or 9 percent.

But by conventional measures, European workers are as productive as Americans. Exports from France and Germany, for example, are highly competitive with the rest of the world's and, unlike the United States, both countries export much more than they import. Furthermore, labour costs as a proportion of Gross Domestic Product (GDP) have been substantially reduced in Europe over the last 20 years:

French wage costs, for example, fell nearly 11 percentage points, from 78.5 percent of GDP in 1980 to 67.6 percent in 2000.

Even German wage costs – widely recognized as high – stand at only 67.6 percent of GDP.

By comparison, American wage costs fell only two percentage points, from 70.7 percent to 68.3 percent of GDP, the same as an average of 15 major European nations.

Some economists say that the higher GDP per capita in the United States overwhelms all other factors in accounting for the fact that its unemployment rate is lower than Europe's.

With a higher GDP per capita, American consumers spend relatively more on labour-intensive services; Europeans spend more of their family budget on necessities like clothing and food, which require less labour. So, strategies that promote growth and raise GDP per capita may be important in raising levels of employment.

Source: Jef Madrick, Europe Is Shooting Itself In The Foot, Economic Scene, New York Times, October 30, 2003.

For text http://www.nytimes.com/2003/10/30/business/30scene.html
For more on Europe http://www.ncpa.org/iss/int/

FMF Policy Bulletin/ 4 November 2003