This is a difficult topic, not least because so much of what most observers take for granted in the comparison between the U.S. and Europe simply is not so.

For example, are wages in Europe more egalitarian than in the United States?  This is the basic premise of the argument that the U.S. has a "flexible labor market" in comparison with Europe.  The idea is also that U.S. wages adjust more readily, generating a more rapid approach to equilibrium and therefore a lower rate of unemployment.

But the premise is false.  European wages are not more egalitarian than here.  It is true enough that the wages of most individual European countries, taken one by one, are somewhat more equal than here. It is true that the Scandinavian countries, or Germany, are much more egalitarian than we are.  The problem is that this way of looking at things overlooks the very large pay differentials that exist between European countries, and these cannot be overlooked in a system that is integrated at the continental level.   Taking those differentials into account, we calculate that pay structures in manufacturing are about 30 percent more unequal in Europe (the EU-15) than in the United States.  Taking into account the accession countries makes the differential even larger.

Nor is it true that relative wages in Europe are rigid.  Exchange rates between the euro, sterling, and the Scandinavian, Swiss and the various East European currency areas have moved considerably in recent years, usually in  response to macroeconomic events, and they continue to do so. From the standpoint of a multinational investor, this affects relative wages.  It is just not true that European wages have remained in rigid relationship to each other, impeding labor market adjustments.

Further, the widely-believed relationships between inequality and unemployment, and between flexibility and unemployment, are the reverse of the facts. As a general rule, egalitarian wage structures are associated with less, not more, unemployment.  It is therefore no surprise that the U.S. has usually had a lower unemployment rate than the European average, and no surprise that the Scandinavian countries have enjoyed the lowest unemployment rates within Europe.   What's more, greater flexibility (movement) in relative wages is generally associated with more, not less, unemployment.  And declines in relative wages (stemming usually from exchange rate depreciation) are associated with rising, not falling, unemployment.  

These matters are documented in various working papers on the site of the University of Texas Inequality Project, at http://utip.gov.utexas.edu, especially the work of Enrique Garcilazo and Deepshikha Roychowdhury.

The U.S. thus benefits from an integrated continental economy with a single currency and strong inter-regional fiscal redistribution, which has given us a relatively egalitarian wage structure and a correspondingly low rate of unemployment most of the time.  We are also blessed with powerful automatic stabilizers and a responsive monetary policy, left over from the New Deal and the Keynesian era of postwar economic policy.

The European Union, on the other hand, was forged in the neoliberal era. It labors under a central bank with a rigid, anti-inflation charter and the near-absence of central fiscal authority. Social welfare systems may be stronger in some countries and in some respects, but automatic stabilizers are weaker, and fiscal policy is not as responsive to crisis.

It is not surprising given that the housing bust happened in the United States, that the recession should have come here first and hit here particularly hard, driving unemployment above the average of the EU-15 (though not, I would wager, above the average of the EU-25).

But for the analytical reasons just given, I agree with the previous comments, and expect that the unemployment problems of Europe will get worse, and stay worse longer, than will be the case here. But that is not because of the workings of a  "European model" in the sense used in John Maggs' question or Floyd Norris's column -- no such model exists in the post-Maastricht world.  Meanwhile the proper policy here is a strong New Deal fiscal and social welfare expansion, jobs programs, and measures like the EFCA to strengthen labor unions. All of these would make the actual United States more like a Europe that exists only in certain imaginations.

Collapse

Floyd Norris is being overly hasty in his seeming advocacy of a European approach to job protection for the United States. For he does so in the midst of an unusually severe global economic downturn  that is still far from fully playing out and that is very likely to reveal that the presently marginally lower unemployment rate in Europe than in the United States will prove to be ephemeral.

            In making his case for a European approach to job protection, Floyd Norris overlooks two key points. The first is that the European recession is significantly deeper and is likely to last significantly longer than that in the United States with clear implications for the relative trajectory of unemployment rates in Europe and the United States over the next year.

Recent data reveal that whereas the US economy contracted at an annualized 6.4 percent rate in the first quarter of 2009, the European economy contracted at an annualized 10 percent rate while the German economy contracted at over 15 percent. The more intractable problems in the European banking sector than in the United States, coupled with Europe’s very much less aggressive monetary and fiscal policy response to the crisis than in the United States, makes it highly probable that Europe will be  very much slower to extricate itself from recession than the United States.

            The second and more important point that Floyd Norris overlooks is the enormous risks that Europe’s rigid labor market poses to the survival of the Euro in its present form. The asymmetric shocks to which the individual European economies are now being subjected underscores the need for very much greater labor market flexibility than Europe presently enjoys if unemployment in many European countries is not to rise to politically intolerable levels. Without very much increased wage flexibility, it is difficult to see how countries like Ireland, Greece, Portugal, and Spain can regain the substantial amount of international competitiveness that they have lost with respect to Germany since the Euro’s launch in 1999 without unusually deep recessions. It is similarly difficult to see how Ireland and Spain might cope with housing busts that make those in the US pale without very much greater inter-European labor market mobility.

            The bottom line is that the United States would be well advised to wait and see how the present global economic cycle plays out before even thinking about abandoning a flexible labor market model which has served it so well in favor of a  European model which is about to be severely tested.

Collapse

Labor statistics are notoriously difficult to compare, as national systems vary a lot when it comes eg to prison inmates, the disabled, and other difficult-to-classify categories. That said, the fact that unemployment presently appears to be higher in the US than in Western Europe, for the first time since the early 1980s (source OECD / Horst Siebert), is thought-provoking. In my opinion, at this stage it merely signals the intensity of the economic shock. If you accept the conventional wisdom that the US adapts more quickly to changes in the economic environment, it is to be expected that America's unemployment rate would rise more rapidly than Europe's in a major economic downturn, but would also peak earlier and decrease quicker than on the old Continent. Indeed, this is exactly what happened during the dotcom crisis, even though at that time the US rate remained below Europe's throughout. The same seems to be happening now - especially as Europe apparently finds it impossible to address its banking crisis and is thus headed towards years of sluggish growth. To be sure, there have been prolonged periods in the past when the European unemployment rate was sustainably lower than the American one, most recently the 1970s.

But I will be surprised if this happens again in the next decade.

Collapse