Posted on : Nov.1,2006 14:20 KST
Dean Baker, Co-Director, Center for Economic and Policy Research
A widely held view among economists and people who follow economic policy is that the countries of Western Europe suffer high unemployment because of their welfare state protections. The basic story is that generous unemployment benefits, legal employment protections, strong unions, and other welfare state institutions reduce profits and sap entrepreneurial spirit. This slows growth and job creation, thereby leaving Europe with a perpetual employment problem.
According to this story, the remedy for Europe is to change the institutional framework. West European countries should cut back their unemployment benefits, weaken legal job protections and pass laws that reduce the power of unions. To put it simply, advocates of this story would tell the European countries that they should make their labor market and economy look more like the United States.
As compelling as this story may be to some, it turns out that history has passed it by. It is no longer the case that the United States has clearly better labor market outcomes for most of its work force than Western Europe. As a result of improvements in Europe’s economy over the last decade coupled with prolonged weakness in the U.S. labor market, the employment prospects for prime age workers (workers between the ages of 25 and 54) are almost the same for West Europe and the United States.
According to data from the Organization for Economic Cooperation and Development (OECD), the employment rate for prime age workers in the United States in 2005 was 79.3 percent. This compares with an employment rate of 78.2 percent in the 15 countries that comprised the European Union before its recent expansion. (Economists generally view employment rates as a better measure than the unemployment rate when making international comparisons, because definitions of unemployment may differ, while employment is less ambiguous.) This gap of 1.1 percentage points would hardly seem to justify overhauling a system that has provided security to the people of West Europe for decades.
The gap looks even smaller when considering the differences by gender. The employment rate for prime age men in the United States is 86.9 percent, just 0.3 percentage points higher than the 86.6 percent average across West Europe.
Of course, there is a larger gap in employment rates for women. The employment rate for prime age women is 2.2 percentage points higher in the United States than Europe. However, this difference is likely more attributable to cultural factors than a weak economy. The socially conservative countries of southern Europe have a much lower employment rate for women than the United States. In Spain the employment rate for women is 10.5 percentage points lower than in the United States and in Italy, it is 14.1 percentage points lower. By contrast, France actually has an employment rate for prime age women that is slightly higher than in the U.S., and in Germany the employment rate is only slightly lower.
The most recent data from the OECD show that there is no longer any meaningful gap between the United States and Europe for prime age men and the remaining gap for women is due to cultural factors, not the condition of Europe’s economy.
Of course, there still are large employment gaps between the United States and West Europe for younger and older workers. While this can be seen as a problem, it is important to recognize that part of this gap is attributable to conscious policy decisions. In West Europe, post-secondary education is relatively cheap or free. In fact, students are often granted subsidies by the state to cover their living expenses. By contrast, in the United States, post-secondary education is often very costly. As a result, the vast majority of post-secondary students in the United States are forced to work to support themselves and pay for their tuition. Whether the European or the U.S. model for secondary education is superior is debatable, but European governments understand that low tuition and generous support for their students will reduce their need to work. This is not an unexpected outcome of their welfare state policies.
Similarly, the lower employment rate for older workers in Europe is largely a result of the wider availability of early retirement pensions from the government and/or private employers. Here also there are reasonable arguments that European pensions are overly generous, especially as life expectancies continue to rise. But the fact that older workers who have pensions are less likely to work than workers without pensions is not a surprise; it is the predictable result of the policy.
In short, there are important issues that can be raised about some European policies that discourage employment, but there is no evidence to support the view that welfare state protections lead to stagnation and high unemployment. For workers in their prime working years, the European welfare states are as successful as the United States in producing jobs. As a result of welfare state protections, these jobs are also likely to be more secure and provide higher wages for most workers. It’s time that the stories about the European welfare states catch up with reality.
