Europe has a persisently high unemployment rate of about 9%, compared to about 5% for the United States. This is a problem that defenders of European-style welfare states must grapple with. The common method is to invoke hidden unemployment. The claim is that the United States’ Bureau of Labor Statistics (BLS) is fudging the numbers by not counting all of the unemployed. In particular, the BLS is leaving off part time, discouraged and other “marginally attached” workers and part time workers.
The problem with the hidden unemployment defense is that the four main organizations that count unemployment - The BLS, the Organization for Economic Cooperation and Development (OECD), Statistical Office of the European Communities (Eurostat), the International Labor Office (ILO) - have harmonized their methods since the 1960’s. They all show that unemployment runs about 4% higher in Europe, give or take a bit. (See the Eurostat data here) See the OECD here
The Bureau of Labor Services looked more deeply into the different methodologies and found that there are still some remaining measurement problems. Correcting for them would lower Canada’s unemployment by 1% and Europe’s by even less, leaving the bulk of the gap unaccounted for except by the relative strength of the economies. Read the full report here.
But the problems with Europe are not just high unemployment. Unemployment in Europe tends to last a lot longer, making it harder to rapidly bounce back after a lost job. Europe also produces more part time jobs and pushes more workers onto extended (government provided) sick leave and early retirement.
Length of unemployment
Let’s really get into the nature of hidden unemployment. It basically means people who aren’t looking very hard for work because they are discouraged about their prospects. You would expect to find more discouraged workers in countries in which long-term unemployment is greater than in countries in which unemployment is of a relatively short duration.
From a BLS report:
Almost half of Europe’s unemployed remain jobless for a year or longer, while less than 10 percent fall into that category in the United States. (See bottom panel of chart 2, based on OECD data.) In 1983, the United States, Canada, and Japan had about the same proportion of long-duration unemployment, while Europe’s was far higher. During the 1980s, the proportion declined somewhat in the United States and Canada, rose in Japan, and remained very high in Europe. All countries except Japan showed a rising trend in the early 1990s. Japan’s Long duration unemployment worsened in the last half of the decade, while the other G7 countries showed some small improvement. The data on duration of unemployment reveal an important difference in the nature of unemployment in the United States compared with Europe. The proportion of long-term unemployment in Europe remains persistently high even during and after recoveries. In the United States, it is relatively low even during downturns in the economy.
On the Dole
As anyone who has every been on unemployment insurances knows, you don’t look very hard for work when you are getting paid not to work. It is only when the benefits are starting to run out that you really start looking hard for work. With its extensive welfare states, we would doubly expect Europe to have higher hidden unemployment. This is also true:
Broader measures of underutilization. In 1993 and 1995, Sorrentino published studies broadening the international analysis of unemployment to cover seven measures of underutilization known then as U–1 through U–7. 20 Both studies found that Japan and Sweden, the countries almost always having the lowest unemployment rates as conventionally measured, experienced by far the largest increases when the definition was expanded to include persons working part time for economic reasons and discouraged workers. In times of recession and recovery alike, the Japanese unemployment rate consistently tripled when these additional measures were incorporated.21 The 1995 study explained that understanding the effect of Sweden’s pioneering programs for retraining and employing the unemployed is important in gaining an appreciation of that country’s labor market situation. Sweden’s very low unemployment rates during 1960–90 were partly explained by a large expansion of those programs during recessions, shielding many persons from unemployment. However, the programs were unable to keep Swedish unemployment from rising to unprecedented levels in the 1990s. If persons in labor market programs were added to the already high number of jobless individuals in 1993, Sweden’s conventional unemployment rate of 9.3 percent would have risen to 14 percent.
14 percent is probably too low. Swedish labor unions have noticed that regions of the country with the highest unemployment also have the highest rates of people on extended disability or early retirements. When you start counting those people Sweden’s hidden unemployment shoots up to a whopping 20%. More here. No wonder Sweden’s GDP has fallen from fourth highest in the world in 1970 to 17th in the world.
Part time workers
Another measure of unemployment is the underemployed: part time workers who would like to work full time.
Most U.S. employment growth since 1983 has been in fulltime jobs. (See table 8.) The United States was the only G7 country with a declining proportion of part-time employment during 1983–2000. In Europe, employment growth has been weak in
general, but, in addition, the increases that did occur were mainly in part-time employment. This appears also to be the case in Japan.…
Chart 7 tracks the ratio of full-time to part-time employment
from 1983 to 2000. (Note that the jump in the trend line for
Europe
(G4) in 1991 was due to the absorption of workers from the former East Germany, who were predominantly full-time workers in the Soviet system.) Europe began the period with the highest ratio of full-time to part-time workers, but the trend was sharply downward thereafter. The United States began the period with a ratio considerably below Europe’s, but ended with the highest ratio: full-time employment was 7 times as high as part-time
employment,while in Europe it was 5 times as high.
Conclusion
I will close with more of the BLS report on unemployment that puts the historical trends into perspective:
Unemployment trends over the past 40 years clearly show divergent paths taken by the United States and Europe. From 1960 to 2000, the United States moved from the position of being a country with relatively high unemployment to a nation that attained the lowest jobless rate among the G7 major industrial countries (the United States, Canada, Japan, France, Germany, Italy, and the United Kingdom).2 By contrast, European unemployment rates moved in the opposite direction, from low to high, with the crossover occurring in the mid-1980s. While Europe and the United States were switching positions, Canada and Japan generally maintained their places in the international array: Canada’s jobless rate was frequently the highest, and Japan’s was almost always the lowest, during the 40-year period.
In contrast to unemployment statistics, relative employment trends were more consistent throughout the period. The United States and Canada generated the strongest job creation, while Japan and Europe had much weaker employment increases. The two North American countries’ employment growth greatly surpassed their population growth, while Europe’s and Japan’s employment did not even keep pace with more slowly rising populations. Canada’s job creation success contravened its relatively high unemployment rate over the four decades.3 The United States had the best of both worlds: lower unemployment rates and high job creation.
Europe has had an historic edge in wealth and jobs over the United States, and in many ways we still hadn’t closed the gap after WWII. That gap has been closed and passed because we have not gone as far into welfare state policies as Europe. Let’s stay the course.
For further reading, check out Cowboy Capitalism by Olaf Gersemann.
