What policies might be appropriate to reduce European Unemployment?

Consider the reasons as to why unemployment rates are so high in Europe. What policies might be appropriate to reduce European Unemployment? There are varying types of unemployment, each with their own causes. Frictional unemployment normally results from job seeking when the market is in a state of full-employment. Those people who are in the process of moving from one job to another and who therefore appear in the unemployment statistics collected at any given time are frictionally unemployed.

Structural unemployment is unemployment arising from changes in demand or technology, which lead to an oversupply of particularly skills or in particular locations. Structural unemployment does not result from an overall deficiency of demand and so therefore cannot be cured by lowering inflation to stimulate in an attempt to stimulate demand. Instead it can only be cured by retraining or relocation of the affected work force. Structural unemployment is distinct from frictional unemployment, which is essentially a short-term phenomenon.

Cyclical unemployment is directly related to swings in the business cycle. During a recession many people put off buying certain durable goods resulting in durable goods industries laying off workers until the economy recovers. Technological change is an increase in the level of output resulting from automation and computerised methods of production. Apart from increasing output, technological change can affect the ratio of capital to labour used in a factory. If the labour force is reduced as a result there is technological unemployment in that industry.

Seasonal unemployment results from changes in the demand for certain products. For example in the construction industry carpenters and builders have less work during the winter and employment in the tourism increases during the holiday season. In order to be able to recommend policies to combat the high levels of unemployment in Europe we first need to identify the main types of unemployment currently in Europe and why they exist before any suggestions can be made to rectify this problem.

The relatively stable changes in the levels of unemployment discount frictional unemployment straight away as if it was simply a fluid labour market that was causing the unemployment, there would be far greater fluctuations in employment levels. This is shown by the graph below in which the unemployment levels of Europe are shown in comparison to those of the USA. There is a standard view of the root cause of the problem.

Europe has rigid wage structures, which deter job creation; it has high minimum wages, which benefit those in employment but erect barriers to entry for those who aren't; and it has an overly generous welfare state, which crowds out private investment by putting high tax burdens on companies. It does seem that there is a simple relationship between equality and unemployment: the price you pay for more jobs is more inequality, and less state benefits and spending.

Comparing America with the Euro zone, one thing becomes clear, America has the jobs and Europe has the welfare state. Therefore many people suggest that Europe needs to re-shape its labour market and its tax and benefits system along US lines while retaining its core social democratic values. Labour market flexibility is seen as the key. America's hire and fire culture; low levels of unionisation and rudimentary social safety net create an environment in which workers price themselves into jobs.

In Europe, by contrast, high levels of job protection, primitive trade unions and generous benefits cause high structural unemployment. This view, although seemingly perfectly valid has one flaw. As the employment section at the Organisation for Economic Co-operation and Development (OECD) pointed out in their annual report, there is no evidence that employment protection legislation costs jobs. Indeed from a commonsensical point of view surely workers who felt happy and secure would be far more productive than those living in a state of permanent uncertainty.

Instead there must be a different cause, and as put forward by the Guardian in October 1999, it is that, measured as a whole, inequality in Europe may actually be higher than it is in the US, and that the key to reducing unemployment is reducing inequality. Two separate studies, one by James Galbraith of Texas University, and the other by Messrs Pedro Conceii?? i?? o and Pedro Ferreira from the Instituto Superior Tecnico in Lisbon; have examined industrial earnings data from individual European Union countries over the past 20 years.

On the basis of these figures, they found that inequality and unemployment are positively correlated, i. e. rising wage inequality leads to rising unemployment and vice-versa. They also found that Europe has more inequality than the US. These findings directly contravene the flexibility argument. If the flexibility argument is correct, then logically those countries in Europe that have the most inequality should have the lowest unemployment. The opposite is, in fact, the case.