Wednesday, September 29, 2010

Look to Europe to Understand Why This U.S. Recovery Is Jobless

Copyright, The New York Times Company

Thanks in part to the legacies of presidents like Ronald Reagan and the Bushes, our country may have been long overdue for an expansion of the social safety net. But Europe shows us that, on the whole, social programs reduce employment, not raise it.

Progressives point out that the Western European economy has a lot going for it: a productive work force, new technologies, universal health care and access to education. Perhaps they’re right that getting our government more involved in the economy and smoothing out capitalism’s “rough edges” would give Americans some of those things, too.

Those same progressives tell us that expanding unemployment insurance and other government programs is an easy way to raise employment in the United States. But they seem to have forgotten that European policies have probably caused Europe’s employment to be less than ours, not more.

The chart below shows the percentage of people who are employed in the United States and in the six Western European countries for which the Bureau of Labor Statistics has compiled comparable employment measures.

Employment has been consistently lower in Western Europe, with an average employment rate gap of 10 percentage points over the years 1980-2007. Our recent sharp drop still leaves two-thirds of the European-American employment gap that was there a few years ago.

Economists have debated the reasons for Western Europe’s relatively low employment, although they generally agree that public policies are at least part of the story.

Profs. Edward Prescott, Jonathan Gruber and David Wise have argued that taxes of one kind or another give Europeans less reason to work. Profs. Alberto Alesina and my fellow blogger Edward L. Glaeser blame more of the difference on heavy regulation of the European labor market. Demographics, especially immigration, are also part of the story, although government policies are responsible for part of the demographic differences, too.

I do not expect our government policies to become 100 percent European any time soon, and even if they did, some employment gap might remain. If the employment rate gap is ultimately only 2 percentage points less than it was before the recession (8 percentage points rather than 10), that will leave our employment pretty similar to what it is now.

Our future is likely to have a permanently larger role for government, and that means employment rates may never be as high as they once were. We might enjoy some of the European lifestyle, or recover the jobs lost during this recession, but not both.


Boonton said...

How to lie with graphs lesson 5,421

1. Create the illusion of a vast difference by shifting your X-axis above the origin.

How to lie with comparisions lesson 3,432

1. Compare two populations without adjusting for age*

* When age would be a relevant driver of the variable of interest such as disease or labor market participation

Google+ said...

Eh, showing the unemployment rates would provide a similar conclusion. The graph is dishonest, maybe - but not wrong.