Refuted economic doctrines #8: US labor market superiority


According to the latest data, the unemployment rate in the US was equal to that in the EU-15 in March, and is now likely to be higher. Writing in the NY Times, Floyd Norris refers to the conventional wisdom that flexibility inherent in the American system — it is easier to both hire and fire workers than in many European countries implies that unemployment should be lower (at any given point in the business cycle) in the US than in Europe.

Although this is the conventional wisdom, the research on which it was based (by Lazear and others) has long since been qualified or refuted. I looked at this in the context of the debate about unfair dismissal laws a few years back. Although the early research supported the simple view that more flexibility = more jobs, later research yielded the conclusion that employment protection laws lower the variance of employment and unemployment but have no clear effect on the average levels.

When you look at the institutions involved, this is unsurprising. Although Norris refers to restrictions on hiring and firing, the reality is that restrictions on hiring are nowhere very important. Even in the extreme case of Spain, they amount to a few weeks of salary. The big differences are in costs of firing, and it is the anticipation of these costs that acts to constrain hiring in periods of expansion.

Advocates of the US system make much of the deterrent to hiring associated with employment protection laws, but they ignore the other side of the coin. When the economy is contract, employment protection laws do in fact protect employment (if they did not, they would have no adverse effect on hiring either).

On this basis there is nothing surprising in what we are seeing. EU unemployment rates should be higher in expansions and lower in contractions, which is exactly what is required for lower variance.

Which is better? The big problem with strong employment protection is that it tends to create an insider class of well-protected permanent employees and an outsider class who are either unemployed or assigned to some form of semi-permanent “temporary” status (see, for example, the tenure system in universities). But, comparing the EU and US as a whole, the opposite seems to be the case – there is a sharper class divide, and less social mobility in the US than in the EU.

59 thoughts on “Refuted economic doctrines #8: US labor market superiority

  1. Some data:

    Tables on OECD stat site gives for 2007 (latest detailed data currently available on the web site) on men 25-54 the following data:

    employment divided by population
    France: 88.3% (hence 11.7% jobless)
    USA: 87.5% (hence 12.5% jobless)

    normalized unemployment rate
    France: 6.3%
    USA: 3.7%

    So with a slightly higher relative working population in this age/sex group France has … a 70% higher unemployment rate than the USA.

    As for women 25/54 in 2007 from OECD:
    FR 76.1
    USA 72.5

    FR 7.7
    USA 3.8

    So here we have clearly more women working in France (3.6 percentage point) relative to their population but unemployment is 102% higher in France! Even worse than for men 25-54.

    I’d like to see a peer reviewed paper explaining those “discrepancies” in the data, any URL?

    BTW what are economist paid for?

  2. I had a couple of thoughts about your reply SeanG: ‘thown’ in my post should’ve been ‘thrown’ and ‘Ophra’ of course should be ‘Oprah’.

  3. PM and Alice,

    you have no idea what you are on about; you cant run a business and employ workers without keeping records – nowadays with credit cards and eft its a simple matter of data entry from your itemised statement.

    BTW it was the unions (thru Hawke) that jumped on PJK’s consumption tax and PJK later taunted Hewson over GST in Fightback.

  4. Rog, you are wrong if you suppose that records at the level of detail a BAS needs are necessary for every business’s own operations. Some records, yes – but I outlined one typical lower level of detail which is enough for some firms. That’s based on actually speaking to people in such areas.

  5. PM Lawrence #47: you are certainly correct to point out that the size and type of business determines whether GST and BAS recording is an extra hurdle or not. A cake and gift shop, an IT firm, a bank, etc are all going to have quite different issues in dealing with the paperwork.

    Obviously large firms that handle tens of thousands of client/customers per year will have systems in place already that deal with records at the transaction level. A few million bucks to shoe-horn in a new business process, and/or adaptation of existing business processes, and the problem goes away – in a large firm.

    Small single person operators are generally time-poor as well as cashflow lumpy, so dealing with the additional record-keeping (which in an ideal world they would have largely been doing anyway) imposes an extra learning penalty and recurrent time penalty – unless they can pay for someone else to do it.

    On the flip-side it probably improved at least a few small businesses’ visibility into how they were tracking – a side-effect of preparing for BAS. Never had to do one, so I’m guessing here.


  6. At most it takes 2 hours to extract data and complete a BAS.

    You need to keep records; dumping dockets in the bottom of the drawer is not good management. Data entry into MYOB or Quickbooks is quite simple but you do need an understanding of bookkeeping and computers and that may stump some business.

  7. Rog, that is quite wrong – unless and until those firms have arranged to capture that data and put it into systems that will process it on demand that way, all of which present time and money costs that don’t show up in “At most it takes 2 hours to extract data and complete a BAS”.

    As I implied, “You need to keep records; dumping dockets in the bottom of the drawer is not good management…” is absolutely wrong, for many firms; it is just precisely the sort of claim I outlined earlier, that “I have even heard of advocates claiming it would force businesses to set up more efficient systems that would benefit them, and never mind the free market idea that if these things were worth it they would already be in use”. Those firms could and did operate perfectly well that way, up until the additional compliance requirements came along – and I spelled out just how they did. So just how is it not good management – for them?

  8. Don, I’m sure there were some gains like that from improved management accounting. Only, if they were cost effective for business reasons they would already have been adopted, by and large; that sort of firm is just precisely the sort where it doesn’t pay for itself. It’s an offsetting factor, not an improvement.

  9. Well, basically everyone but the Germans lie about their unemployment (even the Swedes). My gut feel is that if you adjust for ‘contractors’, casual labour, part timers then the EU (ex the UK) has done better than the US, with much higher salaries and benefits.

    Take Oz, double it and add 5%. And thats about right. US Take U6 and add 25%. UK, who started this nonesense under Thatcher (quickly copied by Regan and Clinton), double and add .. whatever. I know people who have basically never worked in their entire lives in the UK (not their fault though) .. counted? No.

    Move this group to that, redefine them to that .. you know the game. Here in Oz we have a million on disability berefits .. how many real?

    Hard number time: Best estimate of unemployed and underemployed here in Oz is 11.6%. Add 800,000 working age Ozzies living and (until now) working overseas = roughly 15% overall (I’m being kind, you could easily make it 18%). And that is in ‘good times. Plus we are ignoring all those workers who were forced to become ‘contractors’. Who never appear if their work is downgraded, shortened, etc. Add another couple of a %.

    Any bets that will go to 25% over the next few years? Me I’m betting on a TRUE 30%+ by 2011.

    Make that 33% if Holden and Ford goes under (35% if Toyota pulls the plug).

    Now manage a society with that problem.

    As an aside, it will be not that bad in France .. mainly because they kidnap bosses and riot. Being ‘nice’ gets you rooted.

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