Back in 2009, I made a bet with Bryan Caplan that the average unemployment rate in the EU-15 over the following 10 years would be no more than 1.5 percentage points above that in the US. Before talking about the bet itself, I’d like to note that while we disagree about a lot of things, Bryan and I both take a strong stand against war, with a limited exception for self-defence. As Bryan says here, that takes a lot of sting out of the possibility of a losing bet for either of us – agreement on war and peace is more important than disagreement about labor markets in my view.
Now, on to the bet.
First the numbers. Until now, I’ve been consistently ahead. EU-15 and US unemployment rates were very close during 2009 and 2010. A gap has opened up in the last few months and is now about 1.5 per cent. Given the dismal prospects for the EU economy in the coming year, and the likelihood of some kind of recovery in the US, I expect to be losing ground on the bet this year, and probably for a couple of years after that.
Having said that, the original premises of the debate have pretty much ceased to apply. I was expecting a longish recession followed by a gradual recovery in both the US and EU. Macro policy has been worse than I expected in both cases, but dramatically more so in the eurozone, where the ECB seems determined to turn a recession into a depression. It’s this, rather than differences in labor market performance that’s driving the present divergence in unemployment rates.
Looking specifically at the US labor market, it’s hard to see any signs of the flexibility benefits that might be expected to offset the negative effects of a combination of employment at will, an almost non-existent union movement and minimum wages that are substantially lower, in real terms, than they were 30 years ago. While unemployment has fallen from its peaks, there is no sign of a recovery in the more relevant measure of labor market performance, the employment-population ratio.