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European Unemployment

by TGeraghty Fri Nov 25th, 2005 at 06:01:47 PM EST

A fine article from the front page ~ whataboutbob

There is an informative new paper on the unemployment problem in Europe by MIT economist Olivier Blanchard:

European Unemployment: The Evolution of Facts and Ideas

In summary, the author concludes that the European unemployment problem is far more complex than typical media and political discourse admit, and that there are still many things that we do not know.

He makes the following points:

  • The roots of the European unemployment problem lie in the productivity slowdown and commodity price inflation of the 1970s.

  • The rise in unemployment led to changes in government policy to protect workers -- more employment protection and more generous unemployment insurance.

  • In the 1980s, the unemployment problem was compounded by declining business profits and investment, which reduced labor demand, and conflicts between "insiders" and "outsiders" in the labor market.

  • Most countries have partially reversed the labor market policy changes of the 1970s, but only partially, and sometimes with perverse consequences. European labor market institutions are still less employment friendly than they were prior to the 1970s.

  • National differences in institutions matter. Countries with well-developed institutions of social partnership, including centralized government-business-labor wage bargaining, seem to have done better than others.

So let's consider some of the larger points:

The 1970s: Macroeconomic Shocks

The initial increase in unemployment in Europe was primarily due to adverse and largely common shocks, from oil price increases to the slowdown in productivity growth.

This point seems pretty well settled. The basis for this point is to think about what economists refer to as the "natural rate of unemployment" -- the level of unemployment that is consistent with stable inflation.

Unemployment can be a result of increases in the actual unemployment rate above the natural rate, or due to an increase in the natural rate itself. The European unemployment problem seems mostly to be a case of the latter:

What causes increases in the natural rate? One thing is the difference between what we might call the "warranted wage" - the wage consistent with stable inflation, and the "bargained wage" - the wage set by firm-worker bargaining, whether individual or collective. If the bargained wage grows faster than the warranted wage, the natural rate of unemployment rises.

The warranted wage is affected by changes in productivity - the output of an economy relative to the size of all of its primary factor inputs (labor, capital, raw materials, etc), and by changes in the prices of the non-labor inputs.

Specifically, if productivity growth falls, the growth of the warranted wage falls as well. If factor prices - cost of capital, raw material prices - rise, the growth rate of the warranted must fall as well. As we know, both things were happening in the 1970s:

Total factor productivity (tfp) growth . . . which had run at more than 5% in the 1950s and 1960s, was down to 2%. In other words, the annual rate of growth of warranted wages had decreased by 3 percentage points, a dramatic decline. The decline was largely similar across countries.

All of this was happening during the period of labor militancy of the late 1960s and 1970s, meaning that wage demands outpaced growth in the "warranted" wage, and higher unemployment was the result.

So, onto the next point:

Different institutions led to different initial outcomes [amount of increase in unemployment across countries].

The speed of adjustment of wages to changes in productivity, non-wage input prices, and inflation helped determine the extent to which individual countries suffered from high unemployment.

The faster that wages adjusted to higher input prices and slower productivity growth, the less of an increase in the "natural" rate of unemployment a country would get, and the less it would suffer from increases in actual unemployment. One way to get fast adjustment is to let the market take care of things - an environment of weak unions, decentralized (firm-level) wage deals, and so forth.

Another way, however, is to have well-developed tripartite (business-labor-gov't) national wage bargaining institutions. "With centralized bargaining, the parties at the bargaining table could see the need for and implement the wage adjustment required to maintain employment," Blanchard argues. In Austria, for example, unions explicitly emphasized maintaining high employment levels in their wage bargaining strategy.

A second option, for countries in which money wages did not quickly adjust to changes in the inflation rate (i.e. countries in which labor contracts were not indexed to inflation) would be for the central bankers to generate inflation by a monetary expansion. This would increase inflation, which in turn decreased the real (inflation-adjusted) wage and mitigated the employment effects of the shocks. This was a strategy for getting the actual unemployment rate below the natural rate, at least for a time.

Next point:

The increase in unemployment led, in most countries, to changes in institutions as most governments tried to limit the increase in unemployment through employment protection, and to reduce the pain of unemployment through more generous unemployment insurance.

Again, the evidence for this point is clear. The degree of job protection did rise during the 1970s, no question about it. As Jerome has pointed out, European economic policy makers adopted a strategy of living with high unemployment while easing the pain for workers.

The 1980s: Persistence Mechanisms

By the 1980s, European economies had had plenty of time to adjust to the shocks of the 1970s. Yet the natural rate of unemployment did not come down. Why not?

One reason was that central bankers began to react to high inflation by raising interest rates and slowing the growth of the money supply. For much of the 1980s, as a result, the actual unemployment rate was above the natural rate.

But this was not the whole story. Continued high unemployment generated economic effects that tended to make the problem self-perpetuating:

[T]he role of capital accumulation and insider effects . . . explain important aspects of the evolution of European unemployment.

Capital Accumulation. Slow productivity growth and increases in the price of non-labor inputs, leading to falling employment, also caused the profit rate to fall. As long as the profit rate was below the user cost of capital, the capital stock decreased over time, leading to a further decrease in employment. A monetary contraction, such as that engineered by most central banks in the early 1980s, compounded the problem, as increased real interest rates further decreased the rate of capital accumulation.

Insider/Outsider Effects. One of the interesting things about the European unemployment is the big increase in long-term unemployment:

This is one area where the experience of Europe is unusual - the U.S., for example, has not seen such a large increase in long-term unemployment over the same time period.

Increased employment protection, although its overall effect on employment is ambiguous, almost certainly has played a role in increasing long-term unemployment, as Blanchard explains:

By increasing the costs to firms, and more importantly, by strengthening the bargaining power of workers, [employment protection] was likely to lead to an increase in bargained wages, and in turn to an increase in the duration of unemployment

The result of high long-term unemployment has been the creation of a class of "outsiders" - workers with very tenuous connections to the labor market. For these workers, the loss of skills and the loss of morale may make many of the long term unemployed in effect unemployable.

But there are broader macroeconomic effects of long-term unemployment as well. The higher the unemployment rate, the higher the duration of unemployment, and the greater the loss of skills, the lower the downward pressure on wages from a given high unemployment rate. Any "self-correcting" features of the macroeconomy are thus thwarted, leading to persistently high long-term unemployment.

Furthermore, wage bargaining typically takes place between "insiders" - employed workers (or, more specifically, their union representatives) and firms. The unemployed "outsiders" are not represented at the bargaining table. This means that outcome of the bargaining process may be to stabilize employment at  a level that leaves the unemployment rate high, again perpetuating the problem.

Now, it is true that even insiders, due to the fear that they themselves might become unemployed, will care about the overall state of the labor market. And firms can and do threaten to hire the unemployed, a threat which is greater when the unemployment rate is higher. So the concerns of the outsiders do, if only indirectly, impinge upon the wage bargaining process. Nevertheless, this "insider/outsider" effect probably has played a role in making long-term unemployment a perpetual problem by weakening the link between unemployment and wages.

The outcome of all of these economic factors (and maybe others) seems to be that there has been a decrease in labor demand in Europe since the 1970s: at any given wage and level of capital stock, the level of employment is now lower than it was before the 1970s (this shows up in data as a decrease in the wage relative to productivity and thus as a decline in labor's share of national income). This decline in labor demand may be due to institutions like employment protection, or it may be due to a decrease in "labor hoarding" by firms, perhaps as a result of higher competition and tougher corporate governance. This "adverse labor demand shock" does not seem to have affected the U.S. or the U.K. as much as it has affected continental Europe, and some countries (e.g. the Netherlands) have succeeded in reducing unemployment despite suffering from the shock. The issue is largely unresolved.

The 1990s: Institutions

In the 1990s, European unemployment remained very high, peaking at 10% in 1993, and ending at 7.6% in 2000. But this average reflected an increasing heterogeneity across countries:

  • Unemployment remained high in France, Spain, and Italy.

  • Germany's unemployment rate, which had remained relatively low until the early 1990s, steadily increased after reunification; it now stands (mid 2005) at about 10%.

  • Unemployment decreased to under 5% in the UK, Ireland, and the Netherlands, all from high levels in the early 1990s.

  • Even within countries experiences can differ. In Belgium, with an unemployment rate of 8%, the unemployment rate in the Flemish provinces -- those close to the Netherlands -- is 5%, while the unemployment rate in the Walloon provinces --those close to France -- is 11%. In Germany, unemployment is 8.5% in the west, twice as much in the formerly communist eastern states. In Italy, the north enjoys low unemployment while the south suffers from rates near 20%.

  • Unemployment remained relatively low in Austria, Norway, and Portugal. And, while it went up sharply in Sweden, Denmark, and Finland, the behavior of inflation suggests that this was mostly a cyclical movement -- unemployment sharply declined thereafter;

These facts have led naturally to the conclusion that differences in labor market institutions such as unemployment insurance or employment protection can explain cross-country differences in unemployment rates. The evidence, though, is at best mixed:

Unemployment and Labor Market Institutions: The Failure of the Empirical Case for Deregulation

by Dean Baker, Andrew Glyn, David Howell, and John Schmitt

[T]he evidence [for "the widespread belief that rigidities generated by labor market institutions lie at the heart of the unemployment crisis"] is far from conclusive. [T]here is no simple relationship between any of the labor market institutions and the unemployment rate.

. . .

Countries with very different institutional frameworks have managed to achieve unemployment rates substantially below the OECD average. While the United States and United Kingdom stand out as countries that have achieved low rates of unemployment with relatively weak labor market protections, the OECD also includes examples of countries that have achieved comparable results - Austria, Denmark, Netherlands, Norway, and Sweden - with high levels of labor-market protections.

. . .

. . . the mode of bargaining coordination appears to have a substantial impact on the unemployment rate. . . . Increasing bargaining coordination . . . may allow for lower unemployment without the same welfare costs [as deregulation] for workers.

Other studies have found somewhat more affirmative results. Blanchard:

Differences in institutions appeared able to explain much of the differences in unemployment rates across countries at a given point in time - either in the 1980s or in the 1990s.  This was first shown in a cross-country regression by Stephen Nickell in 1997. Using quantitative indexes for a number of labor market institutions for the mid- and late-1980s, he found that, together, they did a good job of explaining differences across 20 OECD countries.  Among the most economically significant variables in his regression were the duration of unemployment benefits (which increased unemployment), and the degree of coordination in collective bargaining (which decreased it).

Furthermore, the way that labor market institutions have changed over time has been very different across countries, in ways that confuse the issue:

Changes in institutions did not appear able however to explain the evolution of unemployment rates over time. . . . what is striking are the different evolutions [of labor market policies such as unemployment insurance replacement rates or employment protection levels] of the . . . countries, and the absence of a common trend. . . . In panel data regressions of unemployment rates on institutions across 20 countries since 1960, none of the labor market institutions appeared significant.

The "tax wedge" has often been blamed by business or politicians for rising unemployment, but Blanchard is skeptical, with one proviso:

The difference between take-home pay for workers and the cost of labor for firms, divided by the wage, has steadily gone up in most European countries since the 1960s.

Taxes or social contributions that treat income equally whatever its source (labor income or unemployment benefits) should not affect the cost of labor to firms, and thus not unemployment. The same should be true for taxes or social contributions which come with corresponding benefits, such as retirement contributions, so long as they are not redistributive.

On empirical grounds, while the increase in the tax wedge fits the general increase in unemployment, it does poorly in explaining differences in unemployment across countries. Three of the four countries with the highest tax wedge, Finland, Sweden, and Austria, are also countries with a low natural rate [of unemployment].

Major effects of the tax wedge are likely to be present only for wages which are at or close to a minimum wage floor. In this case, additional contributions by firms cannot be shifted to workers, and thus lead to an increase in cost.

Nevertheless, there has been a movement to at least partially reform labor market regulations over the last two decades:

Since the early 1980s, because of financial pressure and intellectual arguments, most governments have partly reversed the initial change in institutions. But this reversal has been partial, and sometimes perverse. . . . either because of poor design, unanticipated consequences, or political constraints. Institutions today are [still] less employment friendly than they were in the early 1970s.

One example of how some reforms may have had perverse effects - moves to reduce employment protection may have simply exacerbated the insider/outsider problem:

The decrease in employment protection has come in the form of the introduction of two types of labor contracts, traditional and highly protected permanent contracts, and new, less protected, temporary contracts.

Whether such a reform actually decreases unemployment is ambiguous; what is certain is that it has created a dual labor market, with protected and marginal workers.


So what should be done? Blanchard poses the challenge nicely:

[A]llow economies to constantly reallocate . . . labor from old to new products, from bad to good firms, while providing workers the economic security and insurance against major adverse professional events, job loss in particular, that they value.

While there is a trade-off between efficiency and insurance, the experience of the successful European countries suggests it need not be very steep.

What does this mean for the reform of labor market institutions:

What is important in essence is to protect workers, not jobs.

  • Unemployment insurance, generous in level, but conditional on the willingness of the unemployed to train for and accept jobs if available.

  • Employment protection, but in the form of financial costs to firms to make them internalize the social costs of unemployment, including unemployment insurance, rather than through a complex administrative and judicial process.

  • Low-wage labor: decrease the cost of low skilled labor through lower social contributions paid by firms at the low wage end, and make work attractive to low skill workers through a negative income tax rather than a minimum wage.

This consensus underlies most recent reforms or reform proposals, for example in the recent Hartz reforms in Germany, or the "Camdessus Report" on reforms in France.

Will this be enough to solve Europe's unemployment problem? Blanchard does not think so. There are two other steps that may be needed:

Social Partnership

Some of the successful countries, the Scandinavian countries in particular, have very different structures of collective bargaining from, say, France or Italy, with much more of an emphasis on national, trilateral, discussions and negotiations between unions, business representatives, and the state.

Various measures of trust between unions and firms, from strike intensity in the 1960s to survey measures of trust between firms and workers, can explain a substantial fraction of differences in unemployment across European countries.

Do countries such as France or Italy need to also modify the structure of collective bargaining? Even if they did, the results would be the same as in Sweden or Denmark?

Expansionary Monetary and Fiscal Policy

It may be that, in fact, an expansion of demand might decrease unemployment without leading to steadily higher inflation.

Inflation in the EU15 is now running under 2%, and close to 0% in countries such as Germany. At these low inflation rates, it is not implausible that . . . workers are reluctant to accept nominal wage cuts.

In such an environment, it may be that an unemployment rate above the natural rate may lead to low rather than declining inflation, so Europe's current stable inflation rate does not mean that the European unemployment rate is at the natural rate.

The experience of Spain, where unemployment has steadily decreased without major labor market reforms and without an increase in inflation, can be read in this light.

Great guns, TG! This is a fine contribution to a better historical understanding of unemployment in European countries, and far removed from the usual propaganda narrative.

Could you give a little more explanation of what's meant by the "tax wedge"?

Thanks for this diary.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Nov 23rd, 2005 at 02:51:28 AM EST
The "tax wedge" is the difference between what firms pay to employ workers and what workers actually receive as take-home pay. The "wedge" is created by things like payroll taxes for unemployment insurance, pensions, and other social programs.
by TGeraghty on Wed Nov 23rd, 2005 at 02:59:12 AM EST
[ Parent ]
Well TG, you did it again. Excellent and informative diary. Thank you!! And yes, it adds an important piece of information to the dialogue.

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Wed Nov 23rd, 2005 at 03:29:41 AM EST
On unemployment and long-term insurance.

The UK and the Netherlands are often said to have a lower long-term unemployed figure because they shunt them off onto the disability benefit rolls.

Indeed, it is worth noting that anecdotally in areas of the North of England the labour market has simply peformed a social about face. Where once few women worked and most of the men did, the trend is reversed. I'm not sure how this magic is reflected in the figures.

Some also say that in the US the long-term unemployed are shunted into the black economy (and often, eventually into prison) when their benefits period ends.

  1. If the above statements are true, how does this affect the model?

  2. We've had the discussions here on ET until we are blue in the face, the fact is it is beyond a bunch of hobbyists to resolve the truth of the above statement. Is anyone out there in academe/government ever likely to look into them?
by Metatone (metatone [a|t] gmail (dot) com) on Wed Nov 23rd, 2005 at 03:50:56 AM EST
If the statements are true (and they all probably are to a certain extent, except that I don't know anything about the women working in the North of England), then that would suggest that the UK, Netherlands, and the US all have worse social exclusion problems than the official figures indicate.

It calls into question the facile appeals to the "Anglo-Saxon" model (whatever that means) as the only way to deal with unemployment. It might also mean that the "Dutch miracle" was not all it was cracked up to be (Jerome has argued that it also depended on a real estate bubble, now where have we heard that before).

But I don't think that necessarily invalidates anything that Blanchard says in his paper.

The shocks to the global economy of the 1970s - slow productivity growth, commodity price shocks, and I would add globalization and increased international competition to the list - were real, and they affected the whole world, not just Europe.

In the US , what happened was that the economic problems discredited Keynesian economics and much of the New Deal/Great Society industrial, labor and financial regulatory structure and social welfare programs. Especially those that helped the most marginalized people - the poor, the unemployed, etc. Something similar happened in Britain under Thatcher, but to a lesser extent than here in the US.

The result of the loss of these social supports has been more inequality and poverty in the US, but less of an unemployment problem. The economic problems are here (it's not like there aren't any "outsiders" in the US, for God's sake) they just show up differently than on the continent. There are more Walmart low-wage service jobs or black market jobs or prison cells for our socially excluded.

On the continent these things didn't happen so much, since labor is stronger and liberal ideology is much weaker there. So they have more protections for the poor and unemployed, and less poverty and inequality, but more unemployment.

by TGeraghty on Wed Nov 23rd, 2005 at 04:13:16 AM EST
[ Parent ]
The nit I was picking was with the correlation between the provision of longer term unemployment benefits and the rate of long term unemployment. If what I listed is true, then it is not statistically significant.

Of course, the problem that remains is political.

"Unemployment" (long term unemployed listed in France or Germany) is seen as the terrible curse of sclerottic socialist states, whilst "poverty and inequality" (the US arrangement) are simply the necessity for functioning efficiently in a modern globalised economy.

Now having seen long-term unemployment close up I don't wish to sound like I am minimising it, but I am groping towards a conclusion (which I hope to diarise with reference to Jerome's diary on the Chinese labour force) that we have entered the fabled era of plenty.

Frankly, productivity has, as a whole, moved beyond consumer desire. You could quite convincingly supply the whole world (yes, including all the starving in Africa, etc.) with all the material goods they really have time to consume from pretty much the existing labour force in Asia and the US (for example).

Of course, in this case capital shortages perhaps merely reflect energy shortages.

Anyway, that is a long discussion point and there are lots of holes that need covering, so again, let's just say that given this possibility we need to realise that:

Given the possibility that our economic system massively undervalues services unless they are provided to the ultra-rich (e.g. no economic weight at all to a local community football club, whilst the Fillipino maid working at the CEO's wife is part of increased GDP) it should be realised that we may have a systematic inability to employ people. They will not be needed in manufacturing and we don't have the psychology/economics to be able to justify various non-material economic activities on a large scale.

Thus, arranging society to look after those who do not have the privilege of formal work is going to be an increasing concern.

This connects back to the question. Paying people to do nothing can be terrible for their morale and their mental health etc. Thus, it is not a good solution. However, I do have to question whether being stuck in genuine poverty, working in a semi-legal manner or going to prison are better ways of managing the problem of excess labour.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Nov 23rd, 2005 at 04:51:26 AM EST
[ Parent ]
I'll leave question 1) to TG, but, on question 2) I think there's now now doubt you (we) are right about Incapacity Benefit as a "hiding-place" for the long-term unemployed in the UK, since this is now an openly-admitted policy issue for the government. Blair and Blunkett were fighting over it before Blunkett resigned (Not unsurprisingly, Blair is in favour of shock tactics to force people out of sick benefit and back to work. In which case he'd better start creating unskilled jobs in depressed former industrial areas for people who have lost touch with the labour market...)

The scale of hidden long-term unemployment in the UK suggests the true unemployment rate is 7%-8%.

Incapacity or sickness benefit rates are also relatively high in a number of countries cited here as apparently successful in reducing unemployment, while they are low in countries generally considered to have failed. (See the diary I link to in previous paragraph for OECD figures).

I realize I may be adding yet another layer of blueness to ET faces by going back over this yet again, but it does seem to me:

  • things do end up by emerging into the light (witness the UK Incapacity Benefit debate);

  • even if they didn't, we would still have to try and dig away at them, wouldn't we?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Nov 23rd, 2005 at 04:24:49 AM EST
[ Parent ]
Well, said. I'd appreciate your insight into my crackpot reply to TG.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Nov 23rd, 2005 at 04:53:38 AM EST
[ Parent ]
It doesn't look crackpot, but I'll have to get back later to try to put together a reply.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Nov 23rd, 2005 at 05:07:22 AM EST
[ Parent ]
Not at all, this is important information for us to know. I'm sure not everybody has read every single comment in every single thread up to now.

I would reiterate that the shocks of the 1970s were real, and they affected the whole industrialized world. Different countries responded to them in different ways: Continental Europe by beefing up unemployment insurance and job protection, the US by partially dismantling the regulatory and welfare state.

In the US unemployment went up too, by the way - it averaged 7% during the 1980s through the early 1990s, compared maybe 4-5% during the 50s and 60s. Just not as much as in Europe, which enjoyed unemployment rates of 1-2% during the 50s and 60s. The shocks hit everybody.

As for the persistence mechanisms of the 1980s - the slowdown in investment is clearly something that happened, even in the US investment was far lower in the 1980s and early 1990s than it had been before.

The thing that the US (and the UK) has that France and Germany don't is a low-wage service sector that serves as "employer of last resort." This is one point that is also implicit in Blanchard's analysis.

Scandinavia has the large state-funded social service sector as its' employer of last resort.

Much of the continent has neither. Their welfare states emphasize income transfers rather than state provision of social services. The combination of high minimum wages, "tax wedge" and generous protection for the unemployed price low-skilled low-productivity service jobs out of the market.

So perhaps part of the solution is to remove labor market rigidities that prevent firms from offering and workers from taking low-wage jobs, but then compensate the workers through a "negative income tax" or "basic income" to bring their total incomes up to or beyond the poverty level (as Blanchard recommends).

As for the little "miracle countries" - Ireland, Nehterlands, Austria - they all have the centralized wahe bargaining institutions which allows them to hold down wages (usually in return for more generous state benefits. James Galbraith argues that these countries use these institutions to strategically undercut labor in bigger neighboring countries (the UK in the case of Ireland, or Germany in the case of Austria or the Netherlands).

by TGeraghty on Wed Nov 23rd, 2005 at 05:00:38 AM EST
[ Parent ]
Thanks TG for that detailed diary.

I'd like to make one point which links to Migeru's mention of hysteresis and transition effects. The first reaction to unemployment was to increase protection for the "insiders", and create that class of "outsiders".

That also led companies to focus on insider-poor investments, i.e. they started hiring less not to be stuck with "insiders" should there be a downturn: more capital-intensive investment (explaining the higher productivity of insiders), and an ebb and flow of outsiders depending on outside demand.

When the persistence of high unemployment made this situation unpalatable, the answer was finally to stop protecting insiders so much. The problem is that there had been pretty irreversible changes in the meantime:

  • companies have gotten used to investing incapital rather than in labor;

  • the outsiders have lost the social and professional competences required to join asily the mainstream and are not easily recruited into the "inside"

  • insiders are unhappy to see their protections eroded while unemployment is not obviously improving, and thus overall morale sags, with detrimental effects on the economy.

And despite all this, job growth has been better in the eurozone than the US - weird, isn't it?

Maybe we should focus more on that "morale" and economic well being perceptions effects. If you are told all the time that we are in a crisis much worse than the others, then you believe it, and it becomes politically self-fulfilling.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 23rd, 2005 at 04:54:41 AM EST
Is the emphasis on capital-intensive investment necessarily inconsistent with the slowdown in investment and capital accumulation that Blanchard cites?

I guess there could have been less overall investment, but what investment there was tended toward the capital-intensive?

by TGeraghty on Wed Nov 23rd, 2005 at 05:09:16 AM EST
[ Parent ]
To be honest, I was surprised about that info on investment slowdown. I remember distinctly numbers that showed the exact opposite, with investment remaining much stronger in the eurozone than in the USa and UK. I need to dig this up again.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Nov 23rd, 2005 at 05:19:40 AM EST
[ Parent ]
Yeah, I was just looking at the US numbers and there was no slowdown in gross domestic investment.

There was a slowdown in net investment between the late 1970s and the 1980s/90s because much of the later investment was in things that depreciate rapidly like computers and software.

I'll have to take a closer look at that.

by TGeraghty on Wed Nov 23rd, 2005 at 06:34:05 AM EST
[ Parent ]
Here's something. Robert Brenner in his book The Boom and the Bubble lays out some numbers that (if they are right) seem to verify what Blanchard is saying:

                    Net                Growth Rate of
                Profit Rate          Capital Stock
             1950-70  1970-93  1950-70 1970-93
US             12.9%    9.9%     3.8%    3.0%
Germany    23.2     13.8        6.0       2.6
Japan         21.6     17.2        9.4       7.1
G-7            17.6     13.3        4.5       4.3

but . . .

France        24.2     21.0        3.6       4.7

doesn't seem to fit the pattern (although the years are a little different, starting in 1952 and ending in 1987).

The numbers are from OECD and this book.

by TGeraghty on Wed Nov 23rd, 2005 at 12:53:55 PM EST
[ Parent ]
Well, the eurozone has done better in 96-05, but not so well in 86-96. How much of that is (dare I ask it!) cyclical?
by Metatone (metatone [a|t] gmail (dot) com) on Wed Nov 23rd, 2005 at 05:40:37 AM EST
[ Parent ]
The problem is that there had been pretty irreversible changes in the meantime
Exactly: reversing an economic policy (or any kind of policy, for that matter) will  not restore the previous situation because the system has changed in the meantime.

A point that Stuart Kauffman has been talking about for a while (but in a subdued way since he has no clue how to tackle it) is that in biological evolution (and by analogy in economics), evolution does not happen in a fixed "fitness landscape" but the landscape changes as evolution progresses.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Nov 23rd, 2005 at 07:01:29 AM EST
[ Parent ]
the landscape changes as evolution progresses. _

This is very important.  

What this means is the local minima/maxima of the Agents in a fitness landscape can remain "the same" in relative terms but "improve" in overall terms by raising the fitness landscape.  To illustrate:  If A is at 2 and B is at 3 and the landscape is at 1 then the total of A is 3 and B at 4.  "Improving" the fitness landscape to 3 means A is now at 4 and B at 5.  The relative distance of A to B is remains the same but the objective net increase _is 2 although you can't determine it by comparing A and B.

Another way to put it:  a rising tide lifts all boats.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Nov 23rd, 2005 at 12:23:39 PM EST
[ Parent ]
Another way to put it: everyone needs to run faster just to stay in place.

And the point is not that the fitness landscape rises more or less rigidly, but that the shape of the lanscape changes, and even the dimensionality of the space. In other words, suddenly you find yourself solving a qualitatively different problem.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Nov 23rd, 2005 at 12:26:57 PM EST
[ Parent ]
To drop some terminology... you are talking about coevolution. Kauffman is concerned with speciation, and the role of neutral mutations.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 23rd, 2005 at 12:44:56 PM EST
[ Parent ]
It was kind of you to respond as you did and not with the more blunt "ATinNM, you're blowing smoke up people's arses!"  8-)

Well.  Yeah.  Each of those are also possible.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Nov 23rd, 2005 at 02:13:33 PM EST
[ Parent ]
Excellent diary!

The main problem, perhaps, is the slow speed of educational evolution compared with the rapid restructuring changes in industry and business.

If you keep educating people for jobs that will no longer be available when they graduate, then you reinforce future unemployment. That is why a high-level general liberal education that equips kids as problem solvers and entrepreneurs is better than training them for specific tasks.

Of course, any country makes statistical anlayses of the future demand for particular skills and tries to ensure that these need are satisfied. Such as having enough doctors etc. But these key professions in the welfare of a society are a small percentage of the total number of jobs.

If I were in government I would fight to have teachers among the highest paid, not the lowest. By attracting the very best to teaching, the long term problems of a society can be better addressed.

Short-term problems are of course what obsess politicians.

You can't be me, I'm taken

by Sven Triloqvist on Wed Nov 23rd, 2005 at 06:10:13 AM EST
I would argue that in fact we are seeing more than this.

It is clear, as an example that you are correct, that the IT industry is going through the same evolution as the car industry did, from craft to industrial process. But it is happening faster, and education is not keeping up.

However, I cannot yet find figures, but it seems the computer industry is undergoing the same transformations as the car industry, only, it never employed so many people in the first place.

Biotech will employ even less in the first place before efficiency and productivity destroy it as anything more than a niche employement.

High level education as problem solvers is a positive thing, but the real problem is that we can now solve problems with less labour.

In the ideal world this would allow us to solve more problems, but the seed capital seems to me to be the big obstacle.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Nov 23rd, 2005 at 06:21:48 AM EST
[ Parent ]
That is why I support the teaching of entrepreneurship.

Kaos Pilot business school in Aarhus, Denmark (with which I am peripherally involved) is a good example of this.


From surveys of other European Business Schools, much less then half of graduates expect to run their own business within 5 years. At Kaos Pilot, the majority expect to do so.

Sadly in Finland it is not easy to start your own business - dealing with bureaucracy only starts to become efficient when staff levels reach over 50 or so, and one can acquire the specialist skills to deal with all the form filling, analysis and changing regulations. Nevertheless, of the 230,000 odd businesses in Finland, over 70% employ 10 people or less.

You can't be me, I'm taken

by Sven Triloqvist on Wed Nov 23rd, 2005 at 07:15:58 AM EST
[ Parent ]
Great diary!!!

so great that I disagree almost completely with the ideas behind the report...

I will not give you my vision of the world, but I would give you indeed a good reason why the report is not correct...


Everything that is said there has nothing, absolutely nothing to do with what happened in Spain. In the 70s we were hardly coming out from the closet. Huge employment in agriculture..and hadly developed economy.Fromt hen on employment figure was uniquely fixed by the rate at which people left agriculture to look for other jobs.

It was a dance floor between spectations (individual decision) and economic grow.
Of course there were other inputs and some changes in the labor relations folowing the line of making it easier for to fire someone in a lot of service sector jobs..

Spain in the 80s and the 90s had also nothing to do with the image you are giving for Europe. There were arrangements, salaries bargain and constant discussions about the monetary policy..

But all in all, uemployment only started diminishing when there were no people in the agricultrue willing to leave (agriculture employment figure as any other European country) and a good chunk of the women (the more willing) were already in the labor market...

SO, these general frameworks are normally wrong... and specially when I can hardly believe some figures because of the different ways to compute long term unemployment...BUt, regarding spain nothing to do.. and youc an not use it as example of anything

So, wonderful diary.. and I am sure it may apply to some of the countries...I guess. Certainly not to Spain..

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Nov 23rd, 2005 at 07:14:40 AM EST
Kcurie, you forget that Franco's Spain had to enjoy 10 years of self-insufficiency in 1945-55, missed out on the Marchall plan, sent large numbers of guest workers to France, Benelux and Germany, and insulated the population from the 1973 old shocks by huge government subsidies. In 1982 unemployment was officially over 20%. In the 1980's and 1990's it tended to be anti-cyclical with the rest of Europe, both politically and economically.

Spain only joined "Europe" in 1986, so it is understandable if this article's analysis does not apply.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Nov 23rd, 2005 at 07:19:55 AM EST
[ Parent ]
These are old the things I wanted to say regarding how Spain is absolutely out of step in this frame... I do not know why it is incuded to argument any point...spain was out of step, following tis own dynamics (couled with Euroep of course).

I wonder how different were other countries...


A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Nov 23rd, 2005 at 08:12:59 AM EST
[ Parent ]
Blanchard recognizes that Spain is something of a special case:

. . . the rapid decrease of the unemployment rate in Spain -- which has now fallen below 10% -- is also hard to trace back to either shocks or dramatic changes in institutions. Yet another puzzle is the coincidence of very low productivity growth -- zero measured tfp [total factor productivity] growth in Spain over the last 15 years -- and decreasing unemployment.
by TGeraghty on Wed Nov 23rd, 2005 at 01:37:10 PM EST
[ Parent ]
He just does not know basic Spanish history or he is too lazy to look for it. The reasons are any economic text book written in Spain the last twenty years. There are plenty of them in the libraries...a simple goolge search would meake it

I hope he did not research his paper as much as he researched Spain... SNARK SNARK

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Nov 23rd, 2005 at 01:53:44 PM EST
[ Parent ]
Why are you so sure about what he knows or doesn't know? Did you even bother to read his paper yourself?
by TGeraghty on Wed Nov 23rd, 2005 at 02:05:34 PM EST
[ Parent ]
I'm not a great fan of limited macroeconomic analysis due to the tenuous relationship between macroeconomic policies and microeconomic activity.  Certainly there is some relation but there is, AFAIK, no paper proving what the relationship is.  (This assumes rational macroeconomic policies.)  So let me throw out some observations for comment.

Looking at the 3rd figure the employment numbers for Ireland were impacted by the investment into the country by the EU.  The Irish economy prior to joining the EU was 'not good' with workers leaving the country to find work.  When the investments was made companies planning on establishing an EU presence moved to Ireland to capture some of this investment.  New and "excess" members of the Labour force, instead of leaving, stayed as work became available.  The 1:5 ratio kicked-in (1 job affects 5 jobs).  And a virtuous cycle was created.

But the EU, by the investment, made Ireland more attractive to companies wishing to establish an EU presence and so moved there rather than some other EU country.  Thus the Irish employment figures are better analyized from an EU and not from a country-by-country perspective. (?)

Jumping to another topic, in the 1960's to 1970's we can posit the "Baby Boom" were consumers of production but not yet competitors in the job market.  Also during this time some of the industrial capacity of the US was directed toward the military market to provide goods to fight the Viet Nam War.  After 1970 some of this capacity was re-directed toward the private consumer market in competition with EU companies.  These, with the oil shock, may have driven marginal businesses into bankruptcy over a shorter duration than "normal."  The affects on both the supply and demand sides for labour would intimate an increase in labour militancy for resisting the elimination of jobs, wage rate reductions, and establishing barriers to entering the job market.  The result being an increase in unemployment.

Adding the natural distaste for operating businesses to gut - "creatively destroy" - themselves the social compact to accept high unemployment by the "in's" becomes easier, I submit, to understand.

Another effect on employment is the low rate of new business development in the EU -- but that's another discussion.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Nov 23rd, 2005 at 12:04:45 PM EST
Some of the successful countries, the Scandinavian countries in particular, have very different structures of collective bargaining from, say, France or Italy, with much more of an emphasis on national, trilateral, discussions and negotiations between unions, business representatives, and the state.
As Kcurie has argued eloquently, Spain also falls in this category, and it has reduced its unemployment rate by half in 20 years, which is no mean feat.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 23rd, 2005 at 12:20:52 PM EST
I suggest this can be seen as the affect of increase in the Fitness Landscape.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Nov 23rd, 2005 at 12:28:21 PM EST
[ Parent ]

Dead right.

A bargain system and the fact that people in the agriculture slowly diminished is all you need to know...

Creation of employment needs growth and a good system to share the wealth between workers and bosses...

This is my world view.. I must admit it has been heavily influenced by the fact that I grew up in Barcelona which is the extreme example of good bosses and unions. I have never heard people more intelligent thant those in charge of the commerce chamber and employers and employees organizations. If other countries would have the same kinfd of people in charge the world would be much more better...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Nov 23rd, 2005 at 01:57:59 PM EST
[ Parent ]
I envy Barcelona for its enlightened capitalists. That's where you get nice urbanism like Cerdà or Gaudí. I think Madrid is friendlier, but it has suffered the plight of being the Capital of unenlightened "Hispanity" and so is an urbanistic nightmare. Besides, the people of Madrid resisted Franco's siege for almost 3 years, so he had to retaliate against them (this is the opinion of Javier Marías, one of my favourite madrileño writers).

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 23rd, 2005 at 05:36:09 PM EST
[ Parent ]
Great entry.  Blanchard is a great economist.  I have a book with a few of his articles on my shelf

Unemployment decreased to under 5% in the UK, Ireland, and the Netherlands, all from high levels in the early 1990s.

Yes, but the high levels in the 1990s (and the 1980s, for that matter) were at least partly the result of really stupid economic policy.  Thatcher's government attempted, in a half-assed way, to do what Paul Volcker did at the Fed -- purge the inflation from the system by jacking up interest rates.  She did that, was rewarded with a (horrible but perhaps necessary) recession (just as the US was), but then began pumping up demand and -- voila! -- inflation returned.  See Krugman's Peddling Prosperity.  Unemployment went back into the double-digits, and the Tories have never been trusted on the economy since.  The giant demand was the result of the savings rate going from 4% of DPI to zero.

(Even worse, Davis has left the somewhat-kooky Thatcherite Monetarism of the 1980s for the completely-batshit, Bush-style Supply-Side-ism of today.)

Also, it's not quite fair to compare Ireland with the others, since Ireland has been booming for so many years due to massive investment and development finally arriving.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Nov 24th, 2005 at 01:36:25 PM EST

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