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Return of the Son of the Unemployment Story

by Colman Thu Oct 6th, 2005 at 04:54:15 PM EST

This is a somewhat updated version of my unemployment story. I apologise for taking up further space with this, but it seems to me to be core to the site's mission of debunking the attacks on Europe. I intend putting this into the wiki and posting it a bit more widely soon.

One of the key complaints levelled against the European social and economic model by corporate capitalists is that it causes high unemployment. The examples chosen are generally France and Germany who are compared against the US.

Before we concede that EU unemployment is substantially higher than in the US we need to examine the numbers cited. Often the official national numbers are used despite the fact that they differ fundamentally on what they measure and how they measure it. Reporting the German rate as 12% and the US rate as 5.1% is either lazy, clueless or dishonest. The official German rate includes people working less than 15 hours a week but who want a full-time job as unemployed while the headline US figures count anyone who works for even one hour a week as employed.

I'm not going to consider the questions surrounding unemployment such as job quality, quality of life or happiness: I'm simply going to ask how legitimate is it to compare the unemployment numbers.

I'm going to use the OECD numbers, which are based on labour force surveys carried out under ILO guidelines. Eurostat, who are responsible for co-ordinating the EU surveys, define unemployment as

Unemployed persons are all persons who were not employed during the reference week, had actively sought work during the past four weeks and were ready to begin working immediately or within two weeks.

The first point to make is that the EU-15 rate from the September 2005 is 8.0% vs. a US rate of 5.1%, which is a rather smaller difference than the comparison normally chosen.

The normal comparison listed is

2005 Q1 9.7% 9.7% 5.3%
2005 Q2 9.6% 9.7% 5.1%

which appears to prove that the US has a much lower unemployment rate than France or Germany. How comparable are these numbers?

A 2000 paper from the US Bureau of Labour Statistics examined this and noted the following systematic differences between the way the US and other countries implemented the ILO standards for the labour force surveys:

  1. Passive job seekers were included in EU figures and not in US figures. Passive job seekers have looked in the newspaper for jobs but not taken any other action to find a job.
  2. People waiting to start a job are included as unemployed in the EU, but not included in the US.
  3. The period of availability differs: in the US you only count as unemployed if you are available to work within one week. The EU use a two-week window.

Sorrentino concluded that, based on the limited information available, correcting for these differences would have made about a 0.5% difference to many EU figures, especially the French and German numbers. I can find no information on how current figures would be affected.

Among others, two obvious structural issues affect the comparability of the numbers:

  • The US has 0.8% of it's population (not labour force) under arms, while in Germany and France only 0.3% of population serve in the military. The OECD figures are for civilian employment only, so that's 0.5% extra of the population removed from the labour force. For many young, poor Americans joining the military is one of the few paths to training and work available. If a military career was not available I suspect many of these would end up adding to the unemployment figures.
  • The US has 0.7% of the population in jail compared to 0.1% in the European countries. I think it is fair to speculate that most of that 0.6% extra jail population would show up in the unemployment figures.

We could hypothesise that these two factors might add a further 0.75% to the corrected US unemployment number, raising it to around 6.5%-7%.I don't mean to suggest that people in the military should count as unemployed, simply to point out that there are significant structural differences between the US economy and the EU economies that are often compared to it.

A further complication, and probably both the most profound and most difficult to correct for, is the treatment of "marginally attached workers":

persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work recently.

I believe that the welfare systems in the EU tend to keep people in the official system so that I would expect the numbers of marginally attached workers to be lower 1 which could raise the unemployment figure substantially.

The OECD figures do not include these people and it seems very hard to correct for. The best I can do is compare German official figures, of 11.5% to the US U-6 figure (which includes the marginally attached and those working part-time for economic reasons) of 10%, which if you adjust as suggested above looks awfully similar. This is, of course, a comparison without any rigourous basis, but it is at least as honest as comparing national headline rates.

As an aside, and has often been said around these parts, the German unemployment figure includes a 20% unemployment rate in ex-East Germany's and a 7.5% rate in the old West. Germany is still paying the price for re-unification.

Also as an aside, a brief issued earlier in the year by Katharine Bradbury, Senior Economist and Policy Advisor at the Federal Reserve Bank of Boston, caused rather a stir when she suggested that the US unemployment rate could be understated by 1% to 3% on the basis that labour force participation rates had not recovered in the way that they had in previous economic recoveries. Her position was supported by Brad Delong and Paul Krugman. Her detractors argue that labour participation is down through choice and increased affluence. They don't seem to cite much support for this argument. The strongest criticism, expressed here by James Hamilton is that Bradbury is depending on extrapolating trends, an activity which always carries risks.

In any case, the point of this is to show that even the OECD standardised unemployment rates are not directly comparable, but they do show that while unemployment in the US is probably somewhat lower than in "Old Europe", the differences are not as significant as often suggested and certainly don't support the argument that the European social model is much worse than the US model on employment.

  1. My Google-fu is insufficiently well developed to find actual numbers to support or undermine this belief.. The best I can do is that the 1995(!) numbers show the rate of discouraged workers in the US to be 6 times that of France and three times that of Germany. Help from any technocrats with fancy economics degree would be appreciated here.

Thanks to everyone on European Tribune for their comments on this, especially Jérôme, Afew, Izzy and Wchurcill

Amazing post, Colman, and I'm really looking forward to Son of Unemployment vs. Godzilla.  ;-)

Maybe we can eventually make language a complete impediment to understanding. -Hobbes
by Izzy (izzy at eurotrib dot com) on Thu Oct 6th, 2005 at 05:33:45 PM EST
This is a hot piece, Colman! Go get 'em! Send this puppy out into the world...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Oct 6th, 2005 at 05:37:00 PM EST
Yes, this is a worthwhile topic for discussion.

One point possibly worth consideration is the use of the Employment numbers rather than the Unemployment numbers, since it might be somewhat easier to both define exactly what is meant, and also gather the statistics.

Another point about the Europe versus America aspect of this is the persistence of the unemployment. Over the past decade the German rate has varied between about 10% and 13%, while France has been above 12% and down to around 9%. In contrast, the British rate was about 9% in 1995 and has come down steadily since then to something like 5%. It seems likely that the American and European measurements are different, but one would think that Britain and France and Germany would be using the same metrics. Are they?

You might be interested also in a statistic called the Augmented Unemployment Rate that incorporates some of the factors you're talking about. Using that metric the current U.S. unemployment is closer to 9%.

by asdf on Thu Oct 6th, 2005 at 09:06:39 PM EST
I specifically mentioned U6, which puts the US rate to about 10% according to the last BLS numbers I looked at.

Which unemployment rates are are you talking about for those countries? The OECD ones or national rates?

My concern about French and German figures is that they've been rising for the last few years, not how they compare to the US.

The UK OECD figures should be reasonably comparable to the French and German ones and are much better in a similar economy. As Jérôme pointed out elsewhere Blair talks about free-market solutions, but he doesn't carry them out.

by Colman (colman at eurotrib.com) on Fri Oct 7th, 2005 at 02:27:46 AM EST
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by asdf on Fri Oct 7th, 2005 at 09:33:15 AM EST
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falsehoods about Europe and progressive politics.


The US calculates unemployment in a way that always undercounts...some say significantly undercounts...the true numbers. I'm not a labor economist, but there is much written on this...I've read almost nothing about this.

I had not not considered some of the points that you bring up here, thanks for the posting.

by gradinski chai on Fri Oct 7th, 2005 at 01:24:34 AM EST
Well, it certainly minimises it. Don't forget that I've completely ignored the fact that people who I might think shouldn't need to work are forced to in the US but not in Europe and all sorts of other issues. I haven't addressed quality of work, I haven't addressed happiness or anything like that. Just the comparability of the statistics.
by Colman (colman at eurotrib.com) on Fri Oct 7th, 2005 at 02:36:34 AM EST
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