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Employment and Unemployment - Part II

Sam Vaknin, Ph.D. - 7/18/2006

II. The Facts

IIa. Labour Mobility

"Mobility", "globalization", "flextime" - media imagery leads us to believe that we move around more often, and change (less secure) jobs more frequently. It is not so. By many measures, the world is less globalized today than it was a century ago. Contrary to popular perceptions, job tenure (in the first 8 years of employment) has not declined, nor did labour mobility increase (according to findings published by the NBER and CEPR). Firms' hiring and firing practices are more flexible but this is because "sarariman" jobs are out of fashion and many workers (80% of them, according to the Employment Policy Foundation) prefer casual work with temporary contracts.

Workers keep moving, as they always have, among firms and between sectors. But they are still reluctant to relocate, let alone emigrate. The subjective perception of job insecurity is high, even after the most prosperous decade in recent history. Witness the sparse movement of labour among members of the EU, despite the existence, on paper, of a single labour market. Still, rising systemic unemployment everywhere serves to increase both the efficiency and productivity of workers and to moderate their wage claims.

IIb. Collective Bargaining

Studies linked collective bargaining to an increased wage level, decreased hiring and more rigid labour markets. But unionized labour has greatly contracted in almost all OECD countries. Why has unemployment remained so persistently high?

In France and the Netherlands collective agreements were applied to non-unionized labour (close to four fifth of the actually employed in the latter). Employment increases only where both union membership and coverage by collective agreements are down (USA, UK, New Zealand, Australia).

There are different models of wage bargaining. In the USA and Canada agreements are sometimes signed at the firm or even individual plant level. Throughout Scandinavia (though this may be changing in Norway and Denmark now that centre-right parties have won the elections), a single national agreement prevails. There is no clear trend, though. Britain, New Zealand and Sweden decentralized their collective bargaining processes while Norway and Portugal are still centralized.

Both types of bargaining - centralized and decentralized - tend to moderate wage demands. Centralized bargaining forces union leaders to consider the welfare of the entire workforce. Either of the pure models seems preferable to a hybrid system. The worst results are obtained with national bargaining for specific industries. Hybrid-bargaining Europe saw its unemployment soar from 3 to 11% in the last 25 years. Pure-bargaining USA maintained a low unemployment rate of 5-6% during the same quarter century.

IIc. Unemployment Benefits

Blanchard and Wolfers studied 8 market rigidities in 20 countries (including the EU, USA, Canada, and Japan) between the years 1960-96. The unemployment rate in an imaginary composite of all the studied countries should have risen by 7.2% in this period. But unemployment increased by twice as much in countries with strict employment protection laws compared to countries with laxer labour legislation.

Unemployment in the country with the most generous unemployment benefits grew five times more than in the most parsimonious one. It grew our times faster in countries with centralized wage bargaining than in countries with utterly decentralized bargaining. Labour market rigidities all amplify the effects of asymmetrical shocks - which bodes ill for the eurozone.

Other studies (e.g., the 1994 OECD one year study, the more substantial DiTella-MacCullouch study) seem to support these findings. The transition from a rigid to a flexible labour market does not yield immediate results because it increases labour force participation. But the unemployment rate is favorably affected later.

IId. Minimum Wages

In the USA, the minimum wage is 35% of the median wage (in France it is 60%, in Britain - 45%, and in the Netherlands it is declining). When wages are downward-flexible - more lowly skilled jobs are created. A 1% rise in the minimum wage reduces the probability of finding such a job by 2-2.5% in both America and France, according to the NBER (Lemieux and Margolis).

The proponents of minimum wages say they reduce poverty and increase the equality of wealth distribution. Their opponents (such as Peter Tulip of the Federal Reserve) blame them for job destruction, mainly by raising the NAIRU. The OECD's position is that wage regulation cannot remedy poverty. As "The Economist" succinctly puts it, "few low paid workers live in low-income households and few low-income households include low paid workers. (Thus), the benefits of the minimum wage, such as they are, largely bypass the poor."

Again, it is important to realize that unemployment is not universal - it is concentrated among the young, the old, the under-educated, the unskilled, and the geographically disadvantaged. One in eight of all workers under the age of 25 in the USA are unemployed, more than twice the national average (the figure in France is one in four). A 10% rise in the minimum wage - regardless of its level - reduces teenage employment by 2-4%, calculates the OECD.

Many countries (USA, UK, France) introduced "training wages" - actually, minimum wage exemptions for the young. But even this sub-minimum wages still represent a high percentage of mean youth earnings (53% in the USA and 72% in France) and thus have an inhibiting effect on youth employment.

Minimum wages do reduce inequality by altering the income distribution and by equalizing wages across ages and genders - but they have no effect on inequality and poverty reduction, insists the OECD. "The Economist" quotes these figures (in 1998):

"In American households with less than half the median household income, only 33% of adults have a low-paid job. (compared to 13% in the Netherlands and 5% in the UK). In most poor households no one is employed in a regular job. Many low earners, on the other hand, have well-paid partners, or affluent parents ... Only 33% of those Americans who earn less than two-thirds of the median wage live in families whose income is less than half the national median. (In the UK the figure is 10% and in Ireland - 3%). Over a 5-year period, only 25% of low paid Americans are in a poor family at some point; in Britain 10% are."

Thus, minimum wages seem to hurt poor families with teenagers (by making teenage employment unattractive) while benefiting mainly the middle class.

Still, the absolute level of the minimum wage seems to be far more important that its level relative to the average or median wage. Hungary's unemployment went down, from 9% to 6%, while its minimum wage went up (in real terms) by 72% in 1998-2001. During the same four year period, its economy grew by an enviable 5% a year, real wages skyrocketed (by 17%), and its inflation dropped to 7% (from 16%).

IIe. Structural Unemployment

Most unemployment in Europe is structural (as high as 8.9% in Germany, according to a 1999 IMF study). It is the ossified result of decades of centralized wage bargaining, strict job protection laws, and over-generous employment benefits. The IMF puts structural unemployment in Europe at 9%. This is compared to the USA's 5% and the UK's 6% (down from 9%). The remedies, though well known, are politically unpalatable: flexible wages, mobile labour, the right fiscal policy, labour market deregulation, and limiting jobless benefits.

Some hesitant steps have been taken by the governments of Germany and France (cut jobless benefits and turned a blind eye to temporary and part-time work), by Italy (decoupled benefits from inflation), and by Belgium, Spain and France (reduced the minimum wage payable to young people).

But piecemeal reform is worse than no reform at all. In an IMF Staff Paper, Coe and Snower describe the Spanish attempt to introduce fixed term labour contracts. It established two de facto classes of workers - the temporary vs. the permanently employed - and, thus, reduced labour market flexibility by granting increased bargaining power to the latter. France introduced a truncated, 35-hours, working week. Other countries imposed a freeze on hiring with the aim of workforce attrition through retirement. Yet, these "remedies" also led to an increase in the bargaining power of the remaining workers and to commensurate increases in real wages.

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