Europe's Unemployment Rate

[Ned]

Originally posted by Drogue
I agree, but with no unemployment, are you arguing there wouldn't be runaway inflation? Or that there doesn't need to be unemployment during recession parts of the business cycle so employment can rise later? Or even that tourism, agriculture and other industries don't necessitate seasonal employment, thus being unemployed at some parts of the year?

0 employment puts way to much pressure on businesses who can't then fire bad workers and hire others.

Drogue, businesses can't fire bad workers and are reluctant to hire new one's. I think that aptly describes much of Europe's unimployment problem and it is not because there are too few workers.

[Drogue]

Originally posted by Spiffor
Don't worry. We'll do everything in our power to raise unemployment and to restrict growth. What are employment and growth when they can lead to inflation

Take more notice of the first part - is it sustainable? It leads to periods of boom and bust, where the economy rises unsustainably and then collapses. Generally a steading 2-3% rise in real GDP is better than rising at 4-5% and then crashing every 5 or 6 years.

Moreover, the reduction in GDP needed to reduce inflation is temporary. You forgo 5% of *one* year's GDP to reduce inflation by 1% *permanantly*. So having too low unemployment would lead to inflation rising by 1% for every 2.5% of unemployment below the natural rate, every single year.

To put this into perspective - say the natural rate is 5%. Having 0% unemployment would lead to an extra 2% inflation after a year, and extra 4% after two years... etc. It doesn't take long before you start getting silly double digit rates and economies start crashing.

If, however, you accept unemployment to reduce inflation for a year or two, get inflation down to 2 or 3%, as most western economies have, then you can lower unemployment to the natural rate and everything is fine.

Unemployment is bad, and growth is too. But you can have too much of a good thing. *Some* unemployment is needed, albeit a small amount, and growth can get too high and be unsustainable.

[Lawrence of Arabia]

look guys, heres what im arguing. Europes natural/structural rate of unemployment is a artificially high because of its unemployment benefits, and everything else associated with getting paid while not working, from the amount, to the length. this very thing means that NAIRU is attained much earlier then in the US, and that you strangle your output because more people are unwilling to work, AND youve got the euro bank raising interest rates as soon as there is any GDP growth.

thats a triple whammy. you relax the unemployment rules, you relax the euro banks target rate of inflation, and all of a sudden, the natural rate of unemployment goes DOWN, so you can employ MORE people, and have HIGHER output, WITHOUT worrying about inflation, BECAUSE the phillips curve has shifted to the LEFT.

you see, Im advocating reforms that LOWER the natural/structural rate of unemployment.

[Drogue]

Originally posted by Ned
Drogue, businesses can't fire bad workers and are reluctant to hire new one's. I think that aptly describes much of Europe's unimployment problem and it is not because there are too few workers.

Much as I hate to say you, I think you're exactly right. At least if your refering to employment legislation.

Originally posted by Lawrence of Arabia
hahahah. inflation. theres no chance of that in Europe as long as the euro bank's target inflation rate is 2%. if they set it at 2.5%, it would stimulate growth almost right away, and not by pocket change either.

Though remember the EU measures inflation differently from the US. We used to use the US method, and had a 2.5% target. We changed to the EU method and now have a 2% target. And the 2% target is higher. The difference is about 0.75%, IIRC. So a 2% target for the ECB is equivilent to a Fed target of 2.75%.

Originally posted by Lawrence of Arabia
however, NBER paper #6111 makes it clear the effects of increases in the minimum wage. France's minimum wage is 255% larger in real terms then in 1951. In the US, the real minimum wage (federal) has decreased by 25% since 1951. yet for every increase of 1% in real minimum wage, 4.6 French out of a 100 lost their jobs, costing everyone more, and slowing down the economy.

I would tend to agree. Minimum wages to guarantee a survivable wage are good, IMHO, but anything higher removes some jobs from the economy, as they're not worth any more.

[Drogue]

Originally posted by Lawrence of Arabia
look guys, heres what im arguing. Europes natural/structural rate of unemployment is a artificially high because of its unemployment benefits, and everything else associated with getting paid while not working, from the amount, to the length. this very thing means that NAIRU is attained much earlier then in the US, and that you strangle your output because more people are unwilling to work, AND youve got the euro bank raising interest rates as soon as there is any GDP growth.

thats a triple whammy. you relax the unemployment rules, you relax the euro banks target rate of inflation, and all of a sudden, the natural rate of unemployment goes DOWN, so you can employ MORE people, and have HIGHER output, WITHOUT worrying about inflation, BECAUSE the phillips curve has shifted to the LEFT.

you see, Im advocating reforms that LOWER the natural/structural rate of unemployment.

And you'd be right. However removing unemployment benefits altogether would be bad for the economy.

I agree on Europe, though in the UK, unemployment benefit is barely liveable. As one famous Tory MP who choose to live on unemployment benefit for a week said "unemployment benefit isn't comfortable. It's not easy. It gives and incentive to find a job". It's not meant to be liveable, but people shouldn't starve because they're unemployed. They should be (IMHO) given enough to survive - a place to life, food to eat, the means to get work, education for under 18s and basic healthcare - but not enough to be comfortable. That's what we have. I do agree France and Germany have it set way too high, but that's not all of Europe.

[Lawrence of Arabia]

. . . and thats why the unemployment rate in england is at 4.7%, less then in the US, down 0.1% from last year. And thats why brtain grew at 2.9% annually last quarter, beating the economists forecast bynearly half a percent.

Britain also has 1.1% greater growth then the euro area average, and 4.2% lower unemployment rate then the euro area average. and you dont see the british economy heating up, or spiraling out of control. and this tells us that they have a different level of natural unemployment rate then in France.

[Drogue]

Exactly. And this happened with 8 years of Labour government, with more social programs to get people into work than ever before

I have to say I think the UK has it about right. 2.9% growth is just about sustainable, unemployment is low, inflation is low. It's pretty well done. It's also why we won't join the Euro until France and Germany have economies in step with ours.

[DanS]

To be clear, I think it would be a tragedy if we needed to keep a 5.2% unemployment rate or 4.7% unemployment rate in order to avoid undue inflation. We would need to work on lowering this rate ASAP, if it were so.

Having everyone employed is important for the US on social grounds. Our society is much more cohesive when unemployment is really low. I don't know how Europe compares, since most European societies seem to be built on ethnic drivers.

[Drogue]

Well, with higher unemployment benefit and a culture of a decent welfare state, it's less acute here. Employment isn't as important, though it is still a huge issue.

And 4.7% is low. Yes, lowering NAIRU is a great thing, but having too low unemployment (ie. lower than NAIRU) leads to boom and bust. We've done a lot to get out of that.

[Lawrence of Arabia]

To be clear, I think it would be a tragedy if we needed to keep a 5.2% unemployment rate or 4.7% unemployment rate in order to avoid undue inflation. We would need to work on lowering this rate ASAP, if it were so.

you can never get to 0% unemployment, because employers will always pay their employees more then their employee's reservation rate . this pushes the quantity demanded to be greater then the quantity supplied at that wage level, and thats how we get to this natural unemployment rate (plus, youve always got people in between jobs. I think a 5% unemployment rate in the US is just fine, as long as there is no hidden unemployment.

[Kidlicious]

Originally posted by DanS
To be clear, I think it would be a tragedy if we needed to keep a 5.2% unemployment rate or 4.7% unemployment rate in order to avoid undue inflation.

We do need to keep it that high. We can't even seem to sustain 5.2% right now.

[Dracon II]

Very true. However then a drop in Unemployment from 10% to 5% would lead to real GDP growth of 7%. Is that sustainable? Will it lead to too high inflationary pressure?

Full employment with minimal inflation could be possible... but it requires a great deal of political muscle and the ability to control Unions through corporatist structures. A difficult task, one which the Hawke Labor Government in the 80's tried but didn't achieve (thanks El Freako for those figures... my ignorance of my own country has been revealed. I guess I was just reluctant to use Hitler as an example). The Hawke Labor Government reached such an agreement between itself, the BCA (Business Council of Australia) and the ACTU (Australian Council of Trade Unions).
The basic gist of it was that both business and the Unions ceded control over wage determination to an independent tribunal, the point of which was to keep wages and wage growth in step with productivity and (I think) with CPI. What was achieved was a relatively peaceful time w/regard to industrial action. However, the peace was disturbed by a large recession and the return of conservatives to power, who cut the Unions out of the loop, and have been trying ever since to hand power back to business.
My point is not that such Corporatist structures will eliminate unemployment. The point is that if both business and unions are pacified and cooperate with Government, then increases in unemployment will not necessarily lead to inflation.

[Ned]

Originally posted by Dracon II

Very true. However then a drop in Unemployment from 10% to 5% would lead to real GDP growth of 7%. Is that sustainable? Will it lead to too high inflationary pressure?

Full employment with minimal inflation is possible... but it requires a great deal of political muscle and the ability to control Unions through corporatist structures. A difficult task, but it was achieved in Australia during the 1980's. The Hawke Labor Government reached such an agreement between itself, the BCA (Business Council of Australia) and the ACTU (Australian Council of Trade Unions).
The basic gist of it was that both business and the Unions ceded control over wage determination to an independent tribunal, the point of which was to keep wages and wage growth in step with productivity and (I think) with CPI. What was achieved was a relatively peaceful time w/regard to industrial action. However, the peace was disturbed by a large recession and the return of conservatives to power, who cut the Unions out of the loop, and have been trying ever since to hand power back to business.
My point is not that such Corporatist structures will eliminate unemployment. The point is that if both business and unions are pacified and cooperate with Government, then increases in unemployment will not necessarily lead to inflation.

In the thread about Axis mistakes, I came across several references to Germany's unemployment being zero in 1939. Was this correct?

Also, apparently John Lewis of the CIO was pro-German and wanted FDR to side with Germany at the outbreak of war with Britain. Why? Hitler had eliminated unemployment and brought real German wages up.

We all know how Hitler did it. He controlled the unions while engaging in massive government spending.

[Dracon II]

Originally posted by Ned
We all know how Hitler did it. He controlled the unions while engaging in massive government spending.

Are you opposing my point, or just making an observation about how Hitler achieved full employment?

If you're arguing against it, maybe you should say something more than just "Hitler did it".

[Provost Harrison]

Something's screwed up! I did not post that in this thread!