Euorpean Crisis

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CAUSES OF UNEMPLOYMENT IN EUROPEAN COUNTRIES

Blanchard,2006; Adnett ch.7.4

Unemployment rates, 1970-2002
12

10

8 USA Japan 6 Korea EU 4

2

0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02

Source: OECD data

Two models to explain EU unemployment
• Eurosclerosis: due to labour market rigidites the natural (equilibrium) unemployment rate rises • Histeresis: unemployment increases due to demand/supply shocks (i.e.technological shocks which shift labour demand from the low to the high skilled; or macroeconomic shocks due to restrictive macro policies). With hysteresis there is unemployment persistence which does not consent the unemployment to decline, even when the economic conditions improve.

CAUSES OF HIGH UNEMPLOYMENT IN EUROPEAN COUNTRIES/ 1
Why did unemployment rise more in Europe than in other countries and persisted at high levels since the first oil shock and up to the early nineties? How much the unemployment rise was due: to greater adverse effects of shocks or to European institutions, bad equipped to deal with shock and rapidly adjust to changing economic conditions? No single causes, but interaction of negative shocks and institutions: • negative macroeconomic shocks: worsening of terms of trade restrictive macroeconomic policies to reduce inflation technology international competition • persistence and influence of past shocks due to institutions: wage bargaining, employment protection, barriers to labour mobility taxation on employment UB

CAUSES OF THE HIGH UNEMPLOYMENT IN EUROPEAN COUNTRIES /2

Initial shocks had more adverse effects on EU labour markets due to real wage rigidity which produced higher unemployment costs for a given reduction in inflation. Initial shocks: increases in oil prices, worsening of terms of trade, slowing down of productivity, shift of labour demand from low skilled to high skilled due to technological progress

Determinants of structural unemployment in the EU
Higher real wage rigidity due to institutional features: wage setting mechanisms, employment protection and more generous UB. Labour market institutions: - negative effects on U of strong unions ad unemployment benefits (less harmful with coordination and active job search requirements) - effects of employment protection on composition of U (more long term U, less short term) - ambiguous effect of labour taxes (but negative effects of mix of high minimum wages for young people and high pay-roll taxes) The real wage (especially the relative wage of the low skilled) did not decline in most EU countries despite the decline in the relative demand of low skilled labour. Results: in the EU increase in unemployment; in the US increase in wage differentials and inequality

Hysteresis
In addition the propagation mechanism was longer in EU countries again due to institutional features and lead to long term unemployment and capital decumulation (which further reduced labour demand). Unemployment persistence is due to the increase in the number of the long term unemployed, which do not compete for jobs and do not pressure for real wage reductions. Unemployment persistence may be due to hiring and firing costs and wage setting conditions which segmentate the labour market and reduce the power of outsiders to compete for jobs: - Hiring and firing costs induce firms to reduce hirings and keep out of employment for a long time those looking for a job - Inside membership dynamics: insiders bargaining power increases and reduces the employment probabilities of outsiders - The outsiders (especially the long term unemployed) lose skills and are discouraged in searching for jobs and do not compete for jobs even when conditions improve (the WS curve does not shift downward).

Unions and collective bargaining
Density \1 Coverage \2 Centralisation \3 2,0 2,0 2,0 2,0 1,0 1,0 1,9

Francia Germania Spagna Italia Stati Uniti Giappone Unione Europea

9,1 29,0 21,1 23,7 14,3 24,0 43,1

95,0 92,0 78,0...
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