Are Labour Market Rigidities Responsible for the Unemployment Rate Observed in the United Kingdom and France?

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Are labour market rigidities responsible for the unemployment rate observed in the United Kingdom and France?

LUBS 1610: Research Skills For Economists
200636808
Word Count : 2887

Table of Contents

Introduction3
Few facts and figures4
Shifts in focus 4
Labour market institutions4-5
The Economic Crisis5-6
What do we know now?6
Implications6-7
Conclusion7
Bibliography8
Appendices
Appendix A9
Appendix B10
Appendix C11
Appendix D12
Appendix E13
Appendix F13
Appendix G
Figure 5 - Changes in GDP and Unemployment14
Figure 6 - Employment Protection and Unemployment14
Figure 7 – Changes in GDP and Unemployment15
Appendix H 15

Introduction

European unemployment rates were high even before the economic crisis. Compared to the U.S, the European unemployment rate was always lower throughout the 1970s but has always been higher since the 1980s (Siebert, 1997). Saint-Paul (1996), states that “There is somewhat of a consensus among economists that labour market rigidities are responsible for high unemployment in Europe”. This quote highlights the fault to be within the labour market with the comparison between the U.S and Europe pointing towards the difference of flexibility of the labour market as the problem. Nickell (1997) quoted saying “The European job market is rigid and inflexible. Result: high unemployment. The North American job market is dynamic and flexible. Result: Low unemployment”. In contrast to the U.S, the labour market is stiffer in Europe is known to have stricter regulations. There were other plausible reasons for high unemployment, such as the oil shock in the 1970s or effects from technological change which could have seen unemployment rise. However Siebert (1997) indicated that the U.S also suffered similar experiences in their economy but did not suffer drastic changes in unemployment therefore it is justified to look at the institutional setting in Europe. These theories were however, over a decade old. Although this is the case, even with 30 years of data and clear differences in the evolution of unemployment, our knowledge of unemployment is still incomplete (Blanchard, 2006). The conventional view even now is that Europe is often presented as a single entity in the press and many professional papers (Howell, D. R., et al., 2006). Presently there are 27 members of the European Union and Blanchard (2006) explained that there is a large heterogeneity which leads to a misinterpretation of ‘European Unemployment’. This is proven by the fact that countries such as France, Spain and Italy averaged an unemployment rate of at least 9% in the last decade whilst Austria, Holland and Denmark at 4% or less (Appendix C) suggesting data must be used for individual countries to identify the cause of unemployment. This paper will therefore focus on two European countries, France and the UK, and will aim to ascertain whether labour market rigidities are responsible for the unemployment rate observed presently.

Few facts and figures

The unemployment rate observed in Appendix B before 2008 highlights the unchanged performance difference between the U.S and European economies. Between years 2000 and 2005, rates in the EU varied between 8-9% and currently rising above 10% in the present year underlining a cause of concern to the state of the labour market whilst the U.S hovered around 4-5%. Appendix C shows UK rates fluctuating around the 5% mark until 2008 whereas France recorded a much higher percentage varying between 8-9%. However, the crisis in 2008 saw both the U.S and the UK unemployment rates increase dramatically to figures near around 8% and 9% whereas France remained relatively unaffected. Employment levels are also very low in France at 64% compared to the UK’s 72% followed by high youth...
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