Down And Out All Over Europe: A Lesson For America

Many intellectuals in the U.S. and Asia believe that European social welfare policies should be a blueprint for action in their own countries. But those policies are financed by high taxes and mandates on business that are at least partly responsible for a spectacular increase in European unemployment during the 1980s and 1990s.

In the early 1980s, unemployment was less than 4% in France, Germany, and most other Western European nations. It now averages more than 10%, and the rate for those under 25 is close to 20%. By contrast, unemployment in the U.S. has not increased much during the past 15 years and is still less than 7%, while Japan's rate has risen only slowly and is still below 3%.

The U.S. and Japanese experience shows that the growth in European unemployment is not due simply to greater competition from the less developed world or to other forces that have affected all countries equally. The rapid growth of labor costs throughout Europe appears to have had much to do with the explosion in unemployment.

About half of Germany's average labor cost of $27 an hour results from social security, health, unemployment compensation, disability, and other taxes. And in France, Italy, Spain, and Sweden, the portion of total labor costs attributable to the government is nearly as large. By contrast, this fraction is less than 25% in Japan and the U.S., and even lower in Korea and Taiwan.

Regulations that restrict layoffs and mandate numerous vacation days and other paid leaves raise Europe's cost of labor far above the already high level of wages and taxes on labor. Generous leaves for sickness and other reasons increase Sweden's absenteeism rate to 10% and Germany's to 9%, compared with 2% to 3% in Japan and the U.S.

UNDERGROUND ECONOMY. To reduce costs, many European companies increasingly resort to temporary workers, because they are easy to dismiss and do not qualify for fringe benefits and taxes. In Spain, where it is almost impossible to fire workers on the regular payroll, about one-third of employees are temporary. Even in France and Germany, more than 10% of workers are temps.

Europe's underground economy has also grown enormously, in part because it provides a way to escape government-imposed employee costs. Although no reliable figures on this sector exist, crude estimates suggest perhaps 25% of all Italian and Spanish workers work underground at least part of the time, as do 10% of those in Belgium, France, Germany, and Sweden.

When labor is expensive and when firing employees is difficult, companies replace departing workers only slowly--and are reluctant to expand even when the economy picks up. This is why it now takes much longer than it did a decade ago to find a job in Europe if you are a first-time job seeker, a mother returning to work after childbirth, or an immigrant. It also explains why the youth unemployment rate is so high and why those out of work for over a year have grown to more than one-third of the unemployed. During the past two decades, private employment in the European Community has barely increased: The public sector has accounted for almost all growth in employment. Japan and the U.S. have had the opposite experience: Private employment has surged, while government employment has grown little.

THE HARD WAY. The long-term unemployed, youths, temporary employees, and underground workers--none of these groups have any opportunity to invest in job skills and training. The sharp growth in these categories means that fewer workers are being trained to work in modern economies, which demand high levels of skill and knowledge. The inadequate training that workers receive makes it still harder for them to find satisfactory long-term jobs.

Fortunately, a reaction seems to be setting in. Sweden's conservative government has tightened up its rules for paid sick leave--although they are still generous to a fault. Theo Waigel, Germany's Finance Minister, wants to cut unemployment pay and social-security handouts and scrap maternity pay and payments to construction workers who are temporarily laid off. The French government has frozen social-security benefits and increased the number of years of work needed to be eligible for pensions. In the Netherlands, the Christian Democrats want to shelve the minimum-wage law. A Socialist Spanish government is trying to make it easier for companies to fire employees.

Unfortunately, President Clinton's proposed health tax on employers is just the latest example of a trend in the U.S. to mandate business spending. Others include excessive Social Security and Medicare taxes, difficult-to-meet requirements to employ disabled job applicants, and compulsory leaves for employees to bear children. The European experience should be a lesson to the U.S. and other countries: Employment is much more buoyant when governments interfere less in labor market affairs. Let's hope that this lesson doesn't have to be learned the hard way--through higher unemployment.

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