Analysis: Employment and Unemployment II

SKOPJE, Macedonia, March 12 (UPI) -- This is the second of three parts of my analysis of employment and unemployment. In this part I discuss the facts behind the statistics. Part 1 appeared Monday.

A. Labor 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 eight years of employment) has not declined, nor did labor mobility increase, according to findings published by the NBER and CEPR. Firms' hiring and firing practices are more flexible but this is because "salaryman" jobs are out of fashion and many workers -- 80 percent of them, according to the Employment Policy Foundation -- prefer casual work with temporary contracts.

Workers keep moving, as they always have, among firms and 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 labor among members of the European Union, despite the existence, on paper, of a single labor market. Still, rising systemic unemployment everywhere serves to increase both the efficiency and productivity of workers and to moderate their wage claims.

B. Collective Bargaining

Studies have suggested that collective bargaining leads to an increased wage level, decreased hiring and more rigid labor markets. But unionized labor 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 labor, close to four-fifths of the employed in the latter. Employment has increased only where both union membership and coverage by collective agreements are down, as in the United States, Britain, New Zealand and Australia.

There are different models of wage bargaining. In the United States 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 center-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 percent to 11 percent in the past 25 years. The pure-bargaining United States maintained a low unemployment rate of 5 percent to 6 percent during the same quarter century.

C. Unemployment Benefits

Blanchard and Wolfers studied eight market rigidities in 20 countries (including the European Union, the United States, 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 percent in this period. But unemployment increased by twice as much in countries with strict employment protection laws compared to countries with laxer labor legislation. Unemployment in the country with the most generous unemployment benefits grew five times more than in the most parsimonious one. It grew four times faster in countries with centralized wage bargaining than in countries with utterly decentralized bargaining. Labor market rigidities all amplify the effects of asymmetrical shocks -- which bodes ill for the Eurozone.

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

D. Minimum Wages

In the United States, the minimum wage is 35 percent of the median wage, in France it is 60 percent, in Britain 45 percent, and in the Netherlands it is declining. When wages are downward-flexible, more low-skilled jobs are created. A 1 percent rise in the minimum wage reduces the probability of finding such a job by 2 percent to 2.5 percent in both America and France, according to the U.S. National Bureau for Economic Research as referenced by 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 minimum wages for job destruction, mainly by raising the Non Accelerating Inflation Rate of Unemployment. The OECD's position is that wage regulation cannot remedy poverty. As The Economist succinctly put 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 United States are unemployed, more than twice the national average, whiles the figure in France is one in four. A 10 percent rise in the minimum wage -- regardless of its level -- reduces teenage employment by 2 percent to 4 percent, calculates the OECD.

Many countries, including the United States, Britain and France, introduced "training wages" -- minimum wage exemptions for the young. But even this sub-minimum wages still represent a high percentage of mean youth earnings -- 53 percent in the United States and 72 percent 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 1998 figures: "In American households with less than half the median household income, only 33 percent of adults have a low-paid job (compared to 13 percent in the Netherlands and 5 percent in Britain). 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 percent 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 Britain the figure is 10 percent and in Ireland 3 percent). Over a 5-year period, only 25 percent of low paid Americans are in a poor family at some point; in Britain 10 percent 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 percent to 6 percent, while its minimum wage went up, in real terms, by 72 percent from 1998 to 2001. During the same four-year period, its economy grew by an enviable 5 percent a year, real wages skyrocketed by 17 percent a year, and inflation dropped to 7 percent from 16 percent.

E. Structural Unemployment

Most unemployment in Europe is structural, as high as 8.9 percent in Germany, according to a 1999 International Monetary Fund 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 percent. This is compared to the United States' 5 percent and Britain's 6 percent, itself down from 9 percent. The remedies, though well known, are politically unpalatable: flexible wages, mobile labor, the right fiscal policy, labor market deregulation, and limiting jobless benefits.

Some hesitant steps have been taken by the governments of Germany and France (cut jobless benefits and turn a blind eye to temporary and part-time work), by Italy (decouple benefits from inflation), and by Belgium, Spain and France (reduce 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 labor contracts. It established two de facto classes of workers -- the temporary vs. the permanently employed -- and, thus, reduced labor 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.

F. Unemployment and Inflation

Another common misperception is that there is some trade-off between unemployment and inflation. Both Friedman and Phelps attacked this simplistic notion. Unemployment seems to have a "natural" (equilibrium) rate -- the NAIRU -- that is determined by the structure and operation of the labor market and is consistent with stable inflation.

NAIRU is not cast in stone. Employment subsidies, for instance, make low-skilled workers employable and lower NAIRU. So do unilateral transfers, which raise incomes. According to Phelps, big drops in unemployment need not greatly increase permanent inflation. Stiglitz calculated that America's NAIRU may have dropped by 1.5 percent due to increased competition in the markets for jobs and goods, findings supported by other prominent economists. Stiglitz concluded that NAIRU, in itself, is meaningless. It is the gap between the estimated NAIRU and the actual rate of unemployment that is a good predictor of inflation.

G The Rhineland Model, the Poldermodel, and Other European Ideas

The Anglo-Saxon variant of capitalism is intended to maximize value for shareholders -- often at the expense of all other stakeholders.

The Rhineland model likes to think of itself as "capitalism with a human face". It calls for an economy of consensus among stakeholders, including shareholders, management, workers, government, banks, other creditors, and suppliers, among others.

Netherlands, too, has an advisory Social and Economic Council. Another institution, the Labor Foundation, is a social partnership between employees and employers. Both are relics of a corporatist past.

But the Netherlands saw its unemployment rate decline from 17 percent to less than 5 percent while ignoring both models and inventing the "Poldermodel", a Third Way. Wim Duisenberg, the Dutch banker and current Governor of the European Central Bank, quoted in an extensive analysis of the Poldermodel prepared for The Economist by former Dutch foreign trade minister Frits Bolkstein, attributed this success to four elements:

* Improving state finances;

* Pruning social security and other benefits and transfers;

* Flexible labor markets; and

* A Stable exchange rate.

According to Thomas Mayer and Laurent Grillet-Aubert in "The New Dutch Model," the "Dutch Miracle" traces its beginnings to 1982 and the Wassenaar Agreement in which employers' organizations and trade unions settled on wage moderation and job creation, mainly through decentralization of wage bargaining. The government contributed tax cuts to the deal that served to compensate for foregone wage increases. These cuts generated a fiscal stimulus and prevented a contraction in demand as a result of wage moderation. Additionally, both social security payments and the minimum wage were restricted. Wage increases were no longer matched by corresponding increases in minimum social benefits. Working hours, hiring, firing and collective bargaining were all incorporated in a deregulated labor market. Small and medium size businesses' costly regulation was relaxed. Generous social security and unemployment benefits -- a disincentive to find work -- were scaled back. Sickness benefits, vacation periods, maternal leave and unemployment benefits were substantially adjusted.

The Netherlands did not shy from initiating public works projects, though on a much smaller scale than France, for instance. The latter financed these projects by raising taxes and by increasing its budget deficit. The Dutch preferred to rely on the free market.

Long-term unemployment, that more than 12 months, in Europe constitutes 30 percent of the total. About half the entire workforce under the age of 24 is unemployed in Spain -- and about one-quarter in France and in Italy. Germany, Austria and Denmark escaped this fate only by instituting compulsory apprenticeship. But the young unemployed form the tough and immutable kernel of long-term unemployment. This is because a tug of war, a basic conflict of interest, exists between the "haves" and "have-nots." The employed wish to defend their monopoly and form "labor cartels". This is especially true in dirigiste Europe.

While in the United States, according to the strategic consulting firm McKinsey and Co., 85 percent of all service jobs created between 1990 and 1995 paid more than the average salary, this was not the case in Europe. Add to this European labor immobility -- and a stable geographical distribution of unemployment emerges.

The Dutch model sought to counter all these rigidities. In a report about "The Politics of Unemployment" dated April 1997, The Economist admiringly enumerated these steps:

The Dutch reduced social security contributions from 20 percent of salary in 1989 to 7.9 percent and they halved the income tax rate on average incomes to 7 percent in 1994. They allowed part time workers to be paid less than full timers, doing the same job.

They abandoned sectoral central bargaining in favor of decentralized national bargaining.

They cut sickness benefits, unemployment insurance benefits and disability insurance payments by 10 percent in 1991 alone, from 80 percent of salary to 70 percent. They made it harder to qualify for unemployment -- from 1995 no benefits were paid to those who chose to remain unemployed. The burden of supporting the sick was shifted to the employer or firm. In 1996, the employer was responsible to pay for the first year of sickness benefits.

Even the Dutch model is not an unmitigated success, though. More than 13 percent of the population is on disability benefits. Only 62 percent of the economically active population is in the workforce. But compare the Dutch experience to France's, for instance.

The Loi Robien exempted companies from some social security contributions for 7 years, if they agree to put workers on part time work instead of laying them off. Firms promptly abused the law and restructured themselves at the government's expense.

The next initiative was to reduce the working week to 35 hours. This was based on the "Lump of Labor Fallacy" -- the idea that there is a fixed quantity of work and that reducing the working week from 39 to 35 hours will create more jobs.

In Spain, hiring workers is unattractive because firing them is cost-prohibitive. The government -- faced with more than 22 percent unemployment in the mid-1990s -- had by 2001 allowed more than 25 percent of all workers to go on part time contracts with less job protection.

Still, no one knows how to answer authoritatively the following substantial questions, despite the emergence of almost universally applied U.N.-sponsored Standard National Job Classifications:

* How many are employed and not reported or registered?

* How many are registered as unemployed but really have a job or are self-employed?

* How many are part time workers -- as opposed to full time workers?

* How many are officially employed -- but de facto unemployed or underemployed?

* How many are on "indefinite" vacations, on leave without pay, on reduced pay, etc.?

Many countries have a vested interest to obscure the real landscape of their destitution -- either in order to prevent social unrest or in order to extract disproportionate international aid. In a few countries, limited amnesties were offered by the state for employers' violations of worker registration. Firms were given a few penalty-free weeks to register all their workers. Afterwards, labor inspectors were supposed to embark on sampling raids and penalize the non-compliers, if need be by closing down the offending business. The results were dismal.

In most countries, the unemployed must register with the Employment Bureau once a month, whether they receive their benefits, or not. Non-compliance automatically triggers the loss of benefits. In other countries, household surveys were carried out -- in addition to claimant counts and labor force surveys, which deal with the structure of the workforce, its geographical distribution, the pay structure, and employment time probabilities.

Yet, none of these measures proved successful as long as government policies -- the core problem -- remained the same. Faced with this trenchant and socially corroding scourge, governments have lately been experimenting with a variety of options.

I will examine possible solutions further in Part 3, Wednesday.