Question

The conditions underlying supply and demand for labor have been different in Europe from that in the USA, in a way that has created a much higher natural rate of unemployment. Discuss various factors which contribute to this

Answer 1

The average unemployment rate in the US economy remains relatively low by the standards of other high-income economies. Since the 1970s, many European economies have had unemployment rates running close to 10 per cent, or even higher, across good economic years and poor. Europe's unemployment rates were higher, not because Europe's recessions were deeper, but because the conditions underlying supply and demand for labor in Europe were different, generating a much higher natural unemployment rate.

Most European countries have a mix of generous welfare programs and unemployment benefits, along with nests of laws that impose additional costs upon recruiting businesses. However, many countries have laws that allow companies to give workers months of notice before laying them off and after laying them off to provide significant severance or retraining packages. In France, Germany, Denmark, and Belgium, the legally required notice before laying off a worker may be more than three months, and the legally required severance package may be as high as a year's salary or more in Austria, Spain, Portugal, Italy, and Greece.

These rules are likely to prevent the laying off or dismissal of existing workers. But when firms know it's going to be hard to fire or lay off workers, they also become first hesitant about hiring. In recent years, the typically higher levels of unemployment in many European countries, which have persisted even when economies are rising at a steady pace, are attributable to the fact that the kinds of laws and regulations that contribute to a high natural unemployment rate are much more prevalent in Europe than in the US.