The US unemployment rate: European levels without the European safety net
Jobs growth is a lagging indicator of economic activity, so the June report confirms that the US economy has been in a deep rut (Marshall Auerback calls it a ‘fully-fledged New York City style pot hole’). Yes, the US economy is growing; but sub-2% really ‘feels’ like stagnation, if not recession for many. As always, Spencer provides a fantastic summary of the employment report here on AB: ‘bad news’, he says.
I call it abysmal, both relative to history and on a cross section. The chart below illustrates the unemployment rates across the G7 spanning 1995 to 2011.
Across the G7 economies, the level of the US unemployment rate is second only to France. This is true on a harmonized basis as well.
READ MORE AFTER THE JUMP!
The speed at which the US unemployment rate reached European levels was abrupt. Only the UK has seen such a swift deterioration in labor market conditions.
The chart above illustrates the same time series as in the first unemployment chart, but the rates are indexed to 2005 for comparability. France’s high level of unemployment is structural. In contrast, the US level of unemployment is NOT, not even close.
The chart above illustrates the components of the OECD’s indicators of employment protection. Also, see a short note by the Dallas Fed highlighting the differences between the French and US labor markets (and the 1994 OECD jobs study).
The French labor market is quite rigid, which leads to a structurally elevated unemployment rate and expansive unemployment compensation (see this follow up to the OECD 1994 jobs strategy report). The US Labor markets is much more fluid, which is why the unemployment rate has surged relative to comparable economies in Europe (see second chart).
European levels of unemployment without the European safety net.
The chart illustrates the maximum number of months that a worker can claim unemployment insurance for the year 2007. In normal times, French workers can collect benefits for up to 23 months by law, where the US worker collects for just 6 months. The tax and benefit policies data are updated infrequently, and listed on the OECD’s website (excel file link).
Seriously, shouldn’t Congress be focused on the depressed state of the US labor market, rather than a ‘scaled back’ version of deficit cutting? Addressing one will clearly impact the other – it goes both ways. Unfortunately, the government’s pushing in the wrong direction (cutting deficits brings further unemployment rather reducing unemployment drops the deficits).
Rebecca Wilder
Would Obama and the Democrats go along with the Republicans reducing the budget deficit with budget cuts increasing unemployment and cutting the little bit of social safety net at the very time when we need it most? The way it looks now the Republicans will not even let him have a fig leave to cover up if he agrees to even the $2T cuts. All of it looks bad and I know nothing about economics.
If he puts SS and Medicare on the table in return for big tax cuts and big budget cuts and it is only a bluff, what if the Republicans take him up on it, it seems remote, but what if, who knows?
Rebecca,
Your bottom appears to be that (1) the U.S. does not have a structural deficit problem, (2) the U.S. Government shouldn’t be concerned about fiscal year deficits and national debt growth, and (3) lower unemployment will eliminate portions of the fiscal year deficits.
Is that your basic position?
It is July 10 – what is your gov’t doing? Looks to me as though the lunatics will actually go over the default cliff. So are you planning for it? Selling treasuries? Dropping CD”s (FDIC may not be there)?
It is July 10 – what is your gov’t doing? Looks to me as though the lunatics will actually go over the default cliff. So are you planning for it? Selling treasuries? Dropping CD”s (FDIC may not be there)?
i’m going to address this question without attempting to outline rebecca’s position: we do not have a structural deficit, & we can get out of the debt hole without pain: in april, annie lowrey of slate presented a “do nothing budget plan” which was widely discussed & generally approved by other budget wonks; holding to the CBO baseline, it turns out if we let all the laws currently in effect expire as scheduled, starting with the bush-obama tax cuts for the wealthy; also expiring would be the alternative minimum tax patch and the “doc fix”, which allows medicare doctors annual raises every year…combine those with the saving under the affordable care act, and the federal budget comes into balance before the end of the decade… even by the governments counting, we have over 14 million unemployed, and another 8.6 million part time workers who want fulltime jobs; & those numbers dont even include those who’ve dropped out of the labor force…if even half of those people were employed, you’d have more than 10 million additional taxpayers, which would go a long way towards solving the government’s revenue shortfall… the NYT just had an article that according to Moodys, $2 of every $10 that went into the economy last year were payments like jobless benefits, food stamps, Social Security and disability, dollars which are quickly spent, giving you a high multiplier effect…it doesnt take a rocket scientist to connect the dots and see what would happen to demand if ideologically driven cutbacks reduce that figure…
Dear Rebecca,
some points.
1. The countries with the lowest unemployment in Europe are the Netherlands and Austria, both countries with relatively high scores on the unemployment protection index. It’s just not true that a high score on this index leads to high unemployment. Or maybe it’s better to state it the other way around: so called flexibility does not necessarily lead to low unemployment.
2. This brings us to the concept of ‘flexibility’. As I see it, the German job markets was much more flexible then the USA one, as the number of average hours worked feel quite a bit more, stimulated by smart government policies. The USA seems to be quite rigid, inflexible and outright sclerotic when it comes to such flexibility (this contrary to 1946, when a very large drop in average hours prevented unemployment from rising). Don’t monopolize the phrase ‘flexibility’, please.
3. Which brings us to Spain. Up to 2008 this country had the most vibrant job market of the entire EU…. However, average hours worked actually increased, post housing bubble, possibly because the housing sector employed quite a lot of persons with sub-full time jobs. That’s not the point here, however. Everybody talks about the rigidities of the Spanish job market, but during the demand-boom it wasn’t rigid at all! Might another demand boom, not focused on housing but on health and tourism and whatever, be able to do the same trick (they do however need 40% GDP growth, which is a lot).
4. Last point: in Europe, U-5 unemployment is generally about 2 to 3% higher than the more common metric of U-3 unemployment. In Italy it’s, however, almost 10% higher… In the states of the USA it’s about 1 to 2% higher… Taking U-5, which might be the better metric for international comparisons, would show that USA unemployment is quite a bit lower than in Italy (and that Italian unemployment is about as high as in Spain…). The difference between Italy and Spain: employment rates increased dramatically in Spain and are still quite a bit higher than twenty years ago, despite ridiculous high unemployment (did I mention this thing about the vibrant pre 2008 Spanish labor market already…?)
For a reason which I do not want to know, the Eurostat statisticians do provide the (quarterly) data to calculate U-5, as they publish U-3 as well as the difference between U-3 and U-5. The OESO adds these numbers, I did too (see the link below), but beside you, me and the OESO there do not seem to be too many economists who take the trouble to look at all the details… what a shame. The European economists really have to learn something from the buzz in the blogosphere every time when a new jobs report is published.
http://www.paecon.net/PAEReview/issue56/Knibbe56.pdf
rjs – “we do not have a structural deficit, & we can get out of the debt hole without pain”
Why do you state that the U.S. Government does not have a structural financial deficit?
rjs – “holding to the CBO baseline, it turns out if we let all the laws currently in effect expire as scheduled, starting with the bush-obama tax cuts for the wealthy; also expiring would be the alternative minimum tax patch and the “doc fix”, which allows medicare doctors annual raises every year…combine those with the saving under the affordable care act, and the federal budget comes into balance before the end of the decade”
All of the Bush II era tax cuts are eliminated in the CBO baseline, not just the upper income tax cuts. Big difference.
Unfortunately, it is not true that the Federal Budget would come into balance before the end of the decade. Ignoring interest payments obligations on publicly held debt of the U.S. Government and acting as though such obligations do not count as outlays in the Federal Budget is misstating the facts.
CBO’s January baseline updated in March 2011 indicates the following Federal Budget deficits for 2012-2021:
1,081 692 513 538 635 590 585 665 710 729 resulting in a total of 6,737
CBO’s March baseline indicates the following Federal Government interest payment obligations on publicly held debt for 2012-2021:
257 321 394 463 534 600 658 710 762 807 resulting in a total of 5,506
All of the various efforts to focus solely on the Federal Budgets’ primary deficits are misleading. Moreover, an increase in interest rates on Federal debt held by the public above the projected interest rate levels cited by CBO would not only increase Federal payment obligations but would likely further crowd out discretionary spending levels absent further increases in tax revenues or reductions in Mandatory spending.
The U.S. Government’s future publicly held debt interest payment obligations are quite significant. The interest payment obligations will exceed $1 trillion per year shortly after 2021 unless major changes are incorporated in the Federal Budgets going forward. The obligations may exceed $1 trillion per year prior to 2021 if interest rates ramp up.
given the contractionary fiscal policy path that barack herbert hoover obama is agreeing to put us on, it seems unlikely interest rates will rise anytime soon; markets will be happy to take a couple percent return for 10 years in a deflationary environment..
i have been consistent in my opposition to all the bush tax cuts, both when they were first initiated, and when obama claimed them as his own in renewing them; what little they returned to the middle class was a sop in order to give large gifts to the wealthy…
sans the bush tax cuts, the surpluses that clinton ran during his last two years would have continued, if not for the ill advised wars in iraq and afghanistan, which by the time they are all accounted for will cost us nearly $6 trillion; & considering that 9-11 was the ostensible reason for the wars and homeland security expenditures, and that the hijackers total expenditures was for 16 cheap boxcutters, its easy to see who won that war…
rjs,
You’re challenging the fiscal budget path that “barack herbert hoover obama” (your phrase) is negotiating which is likely to result in ten year budget savings of only $2 trillion (or $200 billion per fiscal year). At the same time, you’re proposing a fiscal budget path (CBO baseline) which would result in a ten year Federal Budgets’ deficits total of $6.737 trillion. President Obama’s negotiated approach would result in a ten year Federal Budgets’ deficits total of $8.149 trillion. President Obama’s projected ten year Federal Budgets’ deficits total would be $1.412 trillion larger. You proposed a more significant deficit reduction approach, and the mix of changes in revenues and outlays would be different.
How did I determine Obama’s total? CBO projected a ten year Federal Budgets’ deficits total of $9.47 trillion resulting from President Obama’s FY2012 Budget proposal. This was identified in the March analysis of the President’s Budget proposal. The President’s budget includes ten year revenue from the 2001 and 2003 tax cuts for upper income earners. The Department of the Treasury provided an estimate of tax revenues that would be realized by eliminating the Bush II era tax cuts and the total for upper income earners is $679.6 billion. The President’s FY2012 budget included tax revenue which would be realized by eliminating the Bush II era tax cuts for upper income earners. I removed that revenue stream as it appears that it will be eliminated from the ongoing debt limit negotiations. That results in a ten year Federal Budgets’ deficits total of 10.1496 trillion. If the ongoing debt limit negotiations only result in $2 trillion in deficit reduction, then the final ten year Federal Budgets’ deficits total would be $8.1496 trillion. I rounded down to $8.149 trillion.
I expect that you are not pleased with whatever may come out of the negotiations in terms of spending reductions as opposed to revenue increases.
There continues, undiscussed, the profligacy of filling of the war troughs.
No one in DC is serious about the US economy elst the war trough would be reduced to less than 30% of the current $800B.
And the CBO projections which were briefed in .pdf saves of powerpoints show the US will continue that huge waste.
At the expense of whatever……………………….
The US “invested” the $2.4T in excess SS reciepts in the war trough, utterly pillaged the productive sector and now it says it cannot cover the SS promises made when the government collected that taxation.
“I expect that you are not pleased with whatever may come out of the negotiations in terms of spending reductions as opposed to revenue increases.” you got that right; i dont even think negotiations about reducing the deficit should be going on now; i think the debt ceiling should just be raised to whatever level is necessary to allow for what is already legislated spending to continue unhindered…the deficit isnt critical. it’s just being used to advance an ideological agenda to eviscerate what little safety net we have in this country …in citing annie lowrey’s piece i wasnt advocating her method, i was merely pointing out one obvious means by which the deficits eventually solve themselves… actually, at this point, i’m willing to throw the whole debt/deficit question under the bus and go ahead with another stimulus, if it could be structured to save or create jobs…as former Fed vice chairman alan blinder wrote in the morning’s WSJ, we have a national jobs emergency …the problem with ARRA was that far too much of it (nearly 40%) was directed to tax relief, and less than 15% to direct job creation…even bill gross, CEO of the world’s largest bond fund, agrees; in his july letter to investors, he wrote “”government should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation” and he repeated david rosenberg’s “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” i should have attributed “barack herbert hoover obama” to paul krugman, but as its become common parlance for him among my friends i figured the reference was known…obama might as well run as a tea party candidate; he’s been so sold on austerity that he makes ronnie reagan look like bernie sanders…
According to EU law, prisoners are considered unemployed. In America, they are not. If the USA reported its unemployment numbers according to European norms, its unemployment numbers would be about two points higher. According to numbers I read in The Economist each week, that makes US unemployment even higher than French unemployment.
During last decades most studies were in favor of more flexibility; it was “an explanation” of high sturctural european unemployment and low US unemployment:
http://www.uh.edu/~pgregory/Siebert.pdf
or http://www2.gsu.edu/~ecobth/Nickell_1997.pdf
Now we have discovered that to much flexibility has been a way to lost employment that will not be created again and let a high structural unemployment.