Sunday, May 24, 2009

More on US/EU Unemployment

. Sunday, May 24, 2009

Apropos of this post by Alex noting that the unemployment rate in the US is now the same as the average of European OECD countries, consider this passage from John Quiggin:

Advocates of the US system make much of the deterrent to hiring associated with employment protection laws, but they ignore the other side of the coin. When the economy is contract, employment protection laws do in fact protect employment (if they did not, they would have no adverse effect on hiring either).

On this basis there is nothing surprising in what we are seeing. EU unemployment rates should be higher in expansions and lower in contractions, which is exactly what is required for lower variance.

Which is better?


Short answer: that is a normative judgment. If my primary concern is improving the lot of the most people most of the time, I might think of it this way: if the "normal" state of a capitalist economy is for there to be more years of growth than recession, and I want to maximize the well-being of the most people for most of the time, then I'd go for the system with the higher variance, since a majority of the time people on the margins will be better off. Additionally, more flexible labor markets allow more labor mobility, which increases competition and boosts productivity. This, in turn, leads to additional economic growth as well as improvements that don't show up in GDP, like the improvements in home computers of similar price over time. Technological advances often generate positive social externalities that don't show up in raw GDP figures.

However, if my primary concern is to avoid sudden catastrophic outcomes for even a small minority of people, and I'm willing to trade off subtle gains for the majority to achieve that, then I might prefer the more stable, but less dynamic, European system.

Now, if unemployment increases in the Eurozone as both Alex and I expect it to do, then this might be a moot point. After all, you can't juxtapose dynamism with stability if one system or other has more of both. And it is worth noting that there is more inter-country variance in unemployment rates in Europe than across states in the US. But if there is a choice to be made, then the appropriate decision can only be made on normative grounds.

Bryan Caplan, who has his own normative views, offers up a bet:

The average European unemployment rate for 2009-2018 (i.e., the next decade) will be at least 1% higher than U.S. unemployment rate. The bet will be resolved when Eurostat releases its final numbers for 2018.

I'm happy to bet each of the three authors $100 at even odds. Will they accept?


So far, I don't believe there are any takers.

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