1. To Accompany “Economics: Private and Public Choice 10th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: James Gwartney, David Macpherson, & Charles Skipton Full Length Text — Macro Only Text — Part: Special Topic: Next page Copyright 2003 South-Western Thomson Learning. All rights reserved. Labor Market Policies and the Natural Rate of Unemployment: – A Cross Country Analysis 66 5 6

2. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Cross-Country Variations in Unemployment Rates

3. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Cross Country Variations in Unemployment Rates During the last decade, the major European economies, Australia, and Canada have each experienced persistent double-digit unemployment rates. In recent years, the unemployment rate of the European Union has been about twice that of the United States.

4. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Source: OECD, OECD Economic Outlook, June 2001. Unemployment rate: Standardized Unemployment Rates of Nine Major Industrial Economies 1991–1995 1996–2000 Australia 9.9 % 7.8 % Canada 10.5 % 8.3 % Japan 2.6 % 4.1 % United States 6.6 % 4.6 % France 11.1 % 11.4 % Germany 6.6 % 8.9 % Italy 10.1 % 11.4 % Spain 20.9 % 18.4 % United Kingdom 9.5 % 6.6 % European Union 10.0 % 9.7 % European Area 10.1 % 10.5 %

5. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. The Structure of Labor Markets in Europe

6. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Unionization and Centralized Wage Setting Compared to the United States and Japan, centralized wage setting through collective bargaining is much more common in Europe and Australia. When used in large and diverse labor markets, a centralized wage-setting process will push wage rates above market levels in various regions and skill categories. This will tend to cause higher rates of unemployment.

7. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Share of employees with wages set by collective bargaining Unionized workers as a share of non-farm labor force: 1995 1980 1995 United States 16 % 26 % 18 % Japan 24 % 28 % 21 % 88 % 80% Australia 35 % France 9 % 85 % 95 % Canada 38 % 37 % 36 % Italy 39 % 85 % 82 % Germany 29 % 91 % 92 % 78 % 76 % Spain 19 % United Kingdom 34 % 70 % 47 % Low-unemployment economies High-unemployment countries Sources: OECD, Employment Outlook (July 1994); OECD, Employment Outlook (July 1997); and OECD, Country Surveys (various issues). Share of Employees With Wages Set by Collective Bargaining

8. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Regulation of Employee Dismissal Regulations limiting the dismissal of employees are more restrictive in Europe. Regulations that make it more costly to dismiss workers will also make employers more reluctant to hire employees. Restrictive dismissal regulations will lead to sluggish employment growth and high rates of unemployment, particularly for youthful workers seeking to enter the work force.

9. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Average months of mandated severance pay & notification for a no-fault dismissal, mid-1990s Source: OECD, OECD Jobs Study: Evidence and Explanations, 1994, Part II, Table 6.5; and OECD, Country Surveys (various issues). 0.0 Low-unemployment economies Japan United States High-unemployment economies Australia Canada France Germany Italy Spain United Kingdom * Indicates that firms must obtain government approval to layoff workers when reducing the size of their labor force. Restrictiveness of Dismissals 0.5 1.5 0.6 2.1* 1.4 11.6 * 5.2* 3.6 Low-employment countries have less restrictive dismissal regulations than high unemployment countries.

10. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Impact of Unemployment Benefits and Payroll Taxes High unemployment benefits will reduce the opportunity cost of job search, and thereby cause more lengthy spells of unemployment. Unemployment benefits are more generous in Europe than the U.S. and Japan.

11. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Sources: OECD, Employment Outlook (July 1994); OECD, Employment Outlook (July 1997),; and OECD, Country Surveys (various issues). United States Japan Australia France Canada Italy Germany Spain United Kingdom Low-Unemployment Countries High-Unemployment Countries Average Gross Replacement Rate of Unemployment Benefits Average Replacement Rates 9 % 10 % 15 % 11 % 12 % 22 % 26 % 27 % 25 % 28 % 27 % 30 % 37 % 38 % 29 % 28 % 26 % 1 % 3 % 20 % 28 % 33 % 32 % 24 % 18 % 1990 1980 1995

12. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Summary: Compared to the United States and Japan, the labor markets of Europe, Australia, and Canada are characterized by: centralized wage-setting processes, more restrictive dismissal regulations, and high unemployment benefits. There is reason to believe that these policies have contributed to the high unemployment rates of these economies.

13. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. The U.K. and New Zealand: The Impact of Structural Changes in Labor Markets

14. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. The U.K. & New Zealand: Studies of the Impact of Structural Changes in Labor Markets Recent reforms in the United Kingdom and New Zealand have increased the level of competitiveness within their labor markets. The rates of unemployment in both countries have declined and are now significantly lower than the rates of countries that follow more restrictive labor market practices.

15. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 1. Suppose that legislation was passed requiring all employers in the U.S. to pay workers that were dismissed one week of severance pay for every year they were employed by the firm. What impact would this have on: a. the dismissal rate of employees, b. the productivity of employees, and, c. the unemployment rate of youthful workers? 2. Do you think that the U.S. should move toward the European labor market model characterized by more extensive collective bargaining, greater government regulation, and more generous unemployment benefits?

16. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 3. Compared to the situation where a union is able to organize only a portion of the firms in an industry, how does the ability to set wages for an entire industry influence the power of a labor union? What does this suggest about the relative strength of unions in Europe versus those in the United States and Japan? 4.Explain why unemployment compensation is an indirect subsidy to employers with a less stable workforce. Is it a good idea to subsidize this type of unemployment? Why or why not?

17. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. End Special Topic 6