04 March 2012

Economic Policy Relevant To Unemployment

If there were any place you'd expect economics to be indifferent to national boundaries, it would be within the Eurozone of the European Union where there is free immigration and there are no customs stations between neighboring member countries, where there is a single currency, where there have been efforts to harmonize economic and monetary policy for half a century.

You would, however, be wrong.

Emmendingen, a German town of 27,000 that is only slightly larger than Sélestat[, France] and barely 20 miles away, has an unemployment rate of under 3 percent. Among those under 25 years of age, the unemployment rate in Sélestat is 23 percent; in Emmendingen, it is 7 percent.

The GDP per capita in Germany is almost identical to the GDP per capita in France, and has been continously almost identical since before 2005. Unsurprisingly, given their common currency, they have had almost the same inflation rates in that time period. But, since 2005, Germany's unemployment rate has fallen from about 12% to about 6%, while France's unemployment rate which started at 9%, quite a bit better off than Germany, wobbled down to about 7% in 2008 and has drifted up to about 10%.

France's economy has been able to buffer itself much better from the financial crisis, at the costs of continuously medicore unemployment rates, while Germany's unemployment rate has behaved as if the financial crisis never happened and the last six years have been one long economic boom.

Language is a barrier to labor mobility, even though immigration laws are not, so Europe's labor market is still not as barrier free as the domestic labor market of the United States, for example.

Also, the two economies starkly uncut the notion that unemployment rates are fundamentally linked to GDP growth. Steven Erlanger at the New York Times accounts for some of the leading reasons experts give for the difference, mostly related to differences in the fundamental makeup of the German and French economies and to how they have made different policy choices about how to organize their labor markets:

Germany has maintained its industrial base and competitive edge, both technologically and in terms of cost, while France lacks a large sector of medium-size industrial enterprises and depends much more on services. The French share of global exports has steadily fallen, while the German share has steadily risen.

French salaries have increased in real terms while German salaries have fallen, making French workers more expensive and thus less productive and competitive. French social protections for the unemployed are also much more lavish, especially after the Germans pushed through the so-called Hartz reforms, which largely limited unemployment benefits to 12 months. In France, the duration is 23 months for those under 50 and three years for those over 50, many of whom never work again.

In part to pay for those benefits, the cost to business of an hour’s labor is 11 percent higher in France. But there is less job security in Germany, and more Germans do part-time work. The Germans do not have a centrally fixed minimum wage, as the French do. . . .

Salaries on the German side are higher for similar work, goods are cheaper, the cost of hiring a full-time employee is lower and the relationship between German workers and their bosses is more supple and flexible, freer of the centralized regulations, ministries and unions characteristic of France. . . . [T]he French have more children than the Germans and more women are in the work force, which swells the numbers looking for work. . . .

Many labor experts single out the German apprenticeship system as a major competitive advantage. It takes young people out of the university track at 16 and trains them in industrial skills, as they simultaneously study for a technical degree and work for a salary. They often get full-time jobs with companies that have invested in training. . . . Many French parents and their children still regard a vocational degree or apprenticeship — instead of a university degree — as a sign of stupidity or failure[.]

Culture may also be at work. One German employment bureaucrat cites the usual cliche: “The French work to live and the Germans live to work.”

The U.S., with a population nearly as great as the European Union, has a huge, largely open internal labor market that is linguistically united, and also has a common currency.

Unemployment benefits have been extended to almost two years in the U.S., like the more generous French benefits, but qualifying for unemployment benefits at all in the U.S. is far more difficult than in Germany or France, and the benefits one does receive in the U.S. are more meager.

Also, unemployment in the U.S. means more sacrifices for famillies in the U.S. in terms of access to health care and higher education. The French and Germans have quite different health care systems, but they are both effectively universal, and the financial contributions families have to make to send their kids to college in either of those countries is trivial compared to that of U.S. families, even for kids attending public colleges. In the U.S., a lost job can mean lost lifelong economic prospects for your children and permanent sacrifices to your health. In Europe, the burdens of unemployment are temporary.

(The universal health care system doesn't come at the expense of quality. Both France and Germany pay far less for health care, with better results, than the U.S., per capita. The French universal health care system is more statist. The German system looks a lot like "Obamacare" and "Romneycare". The quality of higher education in Germany and France probably isn't as outstanding at the high end, although but countries have some prestigious and functional enough universities.)

For an unemployed U.S. worker nearing retirement age, a lost job combined with a weak economy may mean dipping into retirement funds to pay current expenses like a mortgage that would be catastrophic not to pay, at your investments' low point, paying taxes and tax penalties upon withdrawing those funds, and realistically, having to spend more years in the work force at a job for which you are overqualified that pays less than the job you lost.

In France and Germany, private sector workers have government or union sponsored retirement plans that look more like the defined benefit retirement plans of public sector workers and unionized industrial workers in the U.S., and of course, a signficantly greater share of the work force is in the public sector.

Vocational education and apprenticeships are, if anything, more anemic and looked down upon in the U.S. than in France, let alone Germany. The U.S. has perhaps the weakest unions in the developed world, and certainly its unions are far weaker than those of either France or Germany. It also has a labor market less regulated than either France or Germany, and while it has a national minimum wage, it isn't generous compared to that in any particular place in France or Germany.

The U.S. unemployment rate is between Germany's and France's right now, but the U.S. has an exceptionally high share of people who are long term unemployed, and has many people who who are part-time for economic reasons or discouraged workers who have no reason to be out of the labor force but have given up and thus aren't counted as unemployed. The U.S. economy is more like France's than Germany's, it has deindustrialized and imports more than it exports.

U.S. workers work more hours per year than their peers in either Germany or France, the U.S. has fairly comparable labor force participation by women to Germany and France, and overall the U.S. probably has more children per worker on average than either Germany or France (a trend driven significantly by immigration, as native born fertility has plunged in the U.S. just as it has in Europe). The overall foreign born labor pool in the U.S. is also probably larger as a percentage of the labor force than in either Germany or France, even though Germany has many non-citizen workers from Turkey and France has many immigrant workers from its many former colonies, particularly in Africa.

Unlike either Germany or France, the unemployment trends in the U.S. have consistently been a lagging indicator of the business cycle that is strongly linked to the business cycle. The U.S. has cut civilian public sector employment considerably since 2005 at all levels of government and is poised to do so in the military as well; these public sector labor force cuts have offset employment gains in the private sector.

The German economy looks good now, but it didn't look so hot in 2005 or even 2007 compared to France or the U.S. And, nobody is complaining about rising salaries in France. The U.S. has seen considerable economic growth, but almost all of the salary gains in the U.S. have been captured by those at the top of the economic pyramid, while in France, everyone but those of that very top have made more salary gains than their economic counterparts in the U.S. and members of the German and French middle and working class have levels of economic security unimaginable to the their American counterparts.

The two big mysteries of the Germany economy that don't seem to involve tradeoffs of one good thing for another (and hence which might be reproducible and worth reproducing), are the succcess of its apprenticeship track, and the health of its industrial sector. It is hard to tell if the former is mostly just a product of the latter, if the industrial sector owed a lot of its success to apprenticeship programs, or if the two points have little to do with each other.

American supporters of "reindustrialization", both Democrats including President Obama and people on the right like Republican Presidential candidate Rick Santorum, tend to favor getting their by what amounts to merchantalist economic policies. But, those kinds of policies do little to explain why Germany still have a thriving industrial sector, while France has a much more anemic one.

Reindustrialization advocated who bemoan our declining manufacturing sector, rarely question the fact that the vast majority of high schools in the United States offer the vast majority of students whose academic records make it clear that they are unlikely to graduate college with a four year liberal arts degree, essentially a watered down version of the college prepatory curriculum that serves high school students who have a realistic shot of being admitted to college and graduating given their past academic successes. It is not at all obvious that this makes any sense. But, God forbid that we deny any kid on track to take 8th grade math in his senior year in the bottom half of his class in GPA who has twenty unexcused absenses a year and is a regular in detention a shot at going to Harvard or medical school or a chance to run for President. That would be the bigotry of low expectations, right?

UPDATE 3-5-2012: More on apprenticeship options in Germany as a model here.

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