Policy Influences on Unemployment: the European Experience
| Published date | 01 September 1999 |
| Date | 01 September 1999 |
| DOI | http://doi.org/10.1111/1467-9485.00140 |
| Author | Christopher A. Pissarides |
{Journals}sjpe/sjpe46-4/q191/q191.3d
Scottish Journal of Political Economy, Vol. 46, No. 4, September1999
#Scottish Economic Society 1999.Publ ishedby Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
POLICY INFLUENCES ON UNEMPLOYMENT:
THE EUROPEAN EXPERIENCE
Christopher A. Pissarides
ABSTRACT
This paper considers the implications of four kinds of labour market policies for the
1980s rise in European unemployment: unemployment compensation, active labour
market policies, employment protection legislation and taxation. It finds evidence
that all have played a role in the determination of unemployment and discusses the
mechanisms involved, the extent of the influence of each and the lessons learned
from this experience. One of the main findings is that there is a trade-off between
wage inequality and unemployment. Policy has played a role in determining how a
country responded to the negative macroeconomic shocks of the 1980s but policy
alone cannot explain the full rise in European unemployment and North American
wage inequality.
Spud and Renton were sitting in a pub in the Royal Mile.
Ð Weird man, though, like I say, you and me getting sent for the same job,
hey? Spud said, slurping at his Guinness.
Ð Disaster for me mate. I'm not wanting the job. It would be a nightmare.
Renton shook his head.
Ð Yeah, I am happy staying on the dole now, know what I mean?
Ð Trouble is, though, Spud, if you don't try, if you blow the interview on
purpose, they tell the dole and they stop your giro. Happened to us in
London. I'm on my last warning down there.
Ð Yeah ... me and all man. What are you going to do?
Ð Well, what you have to do is to act enthusiastic, but still mess up the
interview. As long as you come across keen, they can't say a thing. If we just
be ourselves, and be honest, they will never give either of us the job. Problem
is, if you just sit there and say nothing, they are straight onto the dole. They
will say: He just can't be bothered.
Ð It's hard for me man ... you know? It's difficult to get it together like that,
like I say, you know, I just get sort of shy.
Ð Well, I'm at one. I will see you back here at two. I'll give you my tie to put on.
adapted from Irvine Welsh, Trainspotting, London: Minerva, 1993 (`speedy
recruitment').
389
Centre for Economic Performance, London School of Economics
{Journals}sjpe/sjpe46-4/q191/q191.3d
IINTRODUCTION
The purpose of this paper is to examine the role played by policy in the rise in
European unemployment from the late 1970s to the late 1980s. Of course, I am
neither the first nor, regretfully, the last to address this question. The facts are
well documented; and the human capital poured over those facts is impressive.
Yet, in the words of Blanchard and Katz (1997), `many suspects have been
identified, but none has been convicted'.
It will not come as a surprise if the reason that no convictions have been made
is that there is no single culprit. If there was, it would have been found. My
purpose is not to look for one. Instead, what I propose to do is to look at a set of
policies and investigate the role that they have played in the performance of the
OECD labour markets between the cyclical peaks of the late 1970s and late
1980s. It is well known and documented several times that the United States has
followed the least interventionist policy in the OECD during this time (see for
example Layard, et al., 1991; OECD Jobs Study, 1994). A primary focus in this
paper is the comparison between the near `laissez-faire' approach of the United
States with the more interventionist policies of European countries.
The period that I have chosen to analyse is one characterized by deflation in
Europe in response to monetarist thinking and the process towards monetary
integration, which has culminated in the single currency; but it is also a period of
trade expansion following trade liberalisation and the single market; biased
technological and structural change; and policy experimentation. This period
followed an earlier one of low unemployment and virtually uninterrupted
growth, during which the role of the State expanded and many policies were
introduced to protect the `rights' of workers.
The policies that were introduced in the 1960s and early 1970s were blamed
for many of the labour market problems faced by European countries in the
1980s. The argument is that the policies led to an inflexible institutional
structure in labour markets and when the negative shocks of the second half of
the 1970s and the 1980s arrived, the market could not adapt quickly enough to
the new environment and employment, both initially and ultimately, absorbed
most of the shocks. Unemployment and its duration increased, giving rise to the
problems of discouragement associated with long-term unemployment. This
conclusion is usually reached when contrasting the experience of the United
States with that of Europe.
European countries have experienced two unemployment cycles since the
early 1970s, whose low points were in ascending order. (The third cycle still
underway is unlikely to have the same feature.) The low point of 1973 was at
about 3%, that of 1979 close to the previous peak of about 5% and that of 1990,
although well below the previous peak, still at about 8% (Figure 1). Note the
symmetry: each trough was about 60% higher than the previous one.
It is widely believedthat this rise in unemployment was a risein the natural rate.
Inflation was constant for much of the second half of the 1980s and whichever
way one chooses to measure the effects of aggregate demand on unemployment,
the numbers thatone comes up with are too small to matter. It has been arguedby
390 CHRISTOPHER A. PISSARIDES
#Scottish Economic Society 1999
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