Saturday, February 25, 2012

There is Bad News and Bad News on Unemployment in Europe –

Why Can’t We Have Good News? – Because European Economic Policy is Producing the Bad News

If anyone wants to contrast the economic situation in Europe with that of the United States, he or she would find out that while employment is growing and the unemployment rate is falling in the U. S., the opposite is happening in Europe.  Even worse, the burden is not spread evenly, young people are bearing the brunt of the suffering, with the youth unemployment rate in Spain and Greece above 40%. 

Spain has recently voted in a center-right government that is trying to tackle the problem by instituting reforms in the labor markets and employment agreements.  The problem for most of Europe is that once a person is hired, it is extremely difficult to get rid of them if they are not appropriate for the job or if their services are no longer needed. 

Everything the government is Spain is trying to do makes sense, because the structure of employment rights in that country and most others does not leave business management in charge of the hiring decision.

By cutting red tape, the new law makes it easier and cheaper to lay off workers. For most firms, maximum lay-off payments will be reduced from 42 months’ pay to 12 months, says Mr de Guindos. That may not immediately affect growth, he adds, but it will hugely boost business confidence. “The reform changes the idea companies have that labour rules are an obstacle,” says Salvador del Rey, of the Cuatrecasas International Institute, a think-tank. Another measure tackles Spain’s top-heavy collective-bargaining system. Whereas unions and employers previously imposed terms from above, companies can now break free of them. This means employers can negotiate shorter working hours or lower wages.

The labor laws that Spain is trying to be rid of are a great example of the law of unintended consequences.  By trying to make employment more secure, unions and government made employment less secure.  The proof, if the existing system were working to preserve employment there would not be charts like this.

But despite the policy of changing the labor markets and the way they function, one cannot be optimistic things will improve.  This is because there has to be a demand for that labor when the labor markets are freed up.  And Spain, along with most other European countries is adopting policy to reduce demand for labor.  This is being done in the name of “austerity” and bringing the fiscal house in order.

How well does that policy work.  Well ask the Greeks, they have been trying it for several years with catastrophic results.

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