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To Fight Unemployment – Increase Labour Freedom!

by Johnny MUNKHAMMAR






For a long time, unemployment has been a serious problem for many European countries. It leads to serious social problems. But now, there are quite a few countries that are very successful in creating new jobs and higher incomes. For any country, it is essential to draw the right conclusions. In short: Copy the best, forget the rest.

Unemployment is down a bit in the EU, and in the euro area, at the moment. At 7,5 per cent, it is the lowest in a long time. The business cycle is simply very good, the global economy is booming – which is bound to have some positive effect even in the Western Europe. But first of all, sooner or later, the business cycle will not be as good. Then what? Back to even higher levels of unemployment than before?

And secondly, the official figure for unemployment doesn’t show the whole picture of social exclusion. There are at least as many people of working age as the formally unemployed that don’t work, but they are called something else, like “early retired”. The total number of people who are excluded is very high, and they are out of a job for a long time. Not least is this the situation for young and immigrants. Thus, the value of a drop in official unemployment of a percentage point should not be exaggerated.

Furthermore, long-term trends show that these problems have been present in Western European countries for a long time. Indeed, the relative decline of several European countries is hardly disputed. The main debate is about the causes of the problems and possible solutions. There will always be politicians, like Ms Royal, who would like to blame someone or something else for problems. But reality speaks another language.

A comparison of labour markets between the more free-market US, and the EU, is quite revealing. The share of the working-age population employed in EU countries is only 64 per cent; in the US, it is 72 per cent. In 2004, only 13 percent of unemployed workers in the US were unable to find a new job within 12 months; in the EU, the figure was 44 percent. In the US, youth unemployment is 10 per cent, in the EU, it is 17 per cent.

But the best comparisons can be made within Europe itself. Denmark has an employment rate of 76 percent, but Poland is far lower at 53 percent. Youth unemployment is above 20 percent in Greece, Italy, Sweden, France, Belgium, and Finland and below 8 percent in Ireland, the Netherlands, and Denmark. In the EU:s 15 member states, between 1995 and 2004, the development of employment was also very different between the countries. In Ireland, the Netherlands, and Spain, the increase in employment was the highest; in Germany and Austria, it was almost zero.

What were the differences between the countries? First of all, the labour market was substantially freer in the countries that succeeded in creating new jobs. Second, payroll and income taxes were more than 10 percentage points lower in the five best economies (in terms of job creation) compared to the five worst. Third, the levels of contribution from the state for unemployment and sick leave were lower in the best economies. Thus, freer labour markets, lower taxes, and lower contributions – in the successful countries.

This should not be a surprise. In recent years, the OECD has published a number of studies that confirm these correlations in its member countries. Government interventions in the labour market produce serious negative effects in terms of unemployment, especially among young people and immigrants. There are numerous academic studies that confirm this, as well as empirical data.

In the newly published “2007 Index of Economic Freedom” (Heritage/Wall Street Journal), there is a new category called Labor Freedom. It measures the degree of a number of regulations in the labour market in four main categories – hiring and firing regulations, for example – on a scale from 1 to 100, and the 41 European countries score between 45,4 and 99,9. The differences are thus substantial. Countries with a high score, and a relatively free labour market, tend to be more successful in terms of employment.

What about the Nordic countries, then? Don’t they have vast government intervention in the labour market and still are successful? No, quite the contrary. First of all, the Nordics are very different. Denmark has one of the highest levels of Labour Freedom in Europe, and they are successful. But Sweden, which has one of the lowest levels, has not been successful. All international analysts advise Sweden to de-regulate the labour market, which the new government has started to do. Thus, learn from Denmark, not from Sweden – in that respect. Sweden is successful in other ways.

Taxes, public monopolies, subsidies and social security will of course also affect the results in the labour market. It is not only direct labour market regulations. The more government intervention, on a general level, the more problems with few jobs. If Labour Freedom is combined with high levels of economic freedom in other categories, there will be better results.

There will always be numerous details to discuss about how to shape an economic policy for strong success in the labour market. But the general picture is clear: The freer a country’s economy is, the wealthier it is – and unemployment is lower.

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Program Director, Timbro - Policy Research Institute in Sweden
Author of “European Dawn” (Timbro/Stockholm Network)

Article was published in economic magazine TREND no. 11
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