| | | | | | | Curiosity 3.2: Why Is Unemployment So High in Europe? | | | | | | | | | | Unemployment in Europe is about twice that of the United States. The most persuasive explanations claim that this difference is due to institutional differences such as higher minimum wages, more unionization, generous unemployment benefits, and various government regulations such as laws forcing Sunday closures and limitations on shop hours. | | | | | | | | | | Layoff regulations and plant-closing laws, for example, make it very expensive for a firm to reduce its work force, so they are reluctant to hire new workers, choosing instead to meet demand fluctuations by adjusting overtime. Reflecting fact, in France the unemployed take five times as long to find a job as in the United States, but once employed are five times less likely to lose their job. | | | | | | | | | | In Germany nonwage labor costs are 42% of gross wages, caused by a need to finance a very generous welfare system. Because of this, in the mid-1990s when the United States was experiencing an 11% increase in employment, Germany was experiencing a 7% decrease. | | | | | | | | | | In short, it seems the natural rate of unemployment is higher in Europe because of institutional phenomena. | | | | | |
| | | | | Unemployment arising from these three sources creates the NRU, the natural rate of unemployment, what economists mean by "full employment." This rate of unemployment was thought to be about 6 percent in the early 1990s, but it has clearly fallen markedly since then (for a discussion of what may have caused this decrease, see curiosity 12.2 in chapter 12). The main point here is that the NRU is neither a fixed nor a known number. It varies across countries and over time within a single country. It is affected, for example, by the current pace of technological change, the rate at which public tastes change, participation rate changes, and government policies affecting labor mobility, job vacancy information, and labor retraining programs. | | | | | | | | | At any point in time, an economy's unemployment rate can be below or above its natural rate of unemployment, as the economy cycles through booms and recessions. Such cycles are called business cycles, with the economy viewed as moving through four stages, an expansionary stage, a peak, a contractionary stage, and a trough. Loosely speaking, we could consider the economy to be in a recession whenever the unemployment rate is above the NRU, and in a boom whenever the unemployment rate is below the NRU. Much macroeconomic theorizing is concerned with generating an explanation for the business cycle phenomenon. Unemployment above the NRU is referred to as cyclical unemployment; it is often used to measure the cost to society of unemployment. | | | | | | | | | 3.4
The Cost of Unemployment | | | | | | | | | When operating at full employment, the natural rate of unemployment, the economy is said to be producing its potential GDP. Figure 3.2 shows the difference between actual output | | | | |
