By Zsolt Darvas, a Senior Fellow at Bruegel, and formerly Research Advisor of the Argenta Financial Research Group in Budapest and Deputy Head of the research unit of the Central Bank of Hungary and David Pichler. Originally published at Bruegel
The common narrative that the US labour market outperforms the EU is not as trustworthy as overall unemployment figures imply. There is a complex interaction between job creation, labour force participation and unemployment. Jobseekers leaving the labour market altogether was an important factor behind the reduction in US unemployment, while Europe’s job growth has been accompanied by increased labour force participation.
The global financial crash had a lasting impact in Europe. Most EU countries faced long recessions and labour market weakness after 2008. In contrast, recovery in the US economy and job market started much earlier. Much has been said about the reasons for this discrepancy between the two regions, and in our view some of the pain of post-2008 Europe could have been avoided.
However, beyond the doom and gloom, comparing the EU and US is a not as simple as it seems. And the balance is not monolithically favourable to the US. In fact, it is worth emphasising a few bits of good news regarding EU labour markets:
- Before the crisis, the rate of job creation was faster in the EU than in the United States;
- In recent years, the rate of job creation in the EU was the same as in the US;
- While labour force participation has been falling in the US, it has increased in Europe.
Job Creation: Is the US a Clear Champion?
There is a wide assumption that the US economy is more effective than Europe at creating jobs, which should be reflected in a more rapid increase in total employment. However, as we see in Figure 1, the EU was actually creating jobs faster than the US in the years before the crisis. From 2000Q1 to 2008Q1, the number of jobs in the EU expanded by 10%, but only by 6% in the United States. Note that this chart compares each region to its own level of employment in 2008Q1; it does not display the percentage employment rate.
When the global financial crisis hit, US employment fell faster and to a larger extent than European employment. Within two years over 5% of US jobs disappeared, versus 3% in the EU – partly because the US has a more flexible labour market. But, thanks to a more effective policy response to the crisis, US output started to recover already in the second half of 2009. This was followed by renewed job creation since early 2010, with employment regaining its 2008Q1 level by the end of 2014.
In contrast, the EU’s employment crisis was less deep but lasted much longer. A broad-based recovery started only after 2013, when the euro crisis was finally contained. However, since then, job creation has been picking up and total employment is now back at pre-crisis levels. On average, the rate of job growth is now the same in the EU and the US: 2.7% in total in the past two years. Even Greece, a hard-hit euro-area country, is seeing a broad-based labour market recovery, as we highlighted in this earlier post.
The OECD reports data for 22 EU countries but not for the EU as a whole. We calculated the EU22 aggregate data using country-specific data. Source: https://data.oecd.org/youthinac/youth-not-in-employment-education-or-training-neet.htm
Beyond the general positive trend of job creation, youth inactivity remains a problem. But this is true on both sides of the Atlantic. The share of young people not in employment, education or training (NEETs) in the 15-29 age cohort group was at 15.3% in the EU and 14.1% in the US in 2017Q1, according to OECD data. These are high rates, even if both fell from 17% at the crisis peak. Youth inactivity can have lasting negative effects, as skills are undermined for a worker’s whole lifetime, with knock-on effects on fertility rates and the ability to provide for one’s children.
There is also a significant degree of intra-EU heterogeneity in terms of job creation (see the charts in the annex below). The countries with the fastest job creation are Malta, Ireland, Hungary, Spain, Luxembourg, Slovakia and Greece. Meanwhile Latvia recorded job losses in the past two years, and Finland, Croatia, Belgium, France, Lithuania and Bulgaria have been able to create very few new jobs.
As Americans Flee the Labour Market, Can We Trust Falling Unemployment Figures?
Looking at the labour market from another perspective, we also see an impressive fall in unemployment rates (the percentage of jobseekers within those who either work or are looking for a job). This is the case in both the US and, more recently, in Europe – although the overall rate is still much lower in the US than in Europe (4.7% versus 8.1% in 2017Q1). Of course, the fall in unemployment rates is partly thanks to the job creation shown in Figure 1. But there are other factors in play which mean we must treat the headline-grabbing unemployment numbers with caution.
Another important reason behind the fall in US unemployment rate was the falling labour force participation rate (Figure 2). More and more people have become disenchanted with labour markets and have given up looking for a job altogether. This means they are no longer counted amongst the unemployed, even if they would ideally have wanted a job. In the US, young people (of both genders) and middle-aged men have displayed a significant fall in labour force participation. This drop was offset only to a small degree by increased labour force participation among older men. Overall US labour force participation has turned slightly upwards only since late 2015, by which time, incidentally, it had fallen to the level of the EU average.
In contrast, from a low level in 2000, labour force participation in the EU has been increasing continuously. Even the crisis-related increase in unemployment did not cause a break in the trend. A steadily higher percentage of Europeans are participating in work, or trying to do so. Even in hard-hit Greece and Spain, labour force participation continued to go up after 2008. The increase is driven largely by higher participation of middle-age women and older age cohorts (of both genders), while the participation of the youth further declined.
The convergence of US and EU labour force participation rates is not just an interesting economic and social trend in its own right. It has an important statistical corollary: unemployment rates are now more comparable between the US as a whole and the EU as a whole. If the same percentage of people in both regions is actively trying to work, then we can now meaningfully compare the percentage of that group which cannot find work. In earlier periods we were comparing the unsuccessful subset of two very different groups.
However, better comparability with the US does not always apply to individual EU countries. There is a large degree of heterogeneity within the EU, as our country-specific charts in the annex show. In particular, labour force participation in the Scandinavian countries, Germany, Netherlands and the United Kingdom is well above the EU and US averages, while Italy, Croatia and Romania report rather low values.
So, just how great was the impact of changes in labour market participation on unemployment rates? In order to answer this question, we calculate a hypothetical counter-factual scenario for the unemployment rates in the EU and US. To do this we assume that labour force participation stayed at its 2008Q1 level throughout the whole period, while maintaining the trends in total employment presented in Figure 1.
Under this scenario, the unemployment rate in the US would have increased to a much higher level in 2010 and the current 2017Q1 rate would be 7.3% instead of 4.7%, because we consider as unemployed all those people who have since left the labour force altogether (Figure 3). In contrast, the unemployment rate in the EU would have increased less after 2008 and the current 2017Q1 rate would be 4.6% instead of 8.1%, because we presume that none has joined the labour force and there would thereby be a lower number of unemployed people.
Thus we can see that the dramatic changes in labour force participation have indeed had a sizeable impact on unemployment rate developments in the US and EU since 2008. Moreover, they paint a more nuanced picture than the often-quoted unemployment rate, which implies that the US labour is undoubtedly outperforming the EU. In fact the story is a little more complex.
Annex: Country Specific Charts
I love the charts….but when I talk or my friends or my family:
Yeah…in a 10 sec soundbite world busting out the graphs and statistics tends to make people’s eyes glaze over. And many of them don’t actually want to know the truth or learn a new perspective if it doesn’t reinforce their existing prejudices and delusions. Some very “smart” and sharp-minded people I know instantly go into defensive mode when their world view is even gently challenged. This type of reaction has become more pervasive since the last election.
I too find many people unwilling to believe things that make them feel uncomfortable — regardless of any arguments or facts I might bring to bear. However I wonder at your assessment that “… people I know instantly go into defensive mode when their world view is even gently challenged.” I used to think that also — and it may have been true at some point. I suspect an even more insidious reason behind people going into defensive mode. I suspect their behavior is driven less by a natural response to being challenged than a growing fear of things they cannot face.
I agree 100%.
…living abroad 4 years, Europe, we were able decipher U.S. employment propaganda regarding E.U. employment…this is longtime propaganda effort…
Stands to reason fully educated (university or vocational equivalent) societies, whose goal is taxpayers for social systems, feature high numbers of employed…
(goal, U.S., determined by corporate – employers-“cheap labor force”; some winners, some losers, majority mediocrity. Corporate dictate then scapegoats “education”)
Yes it is very difficult to move people out of their intellectual comfort zone. I note two techniques employed to cut off the speaker before the now obviously unwelcome conclusion.
1. The plea of subject ignorance: “Oh, I just don’t understand all this, it’s too complicated for me to get to grips with the concept.”
2. An unexpected appointment: “Oh well, I can’t stay here all day when I have so much to do at home.”
The comfort zone in question is the product of a certain class of education which carefully instills all possible arguments against subject ‘X’ for use when unwelcome conclusions loom on the conversational horizon.
One gets a fairer hearing therefore from the so-called ‘uneducated’, who generally have already figured out the essentials and lack only the means of their expression: i.e. the articulation of a conclusion.
Job quality matters too.
Yes yes yes.
Duh duh duh!
Well, yeah. 2 points:
1. I often wonder – and wonder how to know – how many people, like, as it happens, myself, are simply not poor or scared enough (but certainly very far from rich) to chase just any shitty job. I see a whole lot of shitty jobs out there, and not many good ones, in terms of compensation for the sacrifice (in the broadest possible sense of both words).
Employment issues would go away PDQ if the pay and/or benefits were worth it. Most of the time, they’re not, and sadly, many have no choice in the matter.
2. For years now I’ve witnessed a steady drumbeat of overt domestic propaganda about the alleged failure of those nanny states across the pond.
This contrasts very starkly with what I hear people tell me about their experiences over there – which basically boils down to this: while maybe the “growth” isn’t rocket-fueled, the social safety net is real and humane, while corporations (gasp) have their limits. Thanks for the debunking …
Per capita economic growth in France, Germany and even the UK was higher than in the US during both the postwar period and the neoliberal period.
The neoconservatives and neoliberal types will believe what they want to believe.
Even worse, the other considerations are in the quality of the jobs created. I suspect that the US is creating a higher percentage of low wage or unstable temporary jobs, with little, if any benefits. This is even more dire considering the amount of people who are discouraged job seekers. I think that this would be even more apparent in Northern Europe. Oh and those with jobs in Europe have a better work life balance.
Basically this is a way to say that life sucks for the American people, save the rich. Even worse, many nations in Europe has a more robust social safety system.
By no means is the EU perfect. In particular, the austerity measures are little more than class warfare from the rich. Even so, many nations in Europe (and even outside, like Switzerland) have much better employment opportunities for their citizens.
…those who (intend?) conflate “liberal” and “neoliberal” benefit from historical documentation:
“The term neoliberalism was coined at a meeting in Paris in 1938. Among the delegates were two men who came to define the ideology, Ludwig von Mises and Friedrich Hayek. Both exiles from Austria, they saw social democracy, exemplified by Franklin Roosevelt’s New Deal and the gradual development of Britain’s welfare state, as manifestations of a collectivism that occupied the same spectrum as nazism and communism.
In The Road to Serfdom, published in 1944, Hayek argued that government planning, by crushing individualism, would lead inexorably to totalitarian control. Like Mises’s book Bureaucracy, The Road to Serfdom was widely read. It came to the attention of some very wealthy people, who saw in the philosophy an opportunity to free themselves from regulation and tax. When, in 1947, Hayek founded the first organisation that would spread the doctrine of neoliberalism – the Mont Pelerin Society – it was supported financially by millionaires and their foundations.
With their help, he began to create what Daniel Stedman Jones describes in Masters of the Universe as “a kind of neoliberal international”: a transatlantic network of academics, businessmen, journalists and activists. The movement’s rich backers funded a series of thinktanks which would refine and promote the ideology. Among them were the American Enterprise Institute, the Heritage Foundation, the Cato Institute, the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute. They also financed academic positions and departments, particularly at the universities of Chicago and Virginia.
As it evolved, neoliberalism became more strident. Hayek’s view that governments should regulate competition to prevent monopolies from forming gave way – among American apostles such as Milton Friedman – to the belief that monopoly power could be seen as a reward for efficiency.”
Unfortunately, US is not the only country creating temporary low wage jobs. It is the same in some EU countries, at least in Greece, Portugal and Spain where tourism is the main driver of job creation. Something that has to do with Arab Spring, war in Siria and terrorism fear. Many tourists that went to North-African Med, and Asian-Med go now to Greece, Italy, Spain and Portugal (not mediterranian but yet sunny as well as friendly for visitors, I strongly recommend).
Of course this helps but it is not a long term solution.
I’m not sure what to gleam from this article, so I’m just going to spitball and see what y’all think.
The US unemployment rate is decreasing because of a decreasing labor market participation rate. Meanwhile the EU unemployment rate is decreasing because of a general increase in their participation rate. Hopefully I’ve read these graphs and this article right in that sense.
Does this mean that we’re seeing a general shrinkage of the labor markets in the US?
In a word, yes. Less willing participants, less employment offers. Contraction. Despair.
I agree with Altandmain that precariat jobs dominate job openings in the U.S. One study that shows this is http://archive.jsonline.com/business/help-wanted-most-us-job-openings-are-for-low-skill-low-pay-workers-b99460445z1-298692631.html/
Unfortunately, precariat jobs carry with them a number of health, social, and environmental costs which probably far outweigh consumer sovereignty arguments based on lower prices. Once economic externalities associated with low wage-low benefit jobs are taken into account, the likelihood is that low consumer prices across a variety of goods are, in net terms, very costly to society as a whole.
Define *job*??? …something you need two or three of to pay the rent??? Something that leaves you unable to realistically afford even a modest home?…Something that goes away at the touch of a button???
…Its all crap…
How much of the US labor force participation decline is due to the increasing number of overly indebted people – those who have little to no incentive to work because any earnings will be garnished for creditors? Any studies on this?
Regarding the increase in middle age women and older cohorts trying to join the work force: is this a result of actual desire to work, or due to a loss of benefits, or a partner losing employment, forcing the “choice”?
…censoring of “neoliberal” historical documentation, several times, appears defining of “interests”…
(magically, when noted, posts reappear…)
We may see what the USA is and was about, in view of their still not repudiated Monroe Doctrine. Rates of death, violence, poverty all because unlimited gangsters run USA, Mexico etc. and Canada. The civilized peoples are not allowed to intrude upon the Americas.
Socialism is no longer an experiment.
The emphasis on the fraud that is modern economics will be highlighted by a study of history.
The stupidity and stoicism of Americans is reinforced by division. NC disabled comments due to division! I suspect a few decades of misery will change things. Good news, then. USA will get its medicine. Hollywood will prosper, as an opiate.
I can’t parse that comment