Cyclopedia Of Economics 1st edition

IIe. Structural Unemployment

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IIe. Structural Unemployment

Most unemployment in Europe is structural (as high as 8.9% in Germany, according to a 1999 IMF study). It is the ossified result of decades of centralized wage bargaining, strict job protection laws, and over-generous employment benefits. The IMF puts structural unemployment in Europe at 9%. This is compared to the USA's 5% and the UK's 6% (down from 9%). The remedies, though well known, are politically unpalatable: flexible wages, mobile labour, the right fiscal policy, labour market deregulation, and limiting jobless benefits.

Some hesitant steps have been taken by the governments of Germany and France (cut jobless benefits and turned a blind eye to temporary and part-time work), by Italy (decoupled benefits from inflation), and by Belgium, Spain and France (reduced the minimum wage payable to young people).

But piecemeal reform is worse than no reform at all. In an IMF Staff Paper, Coe and Snower describe the Spanish attempt to introduce fixed term labour contracts. It established two de facto classes of workers - the temporary vs. the permanently employed - and, thus, reduced labour market flexibility by granting increased bargaining power to the latter. France introduced a truncated, 35-hours, working week. Other countries imposed a freeze on hiring with the aim of workforce attrition through retirement. Yet, these "remedies" also led to an increase in the bargaining power of the remaining workers and to commensurate increases in real wages.

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