Wednesday 26 September 2012

Immigrants don't steal jobs, inflexible labour markets do

Europe faces an unemployment crisis. But few politicians dare undertake labour market reforms which will hurt their re-election chances today, and show benefits only years later
By Jonathan Eyal, The Straits Times, 25 Sep 2012

THE numbers make for grim reading but nothing seems capable of breaking the unrelenting tide of bad news.

In the United States, jobless rates rose in more than half of its states last month, including seven of the 11 key swing states in this year's presidential election. At 8.1 per cent of the labour force, America's current unemployment is the worst it has been in decades.

Still, this pales in comparison with the 21 per cent unemployment rate recorded in Greece, or the 24 per cent registered in Spain.

Throughout the industrialised world, the plight of the jobless is not only an economic scourge, but a ticking political time bomb as well. Yet despite all the risks, politicians are still dithering, partly because the required solutions are not evident, but also because the political payoff is too remote.

The idea that the state either owes everyone a job or should be held responsible if people don't get one is relatively new. Still, it is so entrenched throughout the industrialised world as to be irrefutable. And failure is uniquely easy to quantify. If a government makes the wrong investment decisions on health or transport infrastructure, it may take years before this becomes apparent. But unemployment figures are published monthly and the slightest blip generates instant demands for a government's resignation.

No consensus has ever emerged over the core reasons for employment downturns. There is broad agreement that everything - from education and vocational training right down to trade, competition, taxation, investment and welfare - has a bearing on the problem, although the debate is hopelessly polarised by competing ideologies.

Still, some myths have been comprehensively demolished.

One is the assumption that the introduction of labour-saving devices automatically results in joblessness. Not necessarily: Britain's 19th century Industrial Revolution unleashed the biggest period of labour creation in human history.

Another myth is that in a globalised economy, jobs migrate to lower-cost countries and, once gone, are lost forever. Not true: Until a few years ago, the labour markets of most Western nations continued to grow, just as they were shedding manufacturing jobs to Asia.

And then, there is the argument that immigrants "steal" jobs from local workers. Again, no: The largest wave of immigration to Europe took place during the 1960s and 1970s, a period when the "Old Continent" continued to enjoy full employment. And Britain found work for an astonishing one million immigrants during the 1990s.

Conversely, however, a nation which has fewer job seekers because it is shrinking in size cannot necessarily expect lower unemployment. Birth rates throughout Europe are below reproduction levels but unemployment rates are at their highest since World War II.

None of this means that governments are powerless bystanders, for it is widely recognised that inflexible labour practices are major culprits. The share of social security contributions which employers have to pay are, in effect, a tax on jobs. In Germany, a company pays 17 per cent of a worker's gross salary in social charges. In France, however, the corresponding figure is 38 per cent. The result? France's unemployment rate stands at 10.2 per cent, double that in Germany.

The inability to dismiss workers in an economic downturn is another key obstacle. Germany got around this problem by pioneering legislation that allows employers to slash pay during a recession, in return for a pledge to keep employees on the payroll; in effect, workers trade the security of their earnings for employment security.

But elsewhere in Europe, this is taboo: Firing an employee in Spain is alleged to be more complex than seeking a divorce.

Trade unions do not help either. Despite their claims to "protect workers", their only interest is in defending those already in employment, rather than encourage the hiring of newcomers. That's a key reason why, on average, a fifth of those aged under 25 are without a job throughout Europe; in Greece and Spain, it's half. Even in the US, where organised labour is weaker, 17 per cent of young people have no jobs.

A faulty education system only makes a bad situation worse. Again, with the notable exception of Germany, most Western countries have abandoned any attempt to offer apprenticeships, so young people leave school with no vocational training. Half of Europe's teenagers now go to universities, but few of their degrees are in employable trades.

And then, there are the welfare payments which introduce perverse disincentives. In most European countries, it is actually more profitable to stay at home and collect unemployment benefits than take on a lowly paid job. That's why most street cleaners are still immigrant labourers, while unemployment is sky-high.

The political fallout from a prolonged period of unemployment is well known. The first result is a high degree of political volatility which precludes any serious decision making. Just ask the Spanish or Portuguese prime ministers, both of whom were recently elected with huge majorities although they had no government experience, but both of whom are already struggling to survive beyond their first year in power.

And the future can be scarier still. Long-term unemployment hits vulnerable communities hard. Even in Germany, the children of Turkish immigrants are three times more likely to be jobless.

Unemployment also increases the general sense of disenchantment with politics and breeds populist movements which reject the entire political system.

These could be fairly harmless - such as the campaigns to "occupy" public parks and financial institutions - but can also be more sinister, such as the extremist political parties now mushrooming in Europe, heirs to the fascist and communist dictatorships which destroyed the continent before.

Given such huge dangers, why are governments unable to take decisive action? Partly because the task of preserving existing jobs and that of creating new ones often require different policies which cannot be easily juggled.

But the ultimate reason for inactivity is that the political price which needs to be paid for implementing labour reforms is immediate, while the payoff can take many years to arrive.

The classic example of this is Britain's Prime Minister Margaret Thatcher who mustered the courage to tear up Britain's trade union-dominated labour market in the 1980s. It is by now largely forgotten that her country continued to suffer from a 10 per cent unemployment rate (similar to that in France today) for another decade; the real economic boom only came to Britain in the 1990s, to the benefit of the opposition Labour Party.

The same happened in Germany, where Mr Gerhard Schroeder, a socialist chancellor, was reviled for ramming through labour reforms which are now helping Dr Angela Merkel, his political opponent, to showcase Germany as one of the world's most vibrant economies.

A study completed by the Organisation for Economic Cooperation and Development, a club of rich states, earlier this year indicates that a full payoff from employment reforms takes, on average, about five years to materialise - too long for any politician.

In reality, not all countries currently afflicted by high unemployment figures are in the same predicament. The US labour market is far more flexible than Europe's. Americans are also used to moving in search of jobs and their nation has many other advantages (including that of a young population) to help it bounce back.

There is also the possibility that new technologies, such as additive manufacturing - or 3-D printing - will result in a return of jobs which once moved to Asia, the so-called "onshoring" which currently excites some US economists.

But Europe enjoys none of these advantages, and has to reinvent itself in the middle of a global economic downturn. The chances are, therefore, high that the armies of Europe's unemployed will simply continue to grow.

As the prime minister of Luxembourg, one of Europe's smallest and least-troubled countries, once memorably summed up the predicament: "We all know what to do; we just don't know how to get re-elected after we've done it."

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