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Lessons from America

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The EU can learn from the United States without neglecting the social tradition of solidarity in Europe.

Discussions in Europe on labour market reforms have been quite extensive in recent years, and this signals how important the issue is and how painful it is becoming for many European countries to have rather inefficient domestic labour markets, not to mention the still nonexistent integrated EU market for labour. Can European policy-makers, trade unions and people in general learn from the American approach? The US is much more pro-active in introducing changes in the product and service markets and in the labour market. This allows them to reap the benefits of this approach earlier than their snail-paced European counterparts. From the mid 1990s the EU and the US established a forum for discussion and co-operation on the subject but European reforms are still lagging behind, with very slow economic growth, while the US is fast moving towards a knowledge-based economy.

The unions are guilty

Some facts first: while output per hour worked is about the same in the EU and the US, Europeans work less than Americans because Europe has a lower employment rate and the average worker has fewer working hours. Compared to the US, Europe has much higher youth unemployment, and lower levels of employment among women and middle-aged people. Youth unemployment is mostly the responsibility of the trade unions, which protect insiders at the expense of those who are not members and therefore have little or no voice. Lower female participation is due to the traditional female role in the family and little support from the welfare system, especially regarding children (e.g. daytime child care with opening hours linked to office hours or child care at the workplace). Participation among middle-age people is low because of the generous pension systems. Therefore, most of the causes of poorer European performance can be related to labour market institutions and policy choices. The recent strong increase in part-time jobs and short term contracts has helped young people and women, but high unemployment persists and in any case these jobs cannot be considered a substitute for full-time jobs as, for example, they do not carry sufficient pension contributions and prevent access to housing mortgages.

European unemployment could partly be attributed to incomplete structural reforms in several sectors where excessive protection, state aid and regulations hamper competition, investments and innovations. Recent measures of “barriers to entrepreneurship” and “public ownership” reported by O. Blanchard in The Economic Future of Europe indicate that although major EU countries have improved on both accounts, they still lag far behind the US. This suggests that reforms have not been sufficiently deep in the product and service markets and in bureaucracy.

At the same time empirical evidence suggests that the welfare state is not at the origin of this weak performance in the labour market and economic growth. Changes in the labour market can be consistent with a traditional European approach of high social solidarity and an extensive welfare system, but welfare institutions need to be adapted (and sometimes expanded) to the new needs of changing economies.

Mobility and integration

The American experience can be useful in several ways, although Europe should not try to replicate the structure of the US labour markets. In the US a major source of demand for skilled young people has come from the Information Technology sector. Europe has not been quick to invest in or adopt new technologies, but a clear move in that direction within the Lisbon Strategie could stimulate growth and provide jobs for young people who are usually quicker to acquire the necessary skills.

Another proposal to improve intra-EU mobility would be to introduce pension contribution mobility for workers who move about Europe, similar to the 401K approach in the US. European workers changing jobs and countries should be able to switch their contributions from one country to another, building their retirement savings; this would favour worker movement across countries and sectors, improving supply and demand, and contributing to a real EU-wide labour market.

A third proposal involves elderly and disabled people. In the US the shortage of workers has created an opportunity for introducing reforms that treat these groups of people like real resources. These reforms help them to continue to make a contribution to society through more jobs for physically impaired people and “phased retirement” for the elderly. In line with Europe’s attitude to be inclusive and attentive to the human dimension of work, these approaches could be used also in the Old Continent.

Overall the major lesson from the US has been that of deregulation and liberalization in product and financial markets, and investment in high tech industries and research, so much so that they can now talk of a knowledge-based society. These policies have generated large efficiency gains for society and consumers, while at the same time stimulating job creation and sustained economic growth.