Thursday, June 10, 2010

European Propaganda

Dan (as in Rdan) sent me a link to this article published at Eurostat, “Impact of the crisis on unemployment has so far been less pronounced in the EU than in the US”. The report states:
The unemployment rate in the EU27 has grown since the first quarter of 2008 as a result of the economic crisis. However, the increase has been smaller than in the US, where the rate has overtaken the EU27 despite having been much lower at the start of the crisis. On a more detailed level, similar patterns in the evolution of unemployment by gender and educational level during the crisis can be observed in the EU27 and the US.
Admittedly, the US unemployment rate has seen a much sharper upward trajectory than that of Europe (see chart below); but that is nothing new. Historically, the US labor market has been more flexible than the European labor market.

Alas, this report is nothing more than European propaganda; and in my view, it was written to assuage the public during a period of heightened political pressure. Pointing out that the US labor market is in worse shape perhaps makes European policymakers “feel” better.

It’s all a mirage, though (see chart below). And furthermore, the European labor market is sure to worsen markedly with fiscal austerity all the rage in Europe.

Back to the point: so why exactly is this propaganda? At 18% of the EU27’s employment in 2009 and 20% of nominal GDP, Germany’s labor policies skew the unemployment rate for the European Union as a whole. From the OECD 2010 Economic survey of Germany:
While the increase in the unemployment rate in the average OECD country was 3 percentage points, the German rate rose by only one half percentage point although the fall in German GDP was above average. This was primarily due to increased flexibility on the firm level that allowed a reduction in labour input by decreasing working hours instead of employment. In addition, the short-time working scheme, whereby the labour office replaces some of the lost income of employees if they work shorter hours, has been used extensively especially as this programme was made more generous during the crisis.
Point: The German government paid firms to hoard workers.

If you take out Germany from the EU27, you get a slightly different picture – one that is not as rosy as the Eurostat report suggests.

In the chart above, I illustrate the reconstructed unemployment rate for the EU27 ex-Germany alongside that for the US and Germany through April 2010 (using the Eurostat data, which is only available through April 2010 on the website although the May unemployment rate has been released).

Clearly, the EU27 unemployment rate is affected by Germany policy. In April the EU27 ex-Germany unemployment rate was 10.3%, which is 0.6% above that of the EU27 as a whole (including Germany). Furthermore, the EU27 ex-Germany unemployment rate surpassed that of the US, rather than the other way around as the report suggests, in January 2010.

Just thought that you should know.

Rebecca Wilder


  1. with 9.9% and 9.7 or 10.3% unemployment, it aint exactly that either one has bragging rights...

  2. Step back for a second and think the point of all this hyperkeynsian activism: To reduce the human suffering created by the business cycle. 

    But wait, Germany has achieved exactly that with less reckless spending or current account deficits. Damn them, its prophaganda!

    [if it was prophaganda, it was very bad one, considering how distorted to the lower end US unemployment numbers are compared to German ones - at least 1% up for the higher incancernation rate, another 1% up forr different measurement.]

  3. Exactly. With the coming austerity measures, the unemployment rate's set to surge! Rebecca

  4. "Kurzarbeit", as this instrument in known in Germany and Austria, has been used by the hundreds of thousands of employees in the past year, but today only a few are still on this program. It was quite a success: if those people would have been laid off, the state would have had to pay full unemployment benefits which would have cost as much as this keep-workers-on-the-payroll subsidy, but the workers would have lost one year of work experience and the companies would have had to re-hire them this year. With Kurzarbeit, the firms could increase the workload of their employees almost overnight as orders started to increase again. Most of those job require extensive training. Think about what you lose if you let workers with 10, 20 years of experience go! I am sure, one of the reasons Austrian and German products are renown for their quality is that they are made by people who know their stuff, who do their job for decades in a row because worker retention is regarded as good practice. 

    And don't underestimate morale: it is a big difference if your workweek is shortened to 20 hours instead of you being put out of work entirely. And if you get a pay cut of say 20% compared to unemployment benefits who are 50% below your wage. For a lot of people, being on Kurzarbeit is mentally much less devastating than being out of work completely. 

    Yes, it distorts the statistics but this is, at leat for now, not relevant any more. There is almost no Kurzarbeit currently.