The Problem of Unemployment in Europe and America

The Problem of Unemployment in Europe and America A Lecture at the American University of Paris September 23, 2004

by James K. Galbraith The University of Texas Inequality Project http://utip.gov.utexas.edu Based on an article co-authored with Enrique Garcilazo published in Banca Nazionale del Lavoro Quarterly Review No. 228, March 2004

The Standard View • Employment is determined in a labor market. • Labor markets are national. • Flexibility reduces unemployment. • The United States has more jobs than Europe, but only at the expense of more inequality. • Is this good or bad? A political question

“Data! Data! Data! I can’t make bricks without clay.” Sherlock Holmes The Adventure of the Copper Beeches

The U.T. Inequality Project • Measures global pay inequality. • Estimates global income inequalities. • Shows now inequality has risen under globalization. • Is changing our understanding of the relationship of inequality to unemployment.

GeneralTechnique We use Theil’s T statistic, measured across sectorswithin each country, region or province, to show the evolution of economic inequality. The components of the statistic provide a measure of the contribution of each “province-sector cell” to inequality. This measure takes account both of the relative income of the cell and its size in relation to the whole employed population. The method permits us to map changes in the flow of incomes across regions and across sectors very accurately through time, using national data sources & without relying on sample surveys.

A brief review of the Theil Statistic: “The Theil Element” n ~ employment; mu ~ average income; j ~ subscript denoting group

Advantages • Our method permits us to assess the value of inequality at each geographic level: • Within provinces • Within countries • Across large regions – such as Europe.

The U.S. Case • In the American case, we have measured inequalities of pay (weekly earnings) in the manufacturing sector on a monthly basis going back to January, 1947, for sectors that are continuously measured since that time. The result gives us a time series of pay inequalities in a key part of the American industrial economy.

Wage Inequality and Some Historical Events Recession Vietnam War Recession Recession Korean War Recession Recession TRUMAN EISENHOWER JFK LBJ NIXON FORD REAGAN BUSH CARTER CLINTON

Wage Inequality and Unemployment Open UnemploymentRate A strong positive correlation between the unemployment rate and wage inequality in the US is exhibited here.

The U.S and Europe • First, let’s compare U.S. inequality to that in each European country. • Then, let’s compare U.S. inequality to that in Europe-as-a-whole • Finally, we ask, what is the relationship between unemployment and inequality in Europe?

EHII -- Estimated Household Income Inequality for OECD Countries Low High

Now, is pay inequality in Europe really lower than in the U.S.? It depends on how you count… The value for the U.S. on this scale is about 0.29, or roughly the height of the blue bar. Overall European manufacturing pay inequality –including differences between countries – is higher than in the US.

European Regional Panel Data Set • Pay across Sectors by European Region • From Eurostat’s REGIO • Annual 1984-2000, up to 159 Regions • Enables us to compute measures of inequality within and between regions. • Permits construction of a panel with which we can isolate regional, national and continental effects

Contribution of European Provinces in Inequality Across the European continent, late 1990s.

A Simple Theory of European Unemployment • Demand Factors: • GDP Growth and Investment • Wealth and Demand for Services • Supply Factors: • Inequalities of Pay • Transition to Work for Youth

Hypotheses • Growth reduces unemployment. (-) • Higher incomes mean fewer unemployed. (-) • Inequality increases unemployment (+) • More younger workers means more unemployed. (+)

Regression analysis of European unemployment

Country Fixed Effects Show the Differences Between Countries Not Explained by the Explanatory Variables. Centralized wage bargains? Emigration?

Time Fixed Effects Show the Movements of Unemployment Across All Regions, After Taking Account of the Regressors

Conclusions • Labor markets are not national. • Macroeconomic conditions matter. • Youth is a problem. • Equality of pay helps. • Flexibility does not. • Small countries have an advantage. • EU policies started off very poorly. • But there is hope for the future.

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The Problem of Unemployment in Europe and America