In 2009, the U.S. unemployment rate exceeded Europe’s for the first time in decades. Apologists for European labor market regulation rejoiced, so I publicly bet that European unemployment would exceed U.S. unemployment over the next decade. The original authors I targeted turned me down, even after I offered a 1 percentage-point spread. But noted economist John Quiggin took the bait. Our final terms:
The stake is $US100 and the agreed criterion is that, for Bryan to win, the average Eurostat harmonised unemployment rate for the EU-15 over the period 2009-18 inclusive should exceed that for the US by at least 1.5 percentage points.
Ten years later, the bet’s results are now in. The average U.S. unemployment rate during this decade was 6.8%. The EU-19 (the original EU-15 plus the Baltics and Slovakia) was 10.3%. Since the EU-15 is no longer widely available, Quiggin would have been within his rights to hold out for slightly adjusted numbers, but via email he has nobly decided to concede. Since the Baltics and Slovakia have low populations, they couldn’t sway the final figure much – and in any case, unemployment rates for the Baltics and Slovakia aren’t major outliers. The upshot is that I won the European unemployment bet by an enormous margin of 2 full percentage-points (on top of the original 1.5 percentage-point edge). And remember: The U.S. had higher unemployment than Europe when the bet began.
What does this all mean? To me, this bet is just a small extra piece of evidence in favor of the orthodox and blindingly obvious theory that Europe has higher unemployment than the U.S. because it has stricter labor market regulation. Flexible labor markets respond more sharply to shocks, but yield lower unemployment rates overall. As I originally explained:
During the dot-com bust, U.S. unemployment remained below Europe’s, but it clearly rose faster. Isn’t this further evidence that the mainstream case against European labor market regulation is overstated?
On the contrary, this is precisely what the mainstream case predicts! Europe makes it harder to get rid of workers, so it’s only natural that when a big shock hits, U.S. unemployment rises more. However, precisely because it is easier for American wages to adjust and American employers to change their minds, our labor market is also relatively quick to recover.
Disclosure: From the outset, Quiggin argued that the U.S. unemployment rates were artificially suppressed by high incarceration. This has always seemed crazy to me, as I explained back in the day:
From a labor market perspective, though, Quiggin’s incarceration adjustment would only make sense if you thought that most or all of the people in jail would be unemployed if they were released. That doesn’t make sense to me – while the people currently in American prisons might not be model workers, most of them could easily be gainfully employed on the outside.
Notice: Even if you think inmates have zero desire to work, you’d expect their removal from society to boost measured labor force participation, not cut measured unemployment. After all, to keep counting as unemployed, you have to keep trying – and failing – to find a job.
That said, I heartily commend Quiggin for actually making our bet. He towers above all of the apologists for European labor market regulation who refuse to put their money where their mouths are.
Stepping back: Isn’t it possible that European-style labor regulation still helps workers, because the extra wages outweigh the lost hours of employment? To be fair, this optimistic story is consistent with standard estimates of labor demand elasticity. However, the optimistic story overlooks a pessimistic truth: Most of the harm of unemployment is psychological, not material. Holding income constant, the employed are much happier than the unemployed. Hence, no sensible person would want to see U.S. workers’ wages rise by 10% if the unemployment rate rose 3.5 percentage-points as a result. And psychology aside, remember that the welfare state forces active workers to support the idle. So when regulation forces wages up, even the lucky workers who keep their jobs ultimately forfeit much of what they gain.
What did I learn from this bet? Back in 2009, I was unaware that Germany had seriously liberalized its labor markets a few years earlier. Since then, German unemployment has fallen from a peak of over 11% in 2005 to 3.3%. The Great Recession barely happened in Germany; unemployment inched up from 7.1% in late 2008 to 7.9% in mid-2009, then continued its free fall. There’s no reason all of the other high-unemployment countries in Europe can’t swallow their pride and follow Germany’s path to progress. Well, unless “We’re too busy debating populism versus socialism” counts as a reason.
By my count, this betting victory brings my record to 19 wins, 0 losses. Yes, perhaps I’ll see my first defeat later this month. But even if I do, I’m not afraid to repeat that I have publicly demonstrated that my judgment is good. And in my demonstrably good judgment, radical deregulation of Europe’s labor markets is long overdue. I’m happy to make the Quiggin bet all over again with anyone who’s interested, but what’s the point? My homeschooled sons understood all of this when they were 12. Forget ideology. Let’s all join hands, admit that labor market regulation is a scourge, and tear down these paper walls.
READER COMMENTS
Brett
Mar 4 2019 at 10:10am
It’s worth remembering, too, how recent much of the strict labor market regulation is (“recent” as in “past 50 years”). A lot of the labor regulation associated with France dates back to the early 1970s and later, and it unsurprisingly led to a rise in the unemployment rate later that decade that they never truly came all the way back down from.
robc
Mar 4 2019 at 10:17am
A loss will be good for you. A perfect record means you aren’t placing enough bets.
cbor
Mar 4 2019 at 12:00pm
By far the biggest limitation on Bryan’s portfolio of bets is finding people willing to put their money where their mouth is.
Patrick S
Mar 5 2019 at 9:04am
Alternately, it could simply mean that he can’t find enough takers to be able to make the number of bets he would like to.
scipio
Mar 4 2019 at 11:08am
The issue I see in your article is that you seam to put into the same basket all the kind of worker, including the “poor” worker, who, on paper, have a job, but who don’t earn enought to live correctly.
I would be genuinly interested to see the employment rate, with those kind of job, wich only exist in a market without much if any labor regualtion, considered on the other side of the equation (i.e. included, for calculation purpose, nto the unemployment rate)
It is especially flagren in germany and the UK, where small “0 hours” job have sprung due to deregulation, effectively counting those people as “working”
Eelco Hoogendoorn
Mar 24 2019 at 4:39am
People with zero-hour contracts are often working full-time; what they dont have is a guarantee they will be doing that in the same place the next month as well. Are you saying that people with a zero-hour contract that only work a day a week are counted as fully employed? That would be a methodological problem indeed; youd hope the metric being compared here would at least wield the same definitions though.
Charles
Mar 4 2019 at 12:09pm
Correlation does not imply causation. While stricter labor laws may be a contributing factor, the US and EU are wildly different economies.
Andre
Mar 4 2019 at 1:38pm
@Charles
That right there is the reason for betting in the first place.
So that folks offering arguments like that can put their money where their mouth is. 🙂
LK Beland
Mar 4 2019 at 2:42pm
As Bryan Caplan points out, differences in labor market regulation were likely important factors.
Differences in monetary policy were also likely important factors. In 2011, the Fed started QE2, while the BCE raised the interest rate twice. This enabled further recovery in the US, while the Euro Zone underwent a double-dip. In general, the Fed’s dual-mandate likely promotes lower unemployment rates than the BCE’s single-mandate.
Adam Daniels
Mar 4 2019 at 4:27pm
If you were to suggest to libertarians in the Eurozone one regulation to focus on getting off the statutes, what would you go for: unions, minimum wage, working hours, redundancy compensation entitlements?
Christophe Biocca
Mar 4 2019 at 6:06pm
Picking on France specifically, the mechanism by which a convention collective, a union-employer agreement covering a set of companies operating in the same sector, can be (and very often is) extended by the labor ministry to apply to the entire sector, is a big issue.
It encourages established players to encode salaries, benefits, training requirements, and other things into a convention, then lobby the ministry to enforce it on their competitors. This turns collective bargaining from what is in theory a dispute-minimization mechanism, to a tool for combined employer/employee rent-seeking by blocking new entrants with cheaper labor from competing.
Shane L
Mar 4 2019 at 5:24pm
Good work by Bryan and John! I also looked at the average unemployment rates for the period for the EU15 countries, but individually. (I used what I think is the same source as Bryan and John, the Eurostat table “Unemployment by sex and age – annual average [une_rt_a]”.) Note the enormous diversity:
Greece 21.0
Spain 20.9
Portugal 12.2
Ireland 11.5
Italy 10.5
France 9.7
Finland 8.3
Belgium 7.7
Sweden 7.6
UNITED STATES 6.8
Denmark 6.7
United Kingdom 6.6
Netherlands 5.7
Luxembourg 5.5
Austria 5.3
Germany 5.2
These are averages, of course, and conceal considerable fluctuation over the period. The single worst year for any country was 2013 for Greece (27.5%) and the single best was 2018 for Germany (3.4%). All of these countries have different social welfare systems, so generalisations about Europe may be a bit unhelpful.
Thomas Sewell
Mar 5 2019 at 12:47am
Shane,
Consider applying the topic of this post, the level of labor market regulations, to the countries in your comment and seeing if having a less regulated labor market between the EU countries is consistent with a lower unemployment rate?
You could start by noting Bryan’s comment about Germany de-regulating their labor market is consistent with their accomplishment as the best average for the decade.
In fact, I’d wager the information on how labor regulations affect employment rates in EU countries is already out there in a study…
Shane L
Mar 5 2019 at 9:14am
Thomas, I’d say there’s a good chance you’re correct. I was nit-picking, indeed.
Rob Wiblin
Mar 5 2019 at 1:34am
How much of this could also be down to excessively contractionary Euro monetary policy over this period?
John Thacker
Mar 5 2019 at 2:24pm
It certainly could, and I think there’s something to it, though the more one emphasizes that as the main route (instead of different labor market regulations), the more one has to agree that the eurozone is not a optimal currency area (and that the ECB sets rates based on what is good for Germany instead of the eurozone as a whole.) The labor market regulation argument provides an alternative way to explain Germany’s good performance (its own labor market reforms); concentrating on monetary policy makes the euro look like more of a mistake.
Blaise
Mar 5 2019 at 10:33am
“By my count, this betting victory brings my record to 19 wins, 0 losses.” This is impressive and shows you have a good judgement also for choosing your bets and opponents. It also appears that you’re going to lose a very important bet on climate change though: http://standupeconomist.com/an-update-on-my-global-warming-bet-with-bryan-caplan-and-alex-tabarrok/
Andre
Mar 5 2019 at 2:55pm
Looks premature to be calling that one. Still has more than a decade to run.
Nathan Benedict
Mar 5 2019 at 12:12pm
Bryan, have you ever dealt with this group of people? I have, and I can assure you that you are being extremely generous when you say that most inmates could be gainfully employed. I would put the number more around 20-25%.
Aleksander
Mar 5 2019 at 7:18pm
If you’re going to switch metrics from wages to happiness, shouldn’t you consider the possibility that people in stable jobs are happier than people who could be fired at a moment’s notice? I’m not sure of the answer, but the psychological argument for free markets is much more dubious than the material. The US isn’t the happiest country in the world.
PDV
Mar 8 2019 at 1:21am
I think you’re misattributing a large portion of the German economic growth. Not to say that labor market deregulation hasn’t helped; I expect that it has. But looking at the German economy, you have to acknowledge the elephant in the room: The Eurozone. The Euro lets Germany increase exports sharply and continuously, without the exchange rates actually reflecting the strength of its economy. Everyone else who uses the Euro is effectively subsidizing German exports, to their great detriment and Germany’s great benefit.
I am not an economist, so I have no idea what magnitude that effect would be expected to have on German unemployment. How much that accounts for and how much deregulating labor accounts for, I do not know. But I do know enough economics to know the sign of the effect.
More generally, I very much like the framing of exchange rates as self-regulating trade barriers. (I believe this framing is originally due to Jane Jacobs, who despite abysmal rigor had a number of very interesting ideas.) Essentially, when an economy is weak, it produces less value, and fewer people want to buy its goods. So its currency weakens to accommodate the balance of trade. This makes goods from outside the currency more expensive – effectively erecting a tariff wall on imports – and goods from inside the currency cheaper to outsiders – effectively subsidizing exports. This achieves the two goals of protectionist trade policy, namely incentivizing domestic industry (the more work done locally, the less added value is affected by the exchange-rate multiplier) and boosting exports (self-explanatory). When the economy, thus stimulated, starts producing more value, the trade imbalance moves back toward even and the ‘tariffs’ and ‘subsidies’ vanish.
This framing suggests that currencies should be as small as possible, and makes clear why the Eurozone was inevitably going to cause the Mediterranean collapse: The weak economies in Spain, Italy, and Greece, when they were on their own currencies, would allow their labor to become pseudo-subsidized and so jump-start their economies. Instead, they’re yoked to Germany, diluting the effect of their small, troubled economies into the pool of Germany’s large, successful one. It also suggests that the American South is well and truly screwed and will remain so as long as one currency covers the entire US of A.
A Country Farmer
Mar 8 2019 at 2:09pm
This post of yours hit the front page of Hacker News – a Silicon Valley-based technology news site, and you may find some criticisms there interesting: https://news.ycombinator.com/item?id=19339569
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