There is no simple explanation or cure for high unemployment in Europe, argue the authors of a recent CEPR Report. Popular explanations, such as new technology, foreign competition or 'Eurosclerosis’ do not provide convincing reasons why unemployment should have risen so dramatically, though all of them may have had some part to play. No single factor can fully explain why so many Europeans fail to find jobs, and many of the more widely touted proposals for reform are either likely to be ineffective or politically difficult to introduce.

For example, according to the Report, the notion that the developing countries have in some sense 'stolen our jobs’ is just plain wrong. Access to a cheaper source of some goods should allow Europe to shift resources into other lines of production in which it has a comparative advantage.

Another common claim is that high unemployment is the consequence of unduly rapid technological change. Again, the Report rejects this argument: Europe’s problem is, if anything, too little, not too much technological change. And the historical evidence clearly refutes the idea that jobs are permanently destroyed by new technology: productivity today is ten times higher than in 1900, but the unemployment rate is not very different.

In comparison with the US, the expected length of unemployment spells is much higher in Europe, as is the percentage of long-term unemployment. Is this the result of Europe’s relatively generous welfare states? The Report notes that welfare provisions did not become significantly more generous between the 1960s (when European unemployment was half that of the US) and the 1980s. Thus, the welfare state cannot be blamed for the rise in unemployment, although it does help account for its persistence.

Another case often argued is that the source of Europe’s unemployment problem is the high level of job security and the consequently 'sclerotic’ nature of its labour markets. Many proposals to cure European unemployment, including the recent OECD Jobs Study, call for extensive deregulation to create US-style 'flexible’ labour markets. The Report notes that reality is actually rather different: one in every six or seven European jobs is created or destroyed each year, a rate only slightly lower than in the US and Canada.

Proposals such as those in the OECD Jobs Study would, if fully implemented, change the face of European labour markets. Some of these reforms are desirable, some less so. But could they ever happen? The Report identifies three reasons why labour market reform is politically difficult to implement in democratic societies.

First, there may be more losers than winners. The majority of the electorate are employed, and policy is in practice determined by their interests. Many of the rigidities that are thought to contribute to Europe’s high unemployment (such as minimum wages, generous unemployment benefits, high firing costs and strong unions) actually benefit some of the employed and are therefore difficult to remove.

Second, labour market reform may be difficult to implement because it is likely to benefit a very heterogeneous group which includes shareholders, skilled workers, small entrepreneurs and unemployed workers. These people may have a common interest in increasing labour market flexibility, but divergent interests on almost all other issues.

Uncertainty about who will benefit and who will lose from reform will lead to a bias in favour of the status quo. Skilled workers and the unemployed with particularly poor prospects of finding a job know for certain that they will gain from reform: the latter will find a job sooner and the former will enjoy higher wages because of the increase in unskilled employment.

The unskilled, however, are much less certain to gain because their wages will fall and/or they might be forced to relocate to other sectors. The same is true of the unemployed with good prospects of finding a job quickly and who would not like to see the wage for their next job fall. If uncertainty about the impact of reform makes the gains too diffuse for the unskilled and the better-placed unemployed, then they might end up opposing reform.

So what can be done to reduce European unemployment? This analysis suggests that the 'European model’ is a 'political equilibrium' which is very difficult to change. It need not, however, remain an equilibrium indefinitely. Just as the Swedish corporatist experiment collapsed as circumstances changed, so might the European model. Until such time, however, it is pointless to talk about sweeping changes. The best that can be hoped for are incremental changes that improve the functioning of the European economy, while still commanding enough support to be politically viable.

The Report advocates a set of reforms which appear to be politically feasible and economically desirable:

• Where possible reduce the duration for which (but not the level at which) unemployment benefits are payable.
• Erode the relative value of the minimum wage, particularly for young workers, and use in-work benefits to tackle poverty instead.
• Where the minimum wage cannot be reduced, restructure the payroll tax so as to reduce the cost of employing unskilled labour.
• Foster competition in product markets as well as labour markets.
• Improve training, but do not expect too much from it.
• Offer the long-term unemployed the option of turning their benefits into employment vouchers.

Unemployment: Choices for Europe is the fifth in the series of Monitoring European Integration Reports published by CEPR. The Report was written by a team of CEPR Research Fellows:

George Alogoskoufis (Athens University of Economics and Business)

Charles Bean (London School of Economics and Political Science)

Giuseppe Bertola (Università di Torino)

Daniel Cohen (ENS, Paris, Université de Paris I, and CEPREMAP)

Juan Dolado (CEMFI, Madrid)

Gilles Saint-Paul (DELTA, Paris)