Unemployment, Labor Market Regulation, and Sour Grapes
By Bryan Caplan
Unlike the authors of the CEPR report, John Quiggin at Crooked Timber is willing to make me a bet about European vs. American unemployment. However, he wants to adjust for incarceration rates:
I’m willing to take Bryan on, with one amendment. I will take the bet provided that people in prison are counted as unemployed. By my estimate, that raises the US rate by about 1.5 percentage points and the the EU-15 rate by about 0.2 percentage points. That is, assuming current imprisonment rates remain unchanged, the bet is that the Eurostat measure of unemployment (which excludes prisoners) should be no more than 2.3 percentage points higher in the EU-15 than in the US.
I’m willing to negotiate the point spread – over email, I offered Quiggin 1.5 percentage-points. But I don’t want to add his incarceration rider, because it muddies the issue of labor market performance. While I think that America’s labor policies are better than Europe’s, I think that America’s penal policies are worse – and likely to remain so. 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.
The really interesting part of Quiggin’s response to me, though, is his conclusion: America’s unemployment advantage is no big deal, anyway:
[A]lthough the US is middling on unemployment outcomes, it’s an outlier on a range of measures that have been presented as important in promoting high employment. In addition to higher geographical mobility, it has very low minimum wages (lower now in real terms than it was in the mid-1950s), very weak trade unions, almost no restrictions on hiring and firing, and very limited welfare benefits for unemployed workers…
In political terms, it’s hard to see how the pressure to adopt “more flexible” labour market institutions can be justified by reference to the US example. While lower unemployment is better, it’s hard to see why a country with a decent minimum wage, strong union movement and good social welfare systems would want to scrap those things to achieve a one percentage point reduction in unemployment.
My reaction: When I was an undergraduate, left-wing economists took unemployment more seriously than other economists. They argued that a job is a lot more than a source of income; it is also a source of happiness, self-respect, and political stability. I think they were right: A heavy-duty safety net is no substitute for financial independence.
As the superior unemployment performance of the U.S. model has become clearer, however, left-wing economists have started thinking about unemployment in more conventional terms. The most plausible explanation for this transition is sour grapes: Since freer labor markets create lower unemployment, lower unemployment isn’t an important achievement. If you’ve got a more charitable explanation, though, I’m listening.