Labor institutions and unemployment - comparing the US and Germany

The dramatic growth of unemployment in the US can’t be seen only as a consequence of the crisis: one of the cause is  the total deregulation of the labor market. The German case and the EU attack to he European social model.

In their  violent campaign against President Barack Obama, Republicans did not advance  any alternative policy to face the economic  crisis. Despite this, they gained an electoral success. In  just over two years the American political landscape has  changed  at an appalling  speed. Hit by the worst economic crisis since the Thirties,the Western world hopefully watched the advent of the new US president. Why  such a  radical reversal? What was Obama’s mistake?

Once to the White House, Obama implemented two major political plans. He launched an  economic stimulus package, including tax cuts for the lower classes and investment, for about $ 800 billion. And he embarked on the reform of the health care system , to remove the shame of almost fifty million people without health insurance in the richest country on the planet.

Could the President do more to promote the economic recovery and fight the rising tide of unemployment? There is no doubt that the fiscal stimulus should have been significantly larger, as many liberal democrats and progressive economists advocated. And,  following the “public option”, the heath care reform could have been more consistent and effective in reducing the hold of insurance companies that drives the overall costs to incomparable levels.

A bolder policy was certainly possible on these two issues. However, the Republicans were against any proposal, their political objective being just the fight against the new President. They fought the midterm elections on two main issues: the unemployment and the opposition to the health care reform. They had no proposal  for the unemployment, except for a restrictive fiscal policy. On the second, they insisted on  the ridiculous arguments such as the “death panels” or the socialist subversion of the individual freedom. Despite of that, they have triumphed.

What didn’t work on the side of Obama’s administration? The monetary policy  brought the interest rates close to zero, and  a massive “quantitative easing” was used by the Fed to bail out banks, while a new package worth $ 600 billion was announced by Bernanke to “monetize” part of the public debt. As for  fiscal policy , a consistent package, wider than in any other OECD country, had been improved, as we have seen, to strengthen the recovery and sustain the employment.

So an intriguing question arises. How is it possible that, despite these monetary and fiscal extensive measures, US  joblessness  has  doubled between 2007 and 2009, rising from seven to almost fifteen million, that is, from 4.6 % to 10% of the workforce? A conservative answer is that part of the new unemployment has structural causes, such as the “mismatch” factor, meaning that firms can’t find workers with appropriate skills. This is the recurring, metaphysic, argument used to accuse the workers for being jobless.

To find an answer, we must look at the labor institutions. The dramatic growth of unemployment in the US can’t be seen only as a consequence of the crisis. One, not minor factor, has to be figured out in the extensive deregulation of the labor market,  which a Keynesian therapy alone, based on monetary and fiscal remedies, could hardly cure.

Let’s make a comparison with  the European Union.  Over 2008- 09 the cumulative GDP drop was 4.2% in the EU against 2.6% in the US. Despite that, the average unemployment increased between 2007 and 2009 by 1.7% in the EU compared with 4.7 in the United States.

The German figures are even more significant. In 2009, at the top of the crisis, GDP dropped there by about 5%, almost twice the figure for the United States, but unemployment rose in Germany only from 7.3% to 7.5%  between 2008 and 2009.  And if we look to the whole period, the OECD calculates that in Germany, unemployment fell from 8.4 %(average 2007) to 6.8% by the third quarter of 2010.

This sharply different outcome doesn’t come from any expansive policy in UE or Germany, but from the different rules in the labor market. In Germany, and in Europe, the labor market offers different levels of protection to the workers, while generally in the US companies hire and fire freely. These have taken advantage of the crisis to execute mass layoffs well beyond the output fall. That allowed a stunning labor productivity growth by 3.8 per cent between 2007 and 2009 in the US against, in the same period, a decrease of 1.3% in Germany. Therefore, it is unsurprising that profits for the 500 S&P listed companies reached, according to Fortune, one of the highest levels over the last fifty years. In the same time the overwhelming rise of unemployment has increased poverty and,  according to the WSJ (In U.S, 14% Rely on Food Stamps, November 4, 2010), 45 millions of individuals depend on food stamps assistance.

It must be added that, when the job is lost, the protection of workers’ earnings is generally higher in Europe. For instance, the State expenditure for unemployment benefits amounts to 1 % of GDP in the US, while it touches on average 1.4% in the OECD countries and is almost double (1.9%) in Germany, according to OECD estimates.

Over the last decades neo-liberal economists have praised the American model of labor market deregulation, while the European work protection was blamed as old fashioned and detrimentally rigid. The current crisis tells a different story. The total deregulation of the US labor market has  brought  dire consequences, whilst the much criticized European labor rigidity has limited the unemployment and, from this point of view, the impact of the crisis.
In this framework the role of Trade Unions is particularly relevant. In the European Union Trade Union membership fell during the last two decades, although  still reaching high levels - around 60 percent of the workforce -  in the Nordic countries.  And even if the membership is limited, the Unions’ negotiation generally covers a majority of the workforce. In Germany, for instance, the Trade Union membership has dropped over the last two decades to 20%  of the workforce, but the collective bargaining directly covers more than 50 percent of the workforce and sets the reference for the non-unionized. In the US Trade Unions membership  covers about 12%, and falls to 8% in the private sector . 

Paradoxically , the European Union’s monetary and financial authorities consider the labor market regulation and the welfare “generosity”, which are part of the European social model, an evil to fight. The Frankfurt-Brussels axis, that is, the European Central Bank and the European Commission, have  imposed to the member states  tough "austerity" programs, based on the Maastricht fiscal constraints, that will inevitably slow down the recovery. And, beyond the austerity plans officially aimed to reduce the budget deficit, a cluster of measures  are envisaged  for more extensive deregulations in the labor market and additional welfare state cuts. A  political reverse in direction of Herbert Hoover, which could only exacerbate and lengthen the economic  crisis.

So, we can  see two very  different attitudes. In the US the fight to reduce  unemployment through an expansive macroeconomic policy has been overturned by the harshly deregulated labor institutions. In the European Union, where unemployment has been contained, nonsense austerity plans are  trying to dismantle what is known as the European social model.

In  conclusion,  the fight of the progressive opinion and political parties to avert a dismal lost decade on the two side of the Atlantic has to face different, but convergent tasks: in the US, an enhanced Obama administration’ commitment to promote the needed economic and social changes, avoiding the low road of an illusory compromise with the Republican opposition; in Europe the capability of the left parties and the Trade Unions to drive the mass discontent and protest against the neo-conservative approach of Frankfurt- Brussels axis.