The Economy's Good News: The Upside of Downsizing

Policy Backgrounders | Economy

No. 146
Wednesday, February 25, 1998
by W. Michael Cox & Richard Alm

Lessons from the European Community

Even if unemployment is brief, it is unsettling, and societies are always tempted to look for ways to avoid layoffs. Policies to save existing jobs, however, will not make Americans better off. The economy will remain vibrant and forward-moving only if it can redistribute its labor resources in response to changes in demand and advances in technology. Efforts to protect jobs by short-circuiting the churn invariably produce higher unemployment, slower job growth and lower productivity growth in the long run.

A comparison between the United States and the European Community bears this out. While America's labor market remains relatively unregulated, many EC nations, hoping to thwart job losses, have saddled employers with burdensome rules on when and how workers can be dismissed. The red tape and reproach firms face if they attempt to cut jobs make them wary of hiring new workers in the first place. With few new opportunities opening up, workers cling to existing jobs. As a result, too many of Europe's labor resources remain frozen, and companies cannot respond quickly and aggressively to changes in the market.

"Europe's efforts to save jobs have instead resulted in unemployment rates of 10 percent or more."

The EC may have managed to "save" a few existing jobs, but the cost in economic performance has been high. Growth is slower. Productivity gains are meager.19 And workers have fewer prospects.

  • The United States has added 15 million jobs since 1990, a gain of 13 percent, while the EC has created 5 million, or just 3 percent.
  • For most of this decade, unemployment in the EC has been at 10 percent or more, double the U.S. rate.
  • Worse yet, more than 5 percent of the EC's labor force has been out of work for a year or more, while in the United States the figure is less than three-fourths of 1 percent.

Read Article as PDF