NCPA - National Center for Policy Analysis


May 8, 2009

Unemployment is taking a very different human toll on opposite sides of the Atlantic, which helps explain why Europe and the United States can't agree on how to attack the global recession.  The United States is spending hundreds of billions of dollars -- including increased assistance to the unemployed -- to prop up the economy, and wants Europe to follow suit.  But most of Western Europe already has a strong, if costly, social safety net, so governments feel less pressure to spend their way out of trouble.  The irony is that for years, Europe tried to rein in its own worker protections -- long considered a drag on growth in good times -- to emulate the faster-growing U.S. economy.  Now the United States is moving toward a more European system, says the Wall Street Journal.

The differing U.S. and European approaches toward worker protections can influence recovery prospects, says the Journal:

  • Unemployment is similarly high, above 8 percent and rising, both in the United States and among the 16 European countries that use the euro currency.
  • But Europe's high payroll taxes, along with restrictions on when and how companies can lay off workers, make employers slower to rehire when a recession ends.

That's one reason why economists expect the United States to stabilize faster than Europe.  Last month the International Monetary Fund predicted that the euro-zone economy will keep shrinking next year, whereas the United States should bottom out by then:

  • In most Western European countries, the state replaces 60 percent to 80 percent of the average worker's lost salary, compared with just over half on average in the United States.
  • European benefits also tend to last longer; for example, in Belgium, jobless benefits have no time limit at all; in Denmark, the state replaces up to 90 percent of lost wages and invests over 4 percent of gross domestic product every year in supporting and retraining the jobless.
  • By contrast, before the current crisis struck, the United States spent about 0.4 percent of GDP on retraining and benefits, according to the Organization for Economic Co-operation and Development (OECD).

The European way takes a toll in taxes, says the Journal:

  • In Germany, for instance, over half the total cost of employing somebody consists of income tax and mandatory contributions to programs including unemployment insurance and pensions.
  • In the United States that figure is 30 percent -- meaning employees take home more of the money it costs to employ them.

Source: Marcus Walker and Roger Thurow, "U.S., Europe Are Ocean Apart on Human Toll of Joblessness," Wall Street Journal, May 6, 2009.

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