European Unemployment Will Rise

What can Europeans teach Americans about increasing employment? Until the financial crisis and recession of the last two years, the answer very clearly would have been "nothing." The European social-democratic model has many virtues, but getting people into work and keeping them there has never been chief among them. Until now. Much ink has been spilled in recent months over the fact that the American and European unemployment rates are now roughly on par at about 10 percent, while a number of Northern European economies—including Germany (7.5 percent), Denmark (7.4 percent), Austria (5.4 percent), and the Netherlands (4 percent)—are well below that. Even as U.S. multinationals send jobs abroad, big European companies like Siemens are adding them at home. Every day seems to bring news of a new turbine factory being built in Denmark or Germany. Newspaper headlines proclaim the European "jobs miracle." As American unemployment figures stay high, economists on both sides of the Atlantic are debating whether the U.S. should start adopting a more continental approach to labor policy.

To answer this, it's important to understand the nature of the "miracle" and whether it has legs. Unlike downturns past, European nations have kept unemployment figures low relative to the U.S. this time around because Europe's labor markets have evolved to depend less on subsidies that keep people on the dole than government schemes to put them back to work quickly. What's more, rather than focusing solely on jump-starting their economies via stimulus, as the U.S. has, Northern Europe has thrown its resources at keeping people at work—by any means necessary.

In the Scandinavian countries, that has involved large and successful retraining schemes to get laid-off workers back into jobs quickly. But in these and other nations, namely Germany, jobs have also been kept by cutting hours. Rather than laying off workers, a number of European companies have opted to cut full-time schedules by a third or more as part of larger government schemes to avoid mass layoffs. Companies save money on salaries because the government picks up the cost of the pay cuts, including payroll taxes. It's a successful stopgap, but one that adds to the national debt and also has the potential to distort European labor markets. Since the subsidies aren't linked to whether jobs are productive, they could inadvertently prop up bloated payrolls in industries that need to slim down—such as, for example, the automobile industry. "These schemes are successful now, but they could become very risky if the recovery is prolonged," says economist Paolo Guerrieri of the University of Rome.

What's more, economists note, European unemployment trends tend to lag behind those of the U.S.—meaning that while American unemployment will probably peak this year, the big European economies will see numbers continue to rise into 2010 and 2011. Germany, for example, is on track to rise 2 full points, hitting 9.5 percent unemployment by 2011, according to Deutsche Bank. The U.S. rate is expected to fall by roughly the same amount over that period. Meanwhile, the U.S. economy will grow about 3 percent per year, the euro zone around 2 percent. Even nimble Denmark won't move past 1.8 percent. So, who's really solved the problem of creating jobs and growth?

The Europe-versus-America comparisons fall short in other ways, too. For starters, nations that had real-estate bubbles suffered more job losses because the construction and real-estate sectors are huge employers—and, in this respect, the U.K., Spain, and Ireland share more in common with the U.S. than with the rest of Europe. Also, certain small European nations enjoy unusually comfortable niches in the global economy. Tiny Norway can keep growth high and unemployment low because it is blessed with oil, gas, and an enormous sovereign wealth fund, unique factors that make it useless as a model for others. Sweden is also uniquely positioned: because it deregulated smartly in the 1990s, it became a chief supplier of key capital goods, like telecom infrastructure to big emerging markets, that are still growing fast. China's buoyancy, along with some well-structured state subsidies, is a key reason Sweden will grow 2 to 3 percent in the next two years, after contracting 4.7 percent last year.

All this underscores the fact that while Northern Europe has handled the crisis relatively well up to now, the future is hardly bright. Indeed, economists say that Europe's usual slower-growth, higher--unemployment trend line will reemerge in the years ahead, not only because Europe is moving faster to tackle its mound of crisis--related debt (which will constrain its ability to grow over the short and medium term), but also because of demographic facts. As Holger Schmieding, Merrill Lynch's head of European economics, notes, "Americans are having and will have more babies than Europeans in the future, which will keep them growing faster for a long time." Bottom line: cooperation among the state, companies, and workers in Northern Europe has stemmed the job problem in the short term. But it doesn't erase the transatlantic facts of life.