The Problem of Unemployment in Europe and America

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The Problem of Unemployment in Europe and America

• A Lecture at the American
• University of Paris
• September 23, 2004

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by James K. Galbraith
The University of Texas Inequality Project
http//utip.gov.utexas.edu
Based on an article co-authored with Enrique
Garcilazo published in Banca Nazionale del
Lavoro Quarterly Review No. 228, March 2004
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The Standard View

• Employment is determined in a labor market.
• Labor markets are national.
• Flexibility reduces unemployment.
• The United States has more jobs than Europe, but
  only at the expense of more inequality.
• Is this good or bad? A political question

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• Data! Data! Data!
• I cant make bricks without clay.
• Sherlock Holmes
• The Adventure of the Copper Beeches

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The U.T. Inequality Project

• Measures global pay inequality.
• Estimates global income inequalities.
• Shows now inequality has risen under
  globalization.
• Is changing our understanding of the relationship
  of inequality to unemployment.

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General Technique
We use Theils T statistic, measured across
sectors within each country, region or province,
to show the evolution of economic
inequality. The components of the statistic
provide a measure of the contribution of each
province-sector cell to inequality. This
measure takes account both of the relative income
of the cell and its size in relation to the whole
employed population. The method permits us to
map changes in the flow of incomes across regions
and across sectors very accurately through time,
using national data sources without relying on
sample surveys.
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A brief review of the Theil Statistic
The Theil Element
n employment mu average income j
subscript denoting group
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Advantages

• Our method permits us to assess the value of
  inequality at each geographic level
• Within provinces
• Within countries
• Across large regions such as Europe.

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The U.S. Case

• In the American case, we have measured
  inequalities of pay (weekly earnings) in the
  manufacturing sector on a monthly basis going
  back to January, 1947, for sectors that are
  continuously measured since that time. The
  result gives us a time series of pay inequalities
  in a key part of the American industrial economy.

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Wage Inequality and Some Historical Events
Recession
Vietnam War
Recession
Recession
Korean War
Recession
Recession
JFK
LBJ
NIXON
FORD
CARTER
REAGAN
BUSH
CLINTON
TRUMAN
EISENHOWER
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Wage Inequality and Unemployment
Open UnemploymentRate
A strong positive correlation between the
unemployment rate and wage inequality in the US
is exhibited here.
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The U.S and Europe

• First, lets compare U.S. inequality to that in
  each European country.
• Then, lets compare U.S. inequality to that in
  Europe-as-a-whole
• Finally, we ask, what is the relationship between
  unemployment and inequality in Europe?

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EHII -- Estimated Household Income Inequality for
OECD Countries
Low
High
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Now, is pay inequality in Europe really lower
than in the U.S.? It depends on how you count
The value for the U.S. on this scale is about
0.29, or roughly the height of the blue bar.
Overall European manufacturing pay inequality
including differences between countries is
higher than in the US.
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European Regional Panel Data Set

• Pay across Sectors by European Region
• From Eurostats REGIO
• Annual 1984-2000, up to 159 Regions
• Enables us to compute measures of inequality
  within and between regions.
• Permits construction of a panel with which we can
  isolate regional, national and continental effects

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Contribution of European Provinces in Inequality
Across the European continent, late 1990s.
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A Simple Theory of European Unemployment

• Demand Factors
• GDP Growth and Investment
• Wealth and Demand for Services
• Supply Factors
• Inequalities of Pay
• Transition to Work for Youth

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Hypotheses

• Growth reduces unemployment. (-)
• Higher incomes mean fewer unemployed. (-)
• Inequality increases unemployment ()
• More younger workers means more unemployed. ()

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Regression analysis of European unemployment
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Country Fixed Effects Show the Differences
Between Countries Not Explained by the
Explanatory Variables.
Centralized wage bargains?
Emigration?
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Time Fixed Effects Show the Movements of
Unemployment Across All Regions, After Taking
Account of the Regressors
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Conclusions

• Labor markets are not national.
• Macroeconomic conditions matter.
• Youth is a problem.
• Equality of pay helps.
• Flexibility does not.
• Small countries have an advantage.
• EU policies started off very poorly.
• But there is hope for the future.

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