Unemployment is one of the biggest economic and social problems in Western Europe. It is a cause for concern among economists and politicians because of the strain it places on the public budgets and tax revenues of welfare states. Unemployment also affects the region’s competitiveness: the rate of unemployment in the European Union (EU) is significantly higher than in its main economic competitors, Japan and the USA. The rate of unemployment in the EU averaged 7.7% in 2002. In the euro area it is 8.4%, and if the 10 accession states are included, the rate rises to 8.8%. This compares with overall unemployment levels of 5.4% in Japan and 5.7% in the USA in 2002. The average unemployment rate for the EU, however, conceals wide national differences between countries such as the United Kingdom, Sweden and the Netherlands, where unemployment is lower than in the USA, and Spain, Italy and Germany where it is higher. The EU unemployment rate is particularly high among three groups: the young, the unskilled, and those living in economically depressed areas. There is also significant long-term (one year or longer) unemployment. Unemployment is higher among women than among men. The respective rates in 2003 were 9.9% and 8.2%.
The cause of unemployment in Europe is considered to be predominantly structural rather than cyclical. Unemployment has risen steadily in Western Europe since the 1970s and in most European countries it has risen from one recession to the next as the loss of industrial employment during an economic slump has not been compensated by the growth of new employment in, for example, the service sector. In the 20 years to 1997 the EU created only 5m. new jobs, 1m. of which were in the private sector. In the USA the figure was 36m. new jobs, of which 31m. were in the private sector. Economists point to labour market rigidities in EU member states as the key factor explaining high rates of unemployment and the difficulty in creating new jobs. These rigidities include the length and generosity of welfare benefits, employment protection, high payroll taxes, centralized wage-bargaining and mobility problems within and across EU states. From this perspective it is argued that the wholesale deregulation of labour markets would increase the incentive for the unemployed to return to them, and that for employers to create new jobs.
However, the deregulation approach has limited appeal among EU member states. Only the United Kingdom (until 1997) had a US-style deregulated labour market; other governments prioritize income equality, social cohesion and re-election over welfare retrenchment and labour-market liberalization. Research has demonstrated that there is no direct causal link between labour-market regulation and high levels of mass unemployment, and that, therefore, wholesale deregulation is not the most effective way of tackling unemployment. Instead, labour-market regulation affects the structure of unemployment if it favours ‘insiders’ (core male workers) at the expense of ‘outsiders’ (the young, the low-skilled, and women). It makes no sense to tackle unemployment with an approach of wholesale deregulation. Rather, measures are required that target unemployment ‘hotspots’, and that are appropriate to national labour-market institutions.
The Netherlands tackled its unemployment problem in the 1980s (successfully) by negotiating wage restraint with social partners and expanding part-time employment. Sweden and Denmark have (successfully) used active labour-market policies (job search and retraining) to return the unemployed to the labour market. On the other hand, France and Germany have (unsuccessfully) sought to bring down unemployment by reducing the supply of labour (early retirement) and sharing out the work available (e.g. through the introduction of a 35-hour working week and by limiting overtime).
Because of the national contingencies of labour-market institutions and causes of unemployment, it has not been possible for the EU to draw up a single European policy to combat unemployment. Instead the EU, concerned by the level of unemployment, developed a general strategy in 1997, referred to as the Luxembourg Process, with the objectives of reducing unemployment, increasing employment and narrowing the gender gap. It aims to do this by co-ordinating the employment policies of EU member states through employment guide-lines, set by the European Commission, and National Action Plans, prepared by the member states. This was followed, in 2000, by the Lisbon Strategy, which set targets to increase overall employment rates to 70% (from 63%) and the female employment rate to 60% (from 55%) by 2010. A High Level Group, chaired by Wim Kok, reviewed the progress of the member states on meeting the targets of the Lisbon Strategy. Its report in 2004 found that development so far had been slow and that many targets would not be met by 2010. This was attributed to an overloaded agenda, poor co-ordination, conflicting priorities, and a lack of determined political action.
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