Deregulation no cure for joblessness, report says

The US labour market is not significantly more flexible than in Europe, and deregulation is not the cure for high unemployment, according to an authoritative new jobs study.

These conclusions challenge the conventional wisdom that heavier regulation in Europe explains why joblessness is twice the US rate.

The report, published today by the Centre for Economic Policy Research, compares figures for the number of people moving into and out of jobs, between jobs, and entering and leaving the labour force.

Total jobs flows are roughly similar in all the countries investigated except for Britain, which has exceptionally low turnover. In addition, the number of jobs created and destroyed between 1984 and 1992 was only a little higher in the US than in Europe .

The main difference is that Americans are more likely to move from job to job via a spell of unemployment while Europeans tend to move directly.

The authors also point out that while Europe's unemployed stay out of work for longer, in America there is a distinction between those who stay in work and those who hop in and out of low-paid jobs.

Add the working poor to the jobless, and the US experience looks more like that of Europe.

The report rejects a number of popular explanations for the steep rise in unemployment in most developed economies since the late 1970s.

New technology is not to blame, it argues, because unemployment among skilled workers has risen almost as much as among the unskilled.

Nor is competition from low-wage developing countries responsible.

Although this could become a threat in future, exports from developing countries to the industrialised world are still too low to have had a big impact.

An over-generous welfare state might have kept unemployment high once it had been driven up by shocks like higher oil prices, but is not a cause of rising joblessness. Benefits have become less generous in most countries.

The report pins the blame for the rise European joblessness during the latest recession on the exchange rate mechanism.

Germany increased its interest rates to adjust for big fiscal transfers to the former East Germany after unification.

Other countries, determined not to devalue against the mark, raised their interest rates too, even though domestic conditions did not warrant it.

If sclerotic labour markets were not the main cause of high unemployment, deregulation was not the cure. Professor Charles Bean of the London School of Economics, the report's co-author, said making it easier to hire and fire workers - as Britain has done - would make unemployment more variable but would not reduce its average level.

``Unemployment in Britain could rise rapidly when the economy slows,'' he said.

The report concludes that a number of policies could help to trim European unemployment rates to 5-6 per cent.

The authors suggest several measures they believe would be politically feasible, including limiting the period for which unemployment benefit is paid, and allowing the jobless to convert their unemployment benefit to vouchers that would be paid to a new employer.

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