Did the U.S. Get Labor Wrong?

By Peter Vanham
Columbia Journalism School, C’12

When Pablo Ruiz de Olano graduated from the University in Barcelona in 2009, his chances of landing a decent job in Spain were bleak. Instead of taking a meager job in his home country, Mr. Olano took his chances elsewhere in Europe. He packed his bags and found a job at the German Electron Synchrotron in Berlin.

People like Mr. Olano are contributing to what the European Union had in mind for its labor market: a model built on the example of the United States, in which unemployment is kept low through a highly mobile labor force.

But even as the first generation of the mobile European workforce hits the labor market, the allure of that model may be fading. The United States now has an unemployment rate of 8.6 percent, and the mobility of U.S. workers has fallen sharply since the housing bust made it more difficult to sell a home.

Now, the call for labor mobility in Europe and the U.S. is being overshadowed by the need for real economic growth.

For years, European unemployment was painfully high. An unemployment rate of 8 to 9 percent was common, and Europeans wondered whether their economies would ever create enough jobs to pull it below 7 percent.

An ocean away, the U.S. had proved that a low rate was possible. From 2001 to 2007, the U.S. unemployment rate consistently stayed below 6 percent, with a record low of 4.3 percent in mid-2007.

Europe’s goal was to reach the American level. To get there, one of the things the European Union could do was to incentivize labor mobility. In Europe, people typically have had a strong affiliation with their home region, and that needed to change.

Programs like the Erasmus student exchange were introduced to create an awareness of a European identity among the younger generations and engender a willingness to live and work abroad. Each year, 200,000 European students left for a semester or year abroad.

For a while, that strategy seemed to work. In early 2008, the unemployment rate in Europe fell below 7 percent for the first time in over a decade.

Just then, Europe’s labor role model, the U.S., failed. Hit by the crisis in 2008, unemployment in the U.S. started to rise. At the same time, many homeowners became ‘locked in’ their houses. Because of the drop in housing prices, they saw the value of their houses fall to less than their outstanding debt. Where people could once move rather easily across states for a good job, many were suddenly anchored by their house.

A year later, the European labor market collapsed, as well.

By early 2010, the euro zone had reached its employment objective: its unemployment rate was on par with that of U.S. Both regions had a rate of 10.4 percent, an historic high for each.

Did labor mobility fail to live up to the expectations?

“No,” says John Schmitt, a senior economist at the left-leaning Center for Economic and Policy Research, “because in creating jobs, a key role is played by economic growth, not the mere notion of labor mobility.”

The high unemployment in the U.S. has nothing to do with a decline in labor mobility, Schmidt says. “For every person that’s locked in their house, there’s another one that saw his house foreclosed. Those people are as mobile as before, or even more so.” (In 2010, a record of 2.87 million houses got notices of default, auction or repossession, according to real estate data research firm RealtyTrak.) And in Europe, Schmitt says, Europe’s mobility was never the problem. For decades, people from poorer regions of Poland, Italy or Spain had been moving to richer regions in the Netherlands, Germany and Belgium.

The high unemployment rate in the U.S. was caused by a fall in economic output. To lower unemployment, a return to normal growth is necessary. “That growth,” Schmitt says, “will have to come from a combination of central bank and government stimulus.”

Following that logic, it doesn’t look like the European unemployment rate will be dropping quickly. European governments are opting for austerity, and the European Central Bank is not concerned with unemployment, focusing instead on price stability.

For now, the prospect of creating jobs seems better in the U.S., even though the government appears unwilling to add more stimulus and Europe’s labor mobility could rise further in the future. The crucial advantage over Europe may prove to be that the Federal Reserve has a dual mandate to lower the unemployment rate and to keep prices stable.

At least one mobile European won’t worry about Europe’s employment lagging behind. After his adventure in Berlin, Mr. Olano continued his job search abroad. He found a job in the U.S. as researcher at the University of Notre Dame.

 

This article was written for the Columbia Journalism School’s seminar on business and economics journalism in the fall of 2011.

 

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