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The Therapy Sessions
Tuesday, July 20, 2004

Voting themselves poor

Economist.com: Labour markets in Europe:
Symbolically significant as it became in its own terms, the 35-hour week was also part of a wider European approach to sclerotic labour markets that can now be seen to have comprehensively failed. In many countries besides France, the cure for high unemployment has been sought in the encouragement of shorter working hours. Another common response to growing insecurity about jobs has been to increase job protection and make it harder to fire people. And a widespread reaction to growing global competition that has lowered pay at the bottom end of the market has been to entrench high minimum wages.

As many pointed out at the time, these measures made little sense. The notion that there is a fixed amount of work to be shared out, so that shorter hours for all must mean more jobs, is widely derided by economists as the ?lump of labour? fallacy. Making it harder to fire people serves mainly to discourage hiring them in the first place. And high minimum wages translate not into better-paid workers but into more people without jobs. These observations are no longer just matters of theory: the recent experience of France, Germany and other continental European countries shows that they apply in practice too. As the OECD's recent Employment Outlook noted, the empirical evidence points to a clear correlation between high levels of job protection and high levels of unemployment.

Belatedly, Europe's governments are realising this, and coming round to the need to free up their labour markets, not tie them down in even more red tape. Indeed, they have begun to grasp that excessive regulation of labour markets, far from being a sensible response to slower growth, is actually a significant cause of it.

Hopefully American politicians will learn from their mistakes.
Oops. Politicans and learn in the same sentence? Shame on me.

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