The Great Recession is showing some unexpected results on the unemployment front. The irresistible job machine that used to be the U.S. labor market continues to sputter. Job creation remains disappointing. A decidedly un-American unemployment rate of close to 10% leaves almost 15 million Americans unemployed. And that is not counting the millions more who are underemployed, or the numerous jobs that are officially and artificially "saved or created" by stimulus spending.
Across the pond, on a European continent traditionally lambasted for its outdated and stifling labor rigidities, the picture is surprisingly less bleak. For sure, European countries have had their fair share of the employment hemorrhaging and have also seen something of the frosty hiring slump that has been the crisis fallout throughout most of the developed world's labor markets. But in relation to their economic performance, many European countries have registered less unemployment increase than the U.S. The list covers almost the entire Old Europe, including such otherwise notorious labor market underperformers as Italy, France, and Belgium.
It used to be different. For decades, Europeans have been told that they need to become more American if they want more growth and more jobs. That conviction eventually morphed into an official European Union agenda for so-called "flexicurity," seeking to combine flexible labor markets with supportive policies for personal employability. Whatever its merits, flexicurity was always more a hype among policy wonks than a reality on the European work floor. The recent reversal in labor-market fortunes has now brought a number of observers to question the mantra altogether. European politicians did not go on a Keynesian spending spree to save jobs. Instead, they to point their countries' built-in labor protections as the reason for their recent outperformance. Union experts have joined the chorus, labeling flexicurity a fair-weather friend and reclaiming old-fashioned restrictions as the guarantors of stability.
This trans-Atlantic comparison is premature. There is simply no quick labor market fix for an economic recession, whatever your policy persuasion may be. Economic differences go a long way toward explaining today's differences in labor-market outcomes among countries. Some countries have been hit more by the Great Recession than others, some have had a major domestic real-estate crisis to add to the global contraction, and some have been able to take better advantage of the rebounding economy in the developing world. Germany's ability to export to Asia helps its domestic employment. A real-estate crisis weighs heavily on unemployment in Ireland and Spain alike, notwithstanding big differences in their respective labor-market models. Beyond the economy there is demography. Aging and immigration affect different countries differently, with ramifications for their respective labor forces and—consequently—unemployment figures.
None of these factors relate to labor-market policies per se, but all of them heavily impact labor-market outcomes. Moreover, the traditional view of the inflexibility of European labor markets is really outdated. Virtually all of the European countries that have rigid and inflexible labor regulations have also grown a wide penumbra of often extremely flexible atypical work. Companies in Europe thus have layers of flexible temporary workers that can be employed, re-employed, and laid off as a matter of course. Such is the legacy of rigid labor markets whose beneficiaries have never accepted overall modernization: a multi-tier market in which insiders enjoy cushy stability for most of their careers at the expense of incoming outsiders. Predictably, the brunt of any labor-market contraction then falls on the outsiders, who either lose temporary work or enter the labor market with very limited job prospects.
The labor-market lesson of the Great Recession so far lies not in the vagaries of unemployment statistics, but in the worsening of the divide between insiders and outsiders. For the responses of virtually all European governments to the current jobs crisis have primarily been aimed at protecting existing jobs even more. Across the Continent, subsidy mechanisms and regulatory measures have sought to avoid redundancies through working-time reduction, temporary-unemployment systems, cash-for-clunkers programs, and the like. As a result, the chasm between the haves and the have-nots on the labor market has only deepened further.
By entrenching existing employment, European politicians and employers have not demonstrated the uselessness of flexible labor markets in times of crisis. They have instead undermined the potential for a downturn to prompt useful job transitions in a period of profound economic change. Europe's internal-market rules did prevent a repeat of wholesale state support as a crisis policy. But its light-version in the labor market has similar consequences. Time will tell whether Europe is—once again—only slowing inevitable transitions and therefore undermining future growth and productivity to the detriment of all, or whether its job shielding will be a jump board and allow companies to grow anew with lower redundancy and recruitment costs.
Whatever the outcome, the bottom line is a labor-market preference for the incumbent at the expense of newcomer. This goes beyond reduced job opportunities as such. The niceties of increased employment protection and automatic stabilizers translate into deficits that will have to be paid by future workers. The same generational arithmetic obviously holds for deficit spending on expanded unemployment insurance and Keynesian job creation in the U.S. Labor-market realities on both sides of the Atlantic thus share what is becoming an overall tendency of our crisis epoch: our generation's unwillingness or inability to pay for its collective mistakes.
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