Mandated business expenses...

S. A. Modena samodena at
Tue Nov 2 23:13:44 EST 1993

The following was scanned in without permission from the 4 OCT 93 
issue of _Business Week_, page 18.

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BY GARY S. BECKER....the 1992 Nobel Laureate, teaches at the 
                     University of Chicago and is a fellow of the  
                     Hoover Institution 


Many intellectuals in the U.S. and Asia believe that European 
social welfare policies should be a blueprint for action in their 
own countries. But those policies are financed by high taxes and 
mandates on business that are at least partly responsible for a 
spectacular increase in European unemployment during the 1980s 
and 1990s.  

In the early 1980s, unemployment was less than 4% in France, 
Germany, and most other Western European nations. It now averages 
more than 10%, and the rate for those under 25 is close to 20%.  
By contrast, unemployment in the U. S. has not increased much 
during the past 15 years and is still less than 7%, while Japan's 
rate has risen only slowly and is still below 3%.  

The U. S. and Japanese experience shows that the growth in 
European unemployment is not due simply to greater competition 
from the less developed world or to other forces that have 
affected all countries equally. The rapid growth of labor costs 
throughout Europe appears to have had much to do with the 
explosion in unemployment.  

About half of Germany's average labor cost of $27 an hour results 
from social security, health, unemployment compensation, 
disability, and other taxes. And in France, Italy, Spain, and 
Sweden, the portion of total labor costs attributable to the 
government is nearly as large. By contrast, this fraction is less 
than 25% in Japan and the U. S., and even lower in Korea and 

Regulations that restrict layoffs and mandate numerous vacation 
days and other paid leaves raise Europe's cost of labor far above 
the already high level of wages and taxes on labor. Generous 
leaves for sickness and other reasons increase Sweden's 
absenteeism rate to 10% and Germany's to 9%, compared with 2% to 
3% in Japan and the U. S.  

UNDERGROUND ECONOMY. To reduce costs, many European companies 
increasingly resort to temporary workers, because they are easy 
to dismiss and do not qualify for fringe benefits and taxes. In 
Spain, where it is almost impossible to fire workers on the 
regular payroll, about one-third of employees are temporary.  
Even in France and Germany, more than 10% of workers are temps.  

Europe's underground economy has also grown enormously, in part 
because it provides a way to escape government-imposed employee 
costs.  Although no reliable figures on this sector exist, crude 
estimates suggest perhaps 25% of all Italian and Spanish workers 
work underground at least part of the time, as do 10% of those in 
Belgium, France, Germany, and Sweden.  

When labor is expensive and when firing employees is difficult, 
companies replace departing workers only slowly--and are 
reluctant to expand even when the economy picks up.  This is why 
it now takes much longer than it did a decade ago to find a job 
in Europe if you are a first-time job seeker, a mother returning 
to work after childbirth, or an immigrant. It also explains why 
the youth unemployment rate is so high and why those out of work 
for over a year have grown to more than one-third of the 
unemployed. During the past two decades, private employment in 
the European Community has barely increased: The public sector 
has accounted for almost all growth in employment. Japan and the 
U. S. have had the opposite experience: Private employment has 
surged, while government employment has grown little.  

THE HARD WAY. The long-term unemployed, youths, temporary 
employees, and underground workers--none of these groups have any 
opportunity to invest in job skills and training. The sharp 
growth in these categories means that fewer workers are being 
trained to work in modern economies, which demand high levels of 
skill and knowledge. The inadequate training that workers 
receive makes it still harder for them to find satisfactory long-
term jobs.  

Fortunately, a reaction seems to be setting in.  Sweden's 
conservative government has tightened up its rules for paid sick 
leave--although they are still generous to a fault.  Theo Waigel, 
Germany's Finance Minister, wants to cut unemployment pay and 
social-security handouts and scrap maternity pay and payments to 
construction workers who are temporarily laid off. The French 
government has frozen social-security benefits and increased the 
number of years of work needed to be eligible for pensions. In 
the Netherlands, the Christian Democrats want to shelve the 
minimum-wage law. A Socialist Spanish government is trying to 
make it easier for companies to fire employees.  

Unfortunately, President Clinton's proposed health tax on 
employers is just the latest example of a trend in the U. S. to 
mandate business spending. Others include excessive Social 
Security and Medicare taxes, difficult-to-meet requirements to 
employ disabled job applicants, and compulsory leaves for 
employees to bear children. The European experience should be a 
lesson to the U.S. and other countries: Employment is much more 
buoyant when governments interfere less in labor market affairs. 
Let's hope that this lesson doesn't have to be learned the hard 
way--through higher unemployment.  

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