Mandated business expenses...
S. A. Modena
samodena at csemail.cropsci.ncsu.edu
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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DOWN AND OUT ALL OVER EUROPE: A LESSON FOR AMERICA
BY GARY S. BECKER....the 1992 Nobel Laureate, teaches at the
University of Chicago and is a fellow of the
WHAT ACCOUNTS FOR JOBLESS RATES OF OVER 10% IN THE EC? COMPANIES
ARE LEERY OF HIRING BECAUSE OF LAWS THAT PROTECT WORKERS FROM
LAYOFFS AND ASSURE GENEROUS VACATION, SICK DAYS, AND FAMILY
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
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-
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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