Home > Uncategorized > Involuntary unemployment in the Eurozone, the rest of the EU and the USA: elevated and high

Involuntary unemployment in the Eurozone, the rest of the EU and the USA: elevated and high

SaveIn the USA and the EU, employment is up and unemployment is down. But unemployment is not yet low. Unemployment rates have to decline more (a bit in the USA, a lot in the EU) and participation rates have to recover (a lot in the USA, a bit in the EU). In the EU, there are large differences between countries (compare Spain with Germany). But on the macro level, there is still a large reservoir of involuntary unemployment and, looking at the participation rates, people who have given up altogether.

For practical reasons (it always takes time and effort to find a job), unemployment will never be zero. But we can account for this and look at “involuntary unemployment” only. In a statistical sense, we might define involuntary unemployment as the number of unemployed which, after a reasonable time, still have not yet found a new job. Available data led me to set this ‘reasonable time’ to one quarter for the EU and to 15 weeks for the USA, the data are shown in graph 1 (German data not available!). In the USA, there are still over 2 million people who were unemployed for 15 weeks or more. Which is way lower than in 2009 – but still 2 million. The comparable figure for the Euro zone is, ahem, 9,7 million and for the non-Euro zone EU about 1,7 million. And though the employment to population ratio in the USA is finally rising in a serious way, it is still way below the per 2008 level (let alone the much higher level of the end of the twentieth century). Aside – the nefarious consequences of the combination of monetary tightening and government austerity in the Euro zone after 2010 clearly show.

Meta: John Maynard Keynes once invented, or at least popularized, the word: “involuntary unemployment”. This means something as: “even when the unemployed are willing to accept a wage cut to find work – they won’t find it”. To restate this in the language of modern data on labor market flows: “even when, during a slump, the wage rate is cut this won’t increase the net outflow (gross outflow minus gross inflow) from the reservoir of unemployed”. One of the reasons for this is the non-existence of individual wages. A wage cut is not a wage cut for an individual worker – but a cut to the ‘market rate’, a ‘wages cut’. That’s the way labor markets work. And worked: historical data on wages very clearly show the existence of very stable market wide wage rates for carpenters, agricultural labor, masons and whatever even in a time when government interference with wage rates was much less than today.

Update: more meta. The way the unemployment data used above are measured ensures that it shows that on the individual level ‘measured unemployment’ is involuntary too, as the unemployed are asked if they are actively trying to change their situation. This is related to but not the same kind as the ‘involuntary unemployment’ referred to above which is probably best explained by the fact that the people in the unemployment reservoir might, in one year, be very different people than in the preceding or the next year. A not entirely satisfying aspect of the definition of involuntary unemployment used above is that even when people get new jobs quite fast they still might encounter many short spells of unemployment, leading to high average unemployment.

  1. July 13, 2017 at 2:00 am

    “We all agree that [in the Great Depression] there were lots of people without jobs. We all agree that lots of them wanted to be working. We all agree that lots of them were miserable. I call that “involuntary unemployment.” But I think they were unemployed because of sticky wages, and that if workers collectively accepted lower wages then we would have had full employment in 1936. And Keynes tells us that if we hold the belief that I hold, and that many interwar economists also held, then we are not entitled to say we think there is such a thing as involuntary unemployment.” — Scott Sumner

    I quote that at every opportunity, in hopes of embarrassing Mr. Sumner.

    • merijntknibbe
      July 13, 2017 at 9:08 am

      Sure!
      two points: Keynes very explicitly did NOT argue for wage cuts in the General Theory. Also, Cole and Ohanian go way further than Sumner by not even looking at individual unemployment but at average number of hours worked per person during the Great Depression, implicitly assuming that everybody works these average hours (instead of some people having a full time job and others being unemployed) and state that this decline of the average was a conscious choice of workers… Whihc is bonkers but Cole and Ohanian are quoted quite often (though Sumner does not like them: http://www.themoneyillusion.com/?p=11168 The irony of the Cole and Ohanian point of view is of course that economists like them Always stress the important of the individual – unless this individual is unemployed.

  2. patrick newman
    July 17, 2017 at 3:25 pm

    Most people who leave a job do so when they have another one to go to. Lottery winners and those retiring ‘volunteer’ to be unemployed. The rest become unemployed involuntarily due to arbitrary dismissal or redundancy. Long term unemployed will arise from a deep recession and/or poor job seeking skills. It is normal in a dynamic growing economy for people to be unemployed for short periods and generally return to or improve on their previous terms and conditions. That is not happening these days and while returning to employment may be quite rapid achieving parity with previous job position is not the norm, hence the slow decline in real incomes and employee benefits. In the UK there is now a conventional wisdom arising that the country is enjoying full employment. Unemployment is currently 1.5M and there are about 750,000 vacancies but there is acute mismatch of those seeking work and the job specification of the large majority of the vacancies. This does not stop the Conservatives reducing benefits to ‘incentivise’ finding work creating and deepening poverty.

    • July 17, 2017 at 11:01 pm

      Patrick, you say ” Long term unemployed will arise from a deep recession and/or poor job seeking skills”. Isn’t there also the problem of the jobs not being where the people are, and housing costs being such that things are going to stay that way?

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