Structural Unemployment in Europe: Reasons and Remedies. Edited by MARTIN WERDING

MIT Press , Cambridge, Mass . 2006 . viii + 350 pp. £29.95.

European unemployment remains a problem and a puzzle, and most of that unemployment is thought to be structural. The popular saloon-bar explanation is that European economies are bound by rigidities. Unemployment benefits are too high and can be enjoyed for too long. The unemployed have little incentive to look for work. Minimum wages, employment protection laws and strong trades unions all conspire to produce a labour market in which the insiders face too little competition from the outsiders. There is too little labour turnover. The unemployment rate consistent with low and stable inflation is too high.

Of course, up close the picture is more varied. In some European countries unemployment is low, while in others it has been persistently high. The path of the unemployment rate over time has varied from place to place. Many countries saw a dramatic rise during the 1970s. In some of these the rate has fallen back, near to levels enjoyed in the ‘golden age’ of the 1950s and 1960s. In others the increase has, very largely, stuck.

A persistent theme in comparative studies of these issues has been the relative role of institutions and shocks. Analysis of the role of institutions goes back a long way, to Mancur Olson (The Rise and Decline of Nations, New Haven, 1982) for example, and it was taken up in a paper by Lars Calmfors and myself (‘Centralization of wage bargaining and macroeconomic performance’Economic Policy, April 1988, 13–47). In this literature unemployment is viewed as an equilibrium phenomenon. Demand and supply shocks are ignored. However, Blanchard and Wolfers (‘The role of shocks and institutions in the rise of European unemployment’, Economic Journal, 110 (2000), C1–C33) ascribe a greater potential role to shocks, arguing that some institutions may allow a better response to shocks than others. So when shocks are relatively small economies may perform well with any institutions; but when shocks become bigger the institutions may make a difference.

Much of the comparative analysis has provided only a brief summary of each country: its institutions, macroeconomic shocks and policies. The contribution of this book is to devote a chapter by a local expert to each of ten European economies. The papers were presented at conference held in Munich in December 2002. Following Martin Werding's introduction, two chapters survey the European unemployment scene. Steve Nickell kicks off with ‘A Picture of European Unemployment’, in which he summarizes his current views on the subject, articulated through many books and articles over the course of fifteen years or more, going back at least as far as the book by Layard, Nickell and Jackman on Unemployment (Oxford, 1991). There is not a European unemployment problem, declares Nickell: rather, it is a problem of the ‘big four’—France, Germany, Italy and Spain. Remove them and the problem disappears. The remaining countries have low unemployment relative to the OECD average. Nickell summarizes data on unemployment and employment from 1960 onwards, looking at the division between long-term and short-term unemployment and the distribution by gender, age and skill. He takes the view that most of what we see is equilibrium unemployment. After considering arguments and empirical findings that are based on the interaction between institutions and shocks, he comes down in favour of institutions as the main determinant of equilibrium unemployment.

Edmund Phelps reflects on the likely sources of high unemployment as being institutions interpreted broadly. He describes his approach to economic performance ‘of which unemployment may be a part’ as ‘somewhat holistic’. He speculates that institutions that cause economies to lack dynamism may be the culprits. These include corporatism (there may be pluses here as well as minuses), social policy, cultural attitudes, the lack of support for entrepreneurship and weakly developed financial markets.

Following these two broad-brush introductory chapters are ten papers dedicated to individual countries, starting with the small success stories and ending with the big failures. The book assembles a very distinguished panel of experts: Torben Andersen (Denmark), Bertil Holmlund (Sweden), Jan van Ours (the Netherlands), Erkki Koskela and Roope Uusitalo (Finland), Brendan Walsh (Ireland), Christopher Pissarides (Britain), Jean Pisani-Ferri (France), Norbert Berthold and Rainer Fehn (Germany), Giuseppe Bertola and Pietro Garibaldi (Italy), and Samuel Bentolila and Juan Jimeno (Spain). These chapters are very useful for giving details of institutional developments, such as changes in the unemployment benefits system or bargaining arrangements, which are difficult for the outsider to detect and assess. Sometimes changes that look minor on paper turn out to have greater significance in practice, and vice versa.

The authors typically give a much richer and more subtle account of labour markets in each country than that portrayed in the international comparative studies. Their weakness is that broad themes are sometimes lost in the local detail, but perhaps this is an inevitable feature of the close-quarters perspective. Ireland remains a corporatist success story. The ‘flexicurity’ model of Denmark survives in Torben Andersen's account. Jean Pisani-Ferri does not obviously accept Nickell's classification of France among the ‘big four’ high-unemployment economies. He credits French governments with having brought down unemployment without sacrificing the social model, though at great and possibly unsustainable cost to the public finances. Christopher Pissarides attributes the British labour market success story to the combination of weaker trade unions and an anchoring of inflation expectations in the inflation-targeting regime of the 1990s. While it is clear that inflation targeting has been accompanied by much greater economic stability than was expected, that very small interest rate movements have been all that is necessary keep inflation on track and that this needs better explanation, it is not clear why an essentially nominal policy (monetary policy) should have had such a powerful effect on the real economy, in allowing the equilibrium rate of unemployment to fall to such a degree.

Shortage of space precludes a longer discussion of the arguments offered about each country. In concluding, I return to the point made above: that the book provides a wealth of fascinating detail about the institutions, shocks and policies pursued in each of the countries from the 1960s until the present. This is a very valuable counterpoint to the summary measures employed in the international comparative studies.