Thursday, April 05, 2007

Unemployment in Germany and the US

A standard piece of conventional economic wisdom says that Germany's labour-friendly regulations and high level of social benefits result in a high level of unemployment. It's not unusual to see unemployment figures as high as 12% quoted in the press, usually in juxtaposition to a US rate of 5% or thereabouts.

But is the difference really as great as that? The German government's numbers are calculated in a very different way from the US. As far as I'm aware, in Germany if you work upto 15 hrs a week but register a desire to work longer, you count as unemployed. In the US, if you work just 1 hour a week, you're employed. The OECD tries to correct for these sorts of accounting difference in its "Standardised Unemployment Rates". The current rates for Germany and the US are 7.7% and 4.6% respectively:,2340,en_2825_495670_38234290_1_1_1_1,00.html

However, Germany's social benefits in themselves surely increase the chance that an unemployed person is formally recorded as unemployed: he or she has much to lose by being "off the books". This "pull" factor is very likely much weaker in the US, so I'd expect a greater chunk of the unemployed in the US to be unrecorded than in Germany. Admittedly, this is hard to correct for. Also, the US figures don't include that country's enormous prison population of well over 2 million. It seems reasonable to assume that a good chunk of these people would be unemployed if they were not incarcerated. Accounting for these differences would surely add at least 1% to the US figure bumping it up to around 5.6%.

Finally, while you can never control for all the many relevant factors, there's one event in recent German history that simply cannot be ignored. This is, of course, reunification. If unemployment is three times higher in the East than West, a back of the envelope calculation suggests that unemployment in West Germany is probably around 6%.

This leaves us with a very minor difference in unemployment rates between the US and West Germany. Put this together with the fact that West Germany had really low unemployment for decades previously, and this must surely put a question mark over the claim that social welfare must lead to joblessness.

1 comment:

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