Fixing Europe's Unemployment

With the death of John Kenneth Galbraith, America has lost its last great social economist - a rare breed of economist who valued human life and social advancement as goals that the market should serve, not the other way around.

Having not read any of his books, I can assume that much of his thinking was considered obsolete during the "attack of the Monetarists" during the stagflation wars of the 1970s.

Europe, far more so than America, believes that the economy should serve society, and not the other way around. The differences between Europe and America is as wide as the ocean that separates them, and both have their advantages and disadvantages.

In America, the free market is king, which has led to massive amounts of wealth, low unemployment (around 5%) and strong growth in a flexible economy. Paradoxically, America also has huge amounts of poverty and social dislocation, disturbingly poor rates of health (including an infant mortality rate that is bettered by Cuba) and decaying public infrastructure.

Europe is the flip side of America. Europe (including the Euro area) has generally languished in economic growth, has less wealth and has around twice the unemployment (over 10% in many areas). Additionally, many European nations have large and growing public debt levels that need to be fixed. On the other hand, Europe has less social problems (even the recent riots and protests in France were quite sedate), admirably high educational levels and a health system that produces better outcomes for two-thirds of the cost of the American health system.

Since I describe myself as a market socialist, I accept both the importance of the free market in developing economic growth, as well as the importance of diverting resources for the public good. The best goal to aim for would be if Europe could somehow be able to maintain its superior social statistics while matching the US in economic performance.

The solution that I am suggesting is nothing new, but is rooted way back in the days when economists like Galbraith held sway.

The fact is, and I hate to admit it being the socialist that I am, that when minimum wage levels are lowered, the market has more chance of employing a person. This is the basis of the solution - reducing the minimum wage level.

Let's take a major European country with 10% unemployment - France. At present, France legislates their minimum wage at €7.61 per hour - which, according to today's exchange rates (US$1 buys €1.2579), is around US$9.57. When you consider the fact that the US minimum wage rate is set at $5.15 per hour, you can see how much harder it is for French businesses to employ staff.

But, of course, imagine if French politicians attempted to legislate a drop in the minimum wage to 4.10 per hour to match the American wage rate - the keywords here would be Bastille and Guillotine.

Moreover, while I certainly agree with the notion that a lower minimum wage level would decrease unemployment, it would also certainly cause that great American institution of "the working poor", ie people who live in abject poverty but who are fully employed at the same time. So what's the solution?

Easy - wage subsidies.

Such a solution may seem like something out of the socialist scrap book, and it is true that wage subsidies in the past have not been successful - mainly because they have been punitive and market distorting. My suggestion is different in that the wage subsidies would be universal - every working person would receive a subsidy. This is far different from subsidising certain industries or employment groups that socialist government have done in ages past since the effect of the subsidy would be felt equally throughout the economy.

So imagine this situation. The French government first legislates that the minimum wage be dropped from €7.61 per hour to €3.50 per hour (which would be lower than the US minimum wage level, US$4.40 per hour). Then it legislates that a universal wage subsidy be introduced at the same time, say €4.50 per hour. This means that the market would pay for labour at a nice low level, but the labour itself would actually be paid at a higher rate than before.

Of course, where would all that money come from? If the French government is going to spend all this money, it has to spend €4.50 per hour per person in the labour force, some 27.72 million people. The solution is simple - a flat income tax rise that produces revenue commensurate with the amount spent on the subsidy. A flat tax to pay for a universal wage subsidy may sound a bit radical, but the net effect would be positive for those on lower levels of income.

Such a subsidy/tax system is not new. A Pigovian Tax is what this system is based on.

I'm using France here as an example. I am unsure of what other European nations pay their workers but I am fairly certain that the levels are unrealistically high. While the specifics that I have given above cannot apply to places like Spain, Italy, Germany, Poland and others, the general principle - lowering the minimum wage below that of the United States, giving a universal wage subsidy that ensures low paid workers have enough money to live comfortably and having a flat income tax increase to pay for the subsidy - is what I am pushing here.

Opponents of such a scheme would point out that such a major government intervention in the economy would distort the natural workings of the marketplace. As the person who is proposing this scheme, I would certainly agree - it is distorting, but that is the point. If the market could, in fact, redistribute wealth in a way that ensures that there is both zero unemployment and zero poverty, then I have yet to see it. While I believe that the market is a powerful force, I do see its limits. The market is not god, and the actions of the marketplace will oftentimes hurt both society and itself by its behaviour. Only via careful intervention by the government can the poor and dispossessed enjoy the benefits the market brings.

For a similar model, see my article Zero Unemployment Economic System.

From the Osostrian School Department

© 2006 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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1 comment:

CraigS said...

Well, they have to do something, and thats as good a solution as I've heard.

But the French seem deeply suspicious of any sort of labor reform, so it may be even that idea would be resisted.

I actually think the ageing population will fix Europes unemployment problem pretty soon - but then there will be other issues to deal with...