Blog Post

Employment in Europe and the US: the EU’s remarkable strength

The common narrative that the US labour market outperforms the EU is not as trustworthy as overall unemployment figures imply. There is a complex interaction between job creation, labour force participation and unemployment. Jobseekers leaving the labour market altogether was an important factor behind the reduction in US unemployment, while Europe’s job growth has been accompanied by increased labour force participation.

By: and Date: September 28, 2017 Topic: Global Economics & Governance

The global financial crash had a lasting impact in Europe. Most EU countries faced long recessions and labour market weakness after 2008. In contrast, recovery in the US economy and job market started much earlier. Much has been said about the reasons for this discrepancy between the two regions, and in our view some of the pain of post-2008 Europe could have been avoided.

However, beyond the doom and gloom, comparing the EU and US is a not as simple as it seems. And the balance is not monolithically favourable to the US. In fact, it is worth emphasising a few bits of good news regarding EU labour markets:

  • Before the crisis, the rate of job creation was faster in the EU than in the United States;
  • In recent years, the rate of job creation in the EU was the same as in the US;
  • While labour force participation has been falling in the US, it has increased in Europe.

Job creation: is the US a clear champion?

There is a wide assumption that the US economy is more effective than Europe at creating jobs, which should be reflected in a more rapid increase in total employment. However, as we see in Figure 1, the EU was actually creating jobs faster than the US in the years before the crisis. From 2000Q1 to 2008Q1, the number of jobs in the EU expanded by 10%, but only by 6% in the United States. Note that this chart compares each region to its own level of employment in 2008Q1; it does not display the percentage employment rate.

When the global financial crisis hit, US employment fell faster and to a larger extent than European employment. Within two years over 5% of US jobs disappeared, versus 3% in the EU – partly because the US has a more flexible labour market. But, thanks to a more effective policy response to the crisis, US output started to recover already in the second half of 2009. This was followed by renewed job creation since early 2010, with employment regaining its 2008Q1 level by the end of 2014.

In contrast, the EU’s employment crisis was less deep but lasted much longer. A broad-based recovery started only after 2013, when the euro crisis was finally contained. However, since then, job creation has been picking up and total employment is now back at pre-crisis levels. On average, the rate of job growth is now the same in the EU and the US: 2.7% in total in the past two years. Even Greece, a hard-hit euro-area country, is seeing a broad-based labour market recovery, as we highlighted in this earlier post.

The OECD reports data for 22 EU countries but not for the EU as a whole. We calculated the EU22 aggregate data using country-specific data. Source: https://data.oecd.org/youthinac/youth-not-in-employment-education-or-training-neet.htm

Beyond the general positive trend of job creation, youth inactivity remains a problem. But this is true on both sides of the Atlantic. The share of young people not in employment, education or training (NEETs) in the 15-29 age cohort group was at 15.3% in the EU and 14.1% in the US in 2017Q1, according to OECD data[1]. These are high rates, even if both fell from 17% at the crisis peak. Youth inactivity can have lasting negative effects, as skills are undermined for a worker’s whole lifetime, with knock-on effects on fertility rates and the ability to provide for one’s children.

There is also a significant degree of intra-EU heterogeneity in terms of job creation (see the charts in the annex below). The countries with the fastest job creation are Malta, Ireland, Hungary, Spain, Luxembourg, Slovakia and Greece. Meanwhile Latvia recorded job losses in the past two years, and Finland, Croatia, Belgium, France, Lithuania and Bulgaria have been able to create very few new jobs.

As Americans flee the labour market, can we trust falling unemployment figures?

Looking at the labour market from another perspective, we also see an impressive fall in unemployment rates (the percentage of jobseekers within those who either work or are looking for a job). This is the case in both the US and, more recently, in Europe – although the overall rate is still much lower in the US than in Europe (4.7% versus 8.1% in 2017Q1). Of course, the fall in unemployment rates is partly thanks to the job creation shown in Figure 1. But there are other factors in play which mean we must treat the headline-grabbing unemployment numbers with caution.

Another important reason behind the fall in US unemployment rate was the falling labour force participation rate (Figure 2). More and more people have become disenchanted with labour markets and have given up looking for a job altogether. This means they are no longer counted amongst the unemployed, even if they would ideally have wanted a job. In the US, young people (of both genders) and middle-aged men have displayed a significant fall in labour force participation. This drop was offset only to a small degree by increased labour force participation among older men. Overall US labour force participation has turned slightly upwards only since late 2015, by which time, incidentally, it had fallen to the level of the EU average.

In contrast, from a low level in 2000, labour force participation in the EU has been increasing continuously. Even the crisis-related increase in unemployment did not cause a break in the trend. A steadily higher percentage of Europeans are participating in work, or trying to do so. Even in hard-hit Greece and Spain, labour force participation continued to go up after 2008. The increase is driven largely by higher participation of middle-age women and older age cohorts (of both genders), while the participation of the youth further declined.

The convergence of US and EU labour force participation rates is not just an interesting economic and social trend in its own right. It has an important statistical corollary: unemployment rates are now more comparable between the US as a whole and the EU as a whole. If the same percentage of people in both regions is actively trying to work, then we can now meaningfully compare the percentage of that group which cannot find work. In earlier periods we were comparing the unsuccessful subset of two very different groups.

However, better comparability with the US does not always apply to individual EU countries. There is a large degree of heterogeneity within the EU, as our country-specific charts in the annex show. In particular, labour force participation in the Scandinavian countries, Germany, Netherlands and the United Kingdom is well above the EU and US averages, while Italy, Croatia and Romania report rather low values.

So, just how great was the impact of changes in labour market participation on unemployment rates? In order to answer this question, we calculate a hypothetical counter-factual scenario for the unemployment rates in the EU and US. To do this we assume that labour force participation stayed at its 2008Q1 level throughout the whole period, while maintaining the trends in total employment presented in Figure 1

Under this scenario, the unemployment rate in the US would have increased to a much higher level in 2010 and the current 2017Q1 rate would be 7.3% instead of 4.7%, because we consider as unemployed all those people who have since left the labour force altogether (Figure 3). In contrast, the unemployment rate in the EU would have increased less after 2008 and the current 2017Q1 rate would be 4.6% instead of 8.1%, because we presume that none has joined the labour force and there would thereby be a lower number of unemployed people.

Thus we can see that the dramatic changes in labour force participation have indeed had a sizeable impact on unemployment rate developments in the US and EU since 2008. Moreover, they paint a more nuanced picture than the often-quoted unemployment rate, which implies that the US labour is undoubtedly outperforming the EU. In fact the story is a little more complex.

Annex: country specific charts

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic More by this author

External Publication

An Effective Regime for Non-viable Banks: US Experience and Considerations for EU Reform

The US regime for non-viable banks has maintained a high degree of stability and public confidence by protecting deposits, while working to minimise the public cost of that protection. EU reformers can draw valuable insights from the US experience. A review of the US regime supports arguments in favour of harmonisation and centralisation of bank insolvency proceedings and deposit insurance in Europe’s banking union.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: July 22, 2019
Read article More on this topic More by this author

Opinion

The EU needs a bold climate strategy

Scientists report that global temperature increases must be limited to below 1.5 degrees Celsius. With global greenhouse gas emissions continuing to increase and rising temperatures driving up the frequency of extreme weather events, the world needs a greater commitment to climate policy.

By: Guntram B. Wolff Topic: Energy & Climate Date: July 19, 2019
Read article More on this topic More by this author

Blog Post

Croatia’s path into the banking union

Croatia seems a suitable candidate for euro area accession: there is a tight peg to the euro, high public debt is coming down, and the banking sector is already dominated by euro area banks. But the Eurogroup has rightly targeted reforms of the state’s role in the economy as a precondition for participation in ERM II and the banking union. None of the announced reform plans are new or easily concluded within the timeframe that has now been agreed.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article More on this topic

Blog Post

Talking about Europe: Die Zeit and Der Spiegel 1940s-2010s

An on-going research project is seeking to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. A first snapshot screened more than 2.8 million articles in Le Monde between 1944 and 2018. In this second instalment we carry out an analogous exercise on a dataset of more the 500 thousand articles from two German weekly magazines: Die Zeit and Der Spiegel. We also report on the on-going work to refine the quantitative methodology.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article More on this topic More by this author

Blog Post

How should the relationship between competition policy and industrial policy evolve in the European Union?

Competition policy aims to ensure that market practices and strategies do not reduce consumer welfare. Industrial policy, meanwhile, aims at securing framework conditions that are favourable to industrial competitiveness, and deals with (sector-specific) production rules as well as the direction of public funds and tax measures. But, how should competition policy and industrial policy interact? Is industrial policy contradicting the aims of competition policy by promoting specific industrial interests?

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: July 15, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Read article More on this topic More by this author

Blog Post

Where Brexit goes, the law shall follow

How the financial industry and the law firms that support it are preparing for what comes next

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: June 25, 2019
Read about event More on this topic

Past Event

Past Event

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 25, 2019
Read article Download PDF More on this topic

External Publication

Soaring house prices in major cities: how to spot and moderate them

This article examines whether there are regional differences in house price growth within European countries and find a stronger cyclical pattern in capital cities compared to other regions, indicating a clear rationale for regional-level tools. The authors recommend using macro-prudential measures at a regional level, in particular loan-to-value and debt-to-income limits, to dampen the housing boom-bust cycle.

By: Grégory Claeys, Konstantinos Efstathiou and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 19, 2019
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Load more posts