Thursday, February 15, 2007

SWEDEN, FRANCE AND LABOR FREEDOM

by Johnny Munkhammar


Several European countries have great problems with unemployment. This is especially severe for young and immigrants. And the real unemployment rate in the EU is most likely twice as high as the official rate. Millions of unemployed are called something else, like “early retired”, on sick leave or on temporary government programs. This is a powder can ready to explode; it is a social tragedy.

Jobs is thus largely in the focus of the public debate. Quite a few populist politicians try to blame unemployment on external forces like globalisation. But the more serious debate is about what changes in economic policy that are necessary to solve the problems. One could argue that there is a substantial amount of evidence that can be found in comparisons between countries.

A comparison of labour markets between the more free-market US, and the EU, is quite revealing. The share of the working-age population employed in EU countries is only 64 per cent; in the US, it is 72 per cent. In 2004, only 13 percent of unemployed workers in the US were unable to find a new job within 12 months; in the EU, the figure was 44 percent. In the US, youth unemployment is 10 per cent, in the EU, it is 17 per cent.

But the best comparisons can be made within Europe itself. Denmark has an employment rate of 76 percent, but Poland is far lower at 53 percent. Youth unemployment is above 20 percent in Greece, Italy, Sweden, France, Belgium, and Finland and below 8 percent in Ireland, the Netherlands, and Denmark. In the EU:s 15 member states, between 1995 and 2004, the development of employment was also very different. In Ireland, the Netherlands, and Spain, the increase in employment was the highest; in Germany and Austria, it was almost zero.

What the successful countries have in common is a high degree of economic freedom, not least in the labour market. That is, less government intervention the economy will lead to a better development in the labour market. There are large amounts of academic studies, and indeed studies from OECD and others, which confirm this. It is a rather well known and established fact.

Still, radical free-market reform is not what is taking place in Germany, Italy or France. And in several countries in Eastern and Central Europe that successfully did de-regulate, this development has stalled and in some countries gone slightly into reverse. Many politicians in countries with substantial government intervention in the economy feel that reforms for a government retreat are hard to do. Thus, they try to find an easy way out – and look at the Nordic countries.

They should not do that. The labour markets of the Nordic countries are extremely different from each other – also in terms of results. Whereas Denmark has actually a very free labour market and many new jobs, Sweden has a highly regulated labour market and has had a very poor development. Those who copy the government interventions of Sweden are likely to share its fate of a severe youth unemployment and vast social exclusion. And, as it happens, the new Swedish government is actually reforming to solve the problem – with lower taxes, lower unemployment benefits, de-regulations for smaller businesses, etc.

The opposite possible scenario for the future can be noted in France, where Ségolène Royal, the Socialist candidate for President, has presented her Election Manifesto with 100 proposals. Many of the proposals have stirred the debate about Europe’s future already. The Manifesto includes an increase in the minimum wage, higher taxes, more regulations in the labour market, expanded public welfare contributions, subsidised jobs for the young and nationalisation of companies. She promises to fight globalisation and any free-market reform.

Sweden and France have similar problems in the labour market. But whereas hardly anyone would like to copy France, many have desired to copy Sweden. Both would be just as ill-avised. And now, Sweden is doing free-market reforms to solve the problems, which should inspire. But if France were to turn in the opposite direction, from a similar starting-point, they would be in serious problems. Both of these countries, in the context of labour freedom or state intervention, currently offer lessons for others about shat to copy and what to avoid.



Johnny Munkhammar is Program Director, Timbro, a Free-Market Institute in Sweden. He works for personal liberty, a free economy and society, open borders and limited government. Information, analysis and comments about national and international economic and political issues can be found on his website.

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