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growth is not automatic.

European figures suggest that in the past twenty years economic recessions have raised the number of unemployed, but booms have not cut them, giving support to the hysteresis argument.  The comparison between EU and U.S. data suggests that the problem of EU unemployment lies in the high level of rigidity in the labour market. Hence the need for the EU to supplement its policies with direct measures on the labour market:

i)  Reduction of the tax wedges.

ii) Relaxation of labour legislation.

iii) Reorganisation of unemployment benefit systems.

iv) Education and training policies.

From an European perspective, faster growth will be a consequence of reducing unemployment through labour flexibility, as much as a solution itself to the problem.


Q1  Provide statistics on unemployment trends in a country of your choice. What policies are currently being applied for reducing unemployment? Would you classify them as Keynesian or classical? What other policies would you recommend? (A useful source is the OECD's annual publication, Employment Outlook).

Students should link unemployment trends to pay trends, reforms of the social welfare, strikes (proxy of trade-unions importance), inflation and the growth rate. In this way they could learn more about the nature of unemployment (cyclical vs. structural), the geographical and occupational composition and the duration in order to provide useful policies aimed to reduce it.  A useful case study might be the Netherlands which has succeeded in reducing its unemployment rate from 12% in 1983 to 6.9% in 1997.

Q2  Explain how business decisions might be affected by a country's unemployment rate. If you were investing in a region or a country, would you be attracted by the existence of high unemployment?

The answer to this question is more related to the country's type of unemployment and labour policy implemented than to the level of unemployment itself, rendering the decision of whether or not to invest dependent on a series of issues:

i) If unemployment is caused by high wages, powerful unions and rigid labour market, it is likely that firms, ceteris paribus, will decide to invest in other countries.

ii) On the other hand, unemployment can be caused by the lack of capital or investment opportunities. If market-friendly labour policies are implemented, with the target of reducing unemployment, thus moderation in wage settlements and flexible contracts (temporary and part-time jobs) could attract investment. Depending on the composition and the skills of the labour force, the type of


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