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Europe and the United States differ in many ways. From the perspective of macroeconomists, some of the most striking differences are in the laws governing labor markets.
In the United States, labor markets are relatively flexible. It is relatively easy for firms to hire and fire workers, and it is relatively easy for workers to move between jobs. This brings many benefits to the economy as a whole, the most important being that it helps ensure good and productive matches between workers and firms. It also has some less attractive implications, particularly for workers. Job security is very limited, and workers might find themselves out of a job with very little warning.
In Europe, labor markets tend to be more rigid. We have explored some of the ways in which this is true. Minimum wages are often higher, unemployment insurance is more generous, and the costs of hiring and firing workers are greater. As a consequence, European countries are typically characterized by higher unemployment than the United States. In addition, unemployment duration tends to be longer: workers who become unemployed tend to take longer to find a new job. This makes the labor market a more difficult place for workers who do not have jobs but a better place for those who do have jobs because they typically enjoy higher salaries and greater security.
We have analyzed the differences between these two parts of the world, but we have not explained why these different economies have settled on such different configurations of labor laws. The explanation is not simple and goes well beyond economics into questions of history, politics, and sociology. Still, there is probably some truth in the simplest explanation: voters have different preferences about how their working lives should look. Perhaps voters in Europe prefer a world of greater job security for the employed, even if it comes at the cost of unemployment problems and a less-efficient economy. Perhaps voters in the United States prefer a dynamic economy, even if it comes at the cost of more uncertainty for working people.
A Washington Post article quoted the following opinion from a French student.Molly Moore, “French Students Hit Streets to Protest New Labor Law,” Washington Post, World News, March 17, 2006, accessed July 7, 2011, http://www.washingtonpost.com/wp-dyn/content/article/2006/03/16/AR2006031601908.html. Do you agree or disagree with these views? Do you think of the labor market experience in your country differently?
“They’re offering us nothing but slavery,” said Maud Pottier, 17, a student at Jules Verne High School in Sartrouville, north of Paris, who was wrapped in layers of scarves as protection against the chilly, gray day. “You’ll get a job knowing that you’ve got to do every single thing they ask you to do because otherwise you may get sacked. I’d rather spend more time looking for a job and get a real one.”
Suppose that there is a legal minimum wage, set in nominal terms. Draw a diagram to show how this can lead to unemployment. Now suppose that there is inflation. What happens to the employment rate? What happens to the unemployment rate?
Table 23.3 Output Level per Day in Different Jobs
Table 23.4 Output Level per Hour from Assigning Jobs