European Shadow Unemployment Is a Real Dilemma

CommentaryThe latest jobs report in the United States shows strengths and weaknesses. Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate fell to 3.5 percent. However, the U.S. job market continues to show negative real wage growth, the employment-to-population ratio is 60.1 percent, and the labor force participation rate is 62.3 percent. According to the Bureau of Labor Statistics (BLS), both measures have shown little net change since early 2022 and each remain 1 percentage point below their values in February 2020. The U.S. jobs figures are constantly dissected by analysts, and there’s a healthy criticism in independent research, which certainly helps enormously when it comes to understanding the health of the labor market. However, in the European Union, things are much worse. The latest unemployment figures are very concerning, but what’s even more worrying is when you analyze “shadow unemployment.” In its latest Economic Outlook for Europe 2023–24 report, UBS shows the significant difference between official unemployment in the euro area and the hidden unemployment coming from furloughed jobs and unoccupied workers that don’t count as officially unemployed. The official unemployment rate in the euro area is still elevated, at 6.5 percent (pdf). The highest unemployment rate is in Spain, at 12.4 percent, followed by Greece, at 11.4 percent, and Italy, at a much lower 7.8 percent. Youth unemployment is also extremely elevated. European Union average youth unemployment stands at 15.1 percent, led by Spain at 32.3 percent, Greece at 31.3 percent, and Italy at a distant 23 percent. However, shadow unemployment in the euro area, according to UBS, stands at 8.8 percent, with Spain at 15 percent, Italy at 8 percent, and Germany well above 5 percent compared with the official 3 percent. There are diverse ways in which European economies leave unoccupied workers out of the official unemployment rate. These include deducting from the unemployment figure those who aren’t working but are receiving training, zero-hour contracts, mini jobs, and those who have a long-term contract but only work a few months. They don’t appear as unemployed even if they have access to unemployment benefits. However, we want to look at these figures as they show the mistakes of a heavily intervened in and rigid labor market. The first source of rigidity is labor costs. The high social security and labor taxes make it more challenging for businesses to reduce unemployment. The tax wedge on work is so elevated in countries such as Spain or Greece that a business pays almost 1,800 euros for a 1,000 euro net salary. If we add to a high tax wedge a string of regulatory burdens and penalties, it shows that a system designed to protect workers is, in fact, leaving millions behind, particularly the young. There are also important barriers to reducing unemployment that include very high direct and indirect corporate taxes as well as language and cultural barriers. Europe’s furloughed jobs scheme was widely praised as a great way to protect workers during the misguided lockdowns of the COVID-19 crisis. While it certainly reduced the official unemployment rate, shadow unemployment rose to 21.7 percent. In the United States, a very flexible labor market still saw unemployment rise to 14.7 percent in April 2020. However, in the United States, the re-opening led to a rapid reduction with faster wage growth, while in the euro area, wage growth remained poor and continues to be negative in real terms, with a significant loss of purchasing power of salaries worsened by the inflationary spike in 2021–2022. While in the United States real wage growth has declined 1.1 percent, according to the BLS, in the euro area the nominal figure in the third quarter of 2022 was just 2.1 percent wage growth (pdf), which means a 6.8 percent negative real figure. There are many different challenges that need to be taken into account, and comparisons are always difficult, but there’s an undeniable negative trend in Europe that’s a direct consequence of constantly increasing intervention in the economy: elevated youth unemployment, much higher unemployment in rigid labor markets compared with more flexible ones, and a concerning trend of destruction of the purchasing power of salaries. My friends in the United States should take note. If you copy European economic policies, you get European unemployment and real wage levels. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times. Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”