The False Panacea of Labor-Market Flexibility

A preliminary comparison between Europe’s largest economy, Germany, and the US suggests that the former is better equipped to hold its own in the age of globalization. And Germany's highly regulated labor market may be partly to thank for that.

AMSTERDAM – Competitiveness has become one of the economic buzzwords of our time. Barack Obama trumpeted it during his State of the Union address in January, and European leaders from the Tory David Cameron in Britain to the Socialist José Luis Zapatero in Spain to Japan’s new Minister of Economics Kaoru Yosano have embraced it as a priority. But what sort of competitiveness do they have in mind?

Asked during an interview in September 2007 whether European governments should liberalize their countries’ labor codes, former United States Federal Reserve Chairman Alan Greenspan responded that Europe’s labor-protection laws significantly inhibited economic performance and resulted in chronically high unemployment across the continent. In the United States, people are fired more easily than in any other country, and the unemployment rate at the time was among the lowest in the world.

But it’s no longer September 2007, and US unemployment stands at 9.4%, not 4.5%. And, according to Greenspan’s successor, Ben Bernanke, there is no reason to assume that the unemployment rate will approach 5% – generally considered to be the natural rate of unemployment – any time soon.

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