European Labor Market

As Blanchard has mentioned, the reasons why macroeconomists care about unemployment are unemployment has important social consequences and unemployment rate give them an indication of whether an economy is operating above or below its normal level of activity. (2003) Hence, employment and unemployment are important subjects to research the status of economic development and people' wealth. Experienced the global economic crisis in 2008, a recession has expanded into the whole world. Every country faces the challenges to resume and improve their economies. In particularly, Europe gathers most developed countries in the world, and plays an important even dominant role on the development of world's economy. Hence, the studies of European labor market become more and more necessary. This essay will study the European labor market combined with a comparison about the unemployment records between UK and Germany from the early 1970s to the present in the following contents. It will be unfolded in four periods, such as, 1970s, 1980s, 1990s to 2000s and recent years. At the same time, the reasons of shifts in unemployment and the similarities and differences in UK and Germany's unemployment records also are explained.

Definition and causes of unemployment

Before the comparison begins, we should find out what is unemployment clearly. Theoretically unemployment can be defined as the number of people of working age who are willing and available to work at current wage rates, but not currently employed. (http://www.bized.co.uk/virtual/economy/policy/outcomes/unemployment/unempex.htm) As Abel, Bernanke and Croushore said, the existence of unemployment implies that, at any time, not all of society's labor resources are actively involved in producing goods and services. (2011) In addition, unemployment rate, the ratio of the number of unemployed to the labor force, is the most intuitive way to measure the unemployment. Hence, the comparison of unemployment between UK and Germany is mainly based on the records of unemployment records in years. What has to be mentioned is that, natural rate of unemployment is the unemployment rate at which price and wage decisions are consistent. (Blanchard, 2003), It is also seen as equilibrium unemployment rate and non-increasing inflation rate of unemployment. Unemployment is usually caused by frictional, structural, changes in real wage and a lack of demand for goods and services. Especially, when the real wage goes up, the labor supply will excess labor demand.

According to the Philips curve, which shows a tradeoff relationship between inflation and unemployment, governments could choose the optimal attainable combination and attain it. When the inflation rate rises, the unemployment rate will decrease.

Theoretical speaking, if actual rate of unemployment increases, it may be given rise to an increase in natural rate of unemployment or an increase of the actual rate of unemployment over natural rate of unemployment.

Comparison about unemployment in the UK and Germany

1970s

After the golden age of 1950s and 1960s, the unemployment of most European countries have maintained a very low level at the beginning of 1970s, such as, in 1970 UK had an unemployment rate about 3.5% while Germany had 0.6%. With the global economy crisis broke out and expanded, European economies suffered a series of shocks and involved in terrible turmoil. Unemployment started to rise in European countries around early to mid-1970s, and continued going up in entire 70s. In UK, its unemployment rate climbed from 3.5% in 1970 to about 5% in 1980 with a range of 1.5%. In Germany, the unemployment rate changed in a range of 3.4%, which increased from 0.6% in 1970 to above 4% in 1975 while declined to 3.2% in 1980. (OECD) With those records have mentioned above, we can see UK's unemployment rate kept higher than that of Germany, while its changed rate of unemployment is lower than that of Germany.

Natural rate of unemployment changes depend on whether the warranted wage rate and bargained wage rate move out of line. It is more likely to rise when growth rate of bargained wage rate over the growth rate of warranted wage rate with the decline of equilibrium employment. (Blanchard, 2003) The warranted wage rate refers to the wage rate consistent with stable employment along a balanced economic growth path. To maintain a stable employment; the warranted wage must grow at the same rate as the rate of technological process. What is more, if the price of another factor of production increases, the costs on production will rise. As a result, the warranted wage should fall in order to maintain the productivity and profitability of firms. The bargained wage is the actual wage determined in bargaining process, which is firm actually paid. If there are real wage rigidities, the warranted wage will not change for same real wage expectations of workers, therefore, the growth rate of bargained wage can exceed that of the warranted wage. The series of adverse shocks in 1970s implied a reduced rate of growth of the warranted wage, which decline the equilibrium employment. In other words, the natural rate of unemployment will increase.

There should be little doubt that the main cause of increase in unemployment in the 1970s was seen as being the result of the common and adverse shocks. It could be reflected in five aspects:

First, two significant increases in the price of oil respectively in 1973 to 1974 and 1979 to 1980 have played a key role in reversing the increase of unemployment. As Blanchard has mentioned, this large increase was the result of the formation of the organization of Petroleum Exporting Countries, a cartel of oil producers, behaved as a monopolist. (2003,152) The increase on price of oil directly leads to a lower real wage and a higher natural rate of unemployment. What is more, the oil crisis has obstructed the growth of economies in the world especially developed countries, which is directly reflected at international trade. European countries, typically like UK and Germany, are oil importers with large quantities of oil. They are likely to experience an adverse shift in their terms of trade. As according to Blanchard, terms of trade are the ratio of import to export prices. (2003) When the terms of trade goes down, a country will get less imported goods form a unit of exports in international trade. In addition, with the sharped increasing oil price, the costs of import and production have go up as well. As a consequence, these oil-related industries tend to retrench their output of products. Hence, their demand for labor