European labour markets : a picture of class warfare

February 7, 2012

February 7, 2012

by Deepankar Basu

The global economic and financial crisis that started with the bursting of the massive housing bubble in the U.S. economy in 2007 shows no signs of “correcting” itself. While there has been some positive news in both in terms of GDP growth in the US economy in the last quarter of 2011, and the labour market in January 2012, the recovery in the US is far from complete. At present there are close to 12.8 million workers looking for but unable to find jobs; and that number would be close to 25 million if we include those who are currently working part-time and wish to move to a full-time job. Comparing the recessions in the US economy in terms of job loss since 1974 shows the depth of the current one and easily drives home the point that anything like a recovery of the labour market is still far out into the future, if at all.

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Figure 1 : Unemployment Rates in Major European Countries (Source: EUROSTAT)

If, on the other hand, we look at the other side of the Atlantic, the scene is much more grim. GDP growth has been weak in most countries in Europe, but what is even more striking is that the unemployment rate in several countries have reached (or is about to reach) Depression era levels. The massive slack in the European labour markets clearly detract from any story of a recovery in the global economy.

Figure 1 and 2 depicts the evolution of the official unemployment rate in the major European countries. Figure 1 covers the so-called PIIGS groups: Portugal, Ireland, Italy, Greece, and Spain; Figure 2 has Denmark, France, Germany, United Kingdom and the US thrown in for comparison. What do the charts show ?

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Figure 2: Official Unemployment Rate in Major European countries, and the US (Source: EUROSTAT).

Let us start with Figure 1, which displays trends for the PIIGS group. They comprise some of the Euro area economies that have been most badly affected by the unfolding global economic and financial crisis. Figure 1 displays several disturbing trends. First, it shows quite unambiguously that there was a break in the trend in the unemployment rate series sometime around late 2007 (or early 2008) for all the 5 countries. At that point (the exact date for which might vary a little across countries), the declining or flat trend for the unemployment rate since the mid-1990s got reversed. The unemployment rate started increasing and for all countries (other than Italy), it is still much higher than what it was a decade ago.

Second, Figure 1 shows that the unemployment rate in Spain and Greece has already reached Depression era levels, and the corresponding rates in Ireland and Portugal are close by. Spain (with a population of just over 46 million) has by far the highest unemployment rates in contemporary Europe. The unemployment rate in Spain crossed 15 percent in early 2009, increasing steadily ever since, reaching a phenomenal 22.9 percent in November, 2011. Greece has been following Spain very closely: in September, 2011, Greece reported an unemployment rate of 18.8 percent. Ireland, which had unemployment rates below 5 percent before the crisis has seen it triple since then. In November, 2011, Ireland reported an unemployment rate of 14.6 percent and Portugal reported an unemployment rate of 13.2 percent.

It is true that Spain and Ireland have had high unemployment rates since the early 1980s (as can be seen in Figure 1). But what is important for our purposes is to see that even these two countries had witnessed a decade long decline in the unemployment rate since the mid-1990s. That trend was decisively reversed with the beginning of the current crisis, and all the gains in terms of the labour market has been wiped out brutally within a few years. The sharply rising trend in the unemployment rate in both Spain and Ireland look pretty ominous, a return to the hardships of the 1980s and early 1990s. The same story can be told for both Greece and Italy with the proviso that unemployment rate levels in these two countries never touched the highs seen by Spain and Ireland; the picture of the trend is, on the other hand, pretty similar to theirs. With Portugal, it is a totally different story. It has had relatively low unemployment rates till the early 2000. Since then, Portugal has seen almost a secularly rising trend in the unemployment rate. A small dip in the mid-2000s was quickly reversed with the beginning of the crisis. Hence, in all the 5 countries of the PIIGS group, favourable trends in the labour market were decisively reversed during the current crisis.

Combing Figure 1 and 2, we see that three large countries, France, Italy and the United Kingdom, which together have a population of about 185 million, have been witnessing unemployment rates between 8 and 10 percent; we can also add Denmark, a much smaller but important country, to this list of mediocre performance countries. Moreover, over the last two years, the unemployment rate has been essentially flat in these countries and have not displayed any tendency whatsoever to decline.

The only country that has seen a decline in the unemployment rate is Germany. But that is hardly a surprise given that the construction of the Eurozone, along with the adoption of the single currency, was meant to facilitate the capture of the markets of the peripheral countries, the PIIGS group for sure but also others, by capitalist enterprises in Germany. Having almost free access to these export markets have helped German firms maintain low unemployment. But it doubtful whether this has benefited German workers since the “competitiveness” was largely built on wage repression in Germany.

All in all, these disturbing numbers clearly show that a large part of Europe is already in, or is rapidly heading towards, what Marxist economist Anwar Shaikh has called the First Great Depression of the 21st Century. But why did the labour market develop such massive levels of slack?

In the short term, the level of unemployment in any capitalist economy depends on what economists call aggregate demand. This is the sum of all the expenditures that are made on purchasing goods and services produced in the economy. These expenditures come from households, firms, the government and the rest of the world (i.e., net export expenditures). When the aggregate demand is high and rising, firms can expect to profitably sell the commodities that they produce. Hence, they hire workers to increase production. On the other hand, when the aggregate demand falls, firms have difficulty selling their commodities at profitable prices, and their inventories pile up. They reduce their production levels, and fire workers. This increases the unemployment rate. As I have argued previously, the sharp decline in aggregate demand that was the result of the global economic and financial crisis has been compounded by the adoption of “austerity” measures across Europe, whereby governments have reduced their expenditures to deal with growing deficits. When governments reduce expenditures in an already depressed economy, the level of aggregate demand plummets. The high unemployment rates are the result of this precipitous fall in aggregate demand across European economies. It seems that the whole set of austerity measures is the specific manner by which the European elite is forcing the cost of adjustment of the economic and financial crisis on the working people of Europe, especially those in the periphery. As we have just seen, “austerity” in the midst of a deep recession means a compounding of the problem of inadequate aggregate demand that started the recession in the first place. This double attack on aggregate demand, the first due to the crisis and the second due to the policy of governments, keeps the unemployment rate from falling; in fact, it persists at high levels or even increases. The continuing high (and rising) unemployment rates across Europe are a direct manifestation of European class warfare.

(The author would like to thank Amit, Pinaki and Shiv for comments and suggestions.)

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