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Monetary Policy Hasn't Helped European Unemployment But It's Not The Cause Of This Evidence

This article is more than 8 years old.

We can definitely say that the ECB's monetary policy hasn't helped unemployment in the eurozone. For goodness sake, they have been making the same mistake the Federal Reserve did in the 1930s. Thinking that low interest rates are equivalent to a loose monetary policy. They even raised interest rates at the depths of the Great Recession. And only just recently have they started doing the quantitative easing that the US and UK were doing three and four years ago. No, monetary policy in Europe has not been good in recent years. More an example of what not to do by modern lights rather than anything that anyone should want to follow.

And it's also obvious that all of this has had something to do with European unemployment over the same time. However, I really don't think that it's the cause of this piece of evidence:

Today, the divide has again emerged, after U.S. and European unemployment rates converged during the nadir of the global financial crisis. Economists have been left scratching their heads about why the trans-Atlantic difference is so persistent.

But a few practitioners of the dismal science argue the answer has been staring policy makers in the face: Tight monetary policies aimed at controlling inflation and setting the region on a path to a single currency have damaged Europe’s labor markets.

There's a much simpler explanation for this. And as ever, Occam's Razor applies: simple explanations are to be preferred to complex ones. Here's something from my old professor, Richard Layard, on the subject:

The evidence for the first proposition is everywhere around us. For example, Europe
has a notorious unemployment problem. But if you break down unemployment into shortterm
(under a year) and long-term, you find that short-term unemployment is almost the same
in Europe as in the U.S. – around 4% of the workforce. But in Europe there are another 4%

who have been out of work for over a year, compared with almost none in the United States.
The most obvious explanation for this is that in the U.S. unemployment benefits run out after
6 months, while in most of Europe they continue for many years or indefinitely.

What happened in the depths of the recent unpleasantness? Correct, there was a significant increase in long term US unemployment.

This came from two things. The first being that there was actually a significant rise in US long term unemployment. And the second a measurement point. To be included in U3, the usually reported US unemployment rate (and the one being used here) you must be in receipt of unemployment insurance. And during the unpleasantness UI was extended out to 99 weeks from the more normal 26. So, the long term unemployed in the US, normally there's not very many of them and we don't count them anyway. But here there were many more than usual and we were also counting all of them. So, obviously, the US unemployment rate rose.

Now we're back to something approaching normality and UI is back to 26 weeks in most places. Thus our measure of unemployment doesn't include however many long term unemployed people we think the US has (at present we think there might be 2-3% of the working age population in this group, a higher number than normal). But all of the eurozone number do include the long term unemployed.

Put these measurement differences together and we're pretty much explaining the gap between the measured numbers.

It's still true that European monetary policy hasn't been good. And that unemployment would be lower if it had been better. But the actual numbers being pointed at strike me to be much more (although not exclusively) as a result of how long unemployment benefits last and the precise details of how we do the counting. I'd also obviously want better European monetary policy but I just can't bring myself to think that this evidence is good enough to insist upon it.

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