UNEMPLOYMENT IN THE EU SINCE 1999

University Degree Business and Administrative studies

In 1999 a new single currency was introduced into the Euro zone, an area compromising initially of 11 countries, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain (Greece joined in 2001 and Slovenia joined the Euro zone on 1 January 2007). Under such an agreement it was necessary for the formation of a single body that would be solely responsible for the setting of monetary policy within the zone. This would have an impact on the ability of national governments to use monetary policies such as interest rates and exchange rates to manage their own economies. It would impact on their ability to control the money supply in the country to achieve aims such as cutting inflation, or ‘cooling’ the economy during times of high economic growth, or re-inflating the economy during harder times.

One sensitive area that could have been affected was the issue of unemployment in the zone. Advocates of the new currency claimed it would increase the number of people in work throughout the zone. There are a few reasons why this would be the case. The introduction of one currency throughout the zone would lead to a huge reduction, if not total eradication of uncertainty with regard to exchange rates. A Spanish firm for example could enter into a contract with a Dutch firm safe in the knowledge that there would be no sudden exchange rate shift that would cause the firm to make a large loss which should theoretically lead to more investment by firms which would bring more jobs to the Euro zone as a consequence of increased trade between member nations. Intuitively it follows that as more firms are entering into trade agreements with one another, there will be more opportunities for job creation (We can see this link with increased trade backed up by increased GDP figures also).

A single currency also eliminates all the transaction costs associated with converting money between all the various currencies that were previously in circulation, which should allow for a greater mobility of labour as workers, particular for workers located close to national boundaries as they would be able to take jobs either side of that boarder and be paid in their ‘home’ currency. The abolition on ‘red tape’ surrounding getting a job in another country would also have had a big impact in this area though, and it has been shown that labour migration in the Euro zone is still ...

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Alternatively, though, the introduction of a single currency could hit employment in some regions of the Euro zone due the restrictions placed on monetary policy alluded to in the opening paragraph. A topical example of this in recent years is Germany, who has been suffering from high unemployment rates and ‘high’ interest rates. To rectify their problem, in the days of the Deutsche Mark, they would simply have lowered interest rates to increase spending and stimulate their economy, but now this is an option unavailable to them. The problem is that other areas of the zone, the Netherlands say have high unemployment rates, and ideally what their economy would require is a high interest rate to dampen the economy. Neither country has autonomous control of their money supply and the ECB (European Central Bank) has to set rates such as best match the needs of the region as a whole, not just individual economies.

There are many different types of unemployment that can occur throughout the euro zone. Frictional unemployment occurs commonly throughout the workforce. It comprises of people that or temporally out of work as they are looking for a new job. Structural unemployment can cause more problems within different states in the euro zone than the area as a whole. This is due to major movements of industries throughout the zone, in search of cheaper labour. It can cause a miss-match to the location of the job and the location of the workers. Cyclical unemployment arises when the demand for employment is in decline, caused by a business cycle recession. Classical unemployment occurs as the national minimum wage is above the true market clearing price. However classical unemployment can really be seen. Technological and structural unemployment occurs as machines are used to replace the human workforce and as seasonal demand dictates the demand for unemployment.

The claimant count is one method of measuring unemployed, simply by counting the number of people claiming unemployment benefits. However the major problem with such figures is that many people would consider themselves unemployed but would not be allowed to claim benefits, or others maybe simply would not claim benefits for one reason or another. Many people also saw the claimant count as been rather open to government manipulation.

The labour force survey measure is comprised of the percentage of 15-64 year olds who are in paid employment excluding those who live in ‘collective households’ (such as halls of residence). Due to this the actual figures quoted are the employment rates in each country. To be officially classed as unemployed, people must have actively sought work in the 4 weeks previous to the survey being carried out and must be ‘currently’ available to take a job (Economics Update 2001, 7).

The data I have is based on the Labour Force Survey

The Euro Zone consists of the 12 countries who had adopted the currency by 31 December 2005 which were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain and Greece.

For comparison, I have included figures for the full Euro area, the EU25, which incorporates the 12 Euro Zone countries as well as The Czech Republic, Denmark, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia, Sweden, The UK and Bulgaria.

As the graph on the previous page indicates, the unemployment rate for the Euro zone does drop, (as the employment rate on the graphs rise) but how much of this drop can we attribute to the Euro? As the unemployment rate also drops in the EU25 as a whole. From the graph, it is clear to see though that unemployment drops furthest in those countries that did adopt the Euro. To emphasise this point I calculated the change in employment rate in all those countries that had adopted the Euro and then in the countries that haven’t adopted the Euro.

The above table illustrates how the employment rate rose by an average of 2.71% in all those countries making up the Euro zone, however some individual countries did rather better than others, such as Spain with a 9.5% rise compared to Germany with only a 0.2 increase and Austria’s that was unchanged over the period as a whole. This data would seem to point towards the Euro having a positive impact on unemployment rates, especially when we consider the table on the following page, showing the average changes in employment rates for the EU25 countries that did not adopt the Euro. Here we find an average change of only 0.98% in employment rates over the same 7 year period (although data is only available for 6 years for a few countries). Some countries, Czech Republic, Denmark, Malta, Poland and Slovakia, even register negative growth over the period.

This data overall would tend to suggest that the Euro is indeed responsible in some extent for the fall in unemployment witnessed in the EU since its introduction in 1999.

(All tables and figures adapted from epp.eurostat.ec.europa.eu)