Persistent Unemployment and Europessimism

Economic pessimism in Europe has been substantially based on the contrasting evolution of unemployment during the 1980s between Europe and the United States. While the U.S. unemployment rate fell from over 10 percent in early 1983 to nearly 5 percent in 1988–1990, the rate for the EC remained above 10 percent for six straight years (1983–8) and fell only modestly thereafter. The causes of high European unemployment have been posed as a choice between restrictive demand policies and structural impediments at the microeconomic level. Published economic research, so far mainly based on data through the mid 1980s, has as yet reached no consensus on the relative persuasiveness of these two explanations. The economic recovery of several European countries in the late 1980s has generated new data that might break through this stalemate.

Given the new weight of the German economy within Europe, its role as the anchor of the EMS, and the recent controversy created by the antiinflationary policies pursued by the Bundesbank, it seems natural to choose Germany for a detailed comparative study with the United States. Following 1960, for almost fifteen years extremely low unemployment rates of about 1 percent were at the core of the German economic “miracle” and provoked transatlantic envy when contrasted with the average 5 percent American unemployment rate over the same period. But after 1973 German unemployment rose steadily and exceeded American unemployment during each year between 1984 and 1990.