"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

An Economists’ Manifesto on Unemployment in the European Union 217
on overtime. Second, and far more serious, the slowdown in the flow of hiring
greatly reduces the chance of outsiders, and particularly new entrants in the labor
force, to find a job and is a major cause for the high, in some cases almost unbelievably
high, incidence of unemployment among young people. This high rate
is particularly striking in countries where no unemployment benefits are provided
for people that have never held a job. In addition, a rise in firing costs cannot be
expected to leave real wages unchanged. On the contrary, the greater the firing
costs, the greater will be the market power of the incumbent employees
(insiders) and thus the higher the wages these workers can achieve. Taking further
into account the fact that the high cost of firing will add to labor costs both directly
and through redundancy, we can expect a lower demand for labor, at least in an
open economy. On the whole, job security legislation must be regarded as a
major negative influence on unemployment, especially youth unemployment,
even if it might have desirable effects in other directions. Consequently, the lower
will be the demand for labor. For these various reasons, increasing job security
is far more likely to eventually decrease jobs and employment rather than the
reverse.
Work-Sharing and Early Retirement
There can be no objection to people reducing their work week or retiring early
if they are prepared to accept the corresponding reduction in weekly pay, but we
hold that there is no justification for the government to provide incentives for
people to work shorter hours or retire earlier.
The logic underlying work-sharing and early retirement is of course elementary.
If there is a fixed amount of paid work to be done in the economy, and if
this work falls very unequally across the population—with a majority of people
enjoying full time employment while a minority is saddled with long periods of
unemployment—then considerations of equity and social cohesion make it reasonable
to seek policies that share the burden of unemployment more democratically.
In short, if the pain and impoverishment of unemployment are inevitable,
it may the best to spread the misery as evenly as possible.
The problem with this approach is that the underlying premise is false. We do
not believe that the European unemployment problem is unavoidable. The amount
of work to be done in the economy is not fixed. When the economy is in recession,
an increase in production and employment—in response, for instance, to a
rise in export demand or on private investment—will lead to a rise in purchasing
power and thereby generate a further increase in production and employment.
In this sense, unemployment is not inevitable. Policy makers who see it as such
are being unduly defeatist; they should spend more thought on bringing unemployment
down rather than on spreading it more thinly.