High European unemployment is the combined result of economic downturns and protective governmental institutions, MIT Economics Chair Olivier Blanchard told 70 Tufts students and faculty at a lecture Thursday.
The talk, which was part of the Department of Economics' Wellington-Burnham Lecture Series, summarized three lectures given by the renowned economist at the prestigious London School of Economics in October.
Unemployment has been a chronic problem in Europe, which saw the percentage of people out of work rise to 11 percent in the 1990s. Blanchard, though, pointed out a small decline in 2000 and said that unemployment on the continent was on the cusp of coming down.
Yet, the number of people looking for work in Europe was not always so high.
"In the 1960s, Europe was doing incredibly well, with strong growth and low unemployment," Blanchard said.
With only 1.7 percent of the workforce unemployed at the time, many Americans looked eastward for solutions to the US's relatively high unemployment rate. But in 1970s, the fast-paced advances in technology that characterized the post-war years came to an end in Europe and productivity slowed.
"Technological progress allows workers to increase their standard of living without increasing labor costs," Blanchard said. There was a dramatic decrease in the underlying rate of technological progress. Wage increase rates took a while to adjust to the [slower] technical progress. So labor costs went up and so did unemployment."
High interest rates in the 1980s and 1990s also affected European companies' ability to invest in capital and hire workers. Unemployment problems are often blamed on Europe's welfare systems, according to Blanchard, as it offers generous cushions for workers who loose their jobs.
"The welfare state is not an invention of the 1970s," he said. "However, some programs did become more generous in the 1960s when times were good and countries thought they could afford a more generous social insurance system, which was counterproductive from the point of view of unemployment."
Blanchard stressed that the key to Europe's problems lay in the interaction between so-called shocks like high oil prices and reduced productivity and governmental institutions.
"Looking across countries, some labor market institutions, from high employment protection to long-lasting unemployment benefits, appear to affect both the strength and the persistence of the effects of shocks on unemployment," Blanchard said.
He said that employment protection in some countries lengthened the effects of shocks because generous programs gave people little or no incentive to start work again, causing them to spend a long time unemployed.
When asked what solutions might solve the continent's employment woes, Blanchard cited a 1982 agreement between Dutch labor, business and government for wage moderation so that firms could afford to invest more.
"Clearly this was a change in the way unions think about the determination of wages," he said.
Blanchard said that recent decreases in unemployment benefits had seen a decline in the number of people out of work. But while many think that Europe simply needs to cut back its generous social programs even further, he acknowledged that reducing unemployment benefits was often political suicide.
Unemployment retraining programs, if implemented correctly, work well and could counter the effects of being out of work, Blanchard said.
"Unemployment changes peoples' way of life," Blanchard said. "They loose skills and morale. Firms don't want to hire them."
The talk took a more academic perspective than recent lectures in the series, according to Yannis Ioannides, Tufts' Neubauer professor of economics. "This particular topic was macroeconomic and precise," he said. "It is interesting because we are talking about enormous differences. Real suffering has been associated with unemployment in some countries.
"[Unemployment] has been a puzzle for politicians in Europe. In the US in the late 70s and early 80s, unemployment was high and people were worried about its effects on the foundations of America. In Europe it has been that way for 20 years," he said.
Students were equally intrigued by Blanchard's perspective.
"I thought it was very thorough, but broad enough so that an undergraduate population could relate to it," said junior Manijeh Azmoodeh, president-elect of Tufts' Economics Society. "I'm thrilled that the department puts it on and I wish more students would come and show an interest."
In addition to his position as chair of MIT's Department of Economics, Blanchard is the Class of 1941 Professor of Economics. He is also a regular contributor to the French daily newspaper Lib?©ration.
Previous speakers in the Wellington-Burnham Lecture Series include a former Secretary of the Treasury and Mexico's Minister of Finance. The next lecture in the series will be held on April 19 and will feature Jose Scheinkman of Princeton University. He will discuss the use of economic ideas to study social interaction.
