Keating: Youth Are Floundering in Rigid Labor Markets

June 27, 2013

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by Maryann O. Keating, Ph.D.

For those 25 years of age and under, joblessness remains a disaster both in the U.S. and elsewhere. German chancellor Angela Merkel risked incurring the wrath of struggling Eurozone countries by saying unemployed youngsters must be prepared to move for work. Merkel was quick to add that it was unfair that young people have to pay the bill for something they did not cause.

Labor force flexibility offers a less desperate solution than requiring young job seekers to leave home or country. What is meant by “labor force flexibility”? It is a characteristic of a country’s employment practices that allows companies to adjust to fluctuations in the economy with respect to consumers’ demand.

In general, the fewer regulations governing employment the greater flexibility in hiring. Minimum or maximum wages, laws inhibiting layoffs, severance requirements, and restraints on hiring and hours of work introduce rigidities into the employment process. In other words, the decision to hire should be less onerous than the marriage vow to share “all worldly possessions until death do us part.”

Country	Youth Unemploy- Ment *	Labor Market Flexi- bility Index**		Country	Youth Unemploy- ment*	Labor Market Flexi- bility Index**
Belgium	22.2%	69.8		Luxembourg	19.3%	39
Bulgaria	29.0%	74.8		Malta	14.7%	65.4
Czech Rep.	19.2%	85.5		Netherlands	10.4%	58.6
Denmark	14.8%	91.1		Poland	28.1%	62.9
Germany	7.6%	43.8		Portugal	38.2%	31.0
Ireland	30.5%	76.6		Slovenia	24.4%	40.4
Spain	55.8%	54.3		Slovakia	34.7%	72.2
France	26.3%	60.5		Finland	19.9%	45.5
Cyprus	32.3%	62.8		Sweden	24.4%	53.6
Lithuania	24.8%	64.1
Greece	62.5%	42.1		United States	17.3%	95.5

Source: *EUROSTAT, 2013 **The Heritage Foundation 2013 Index of Labor

Currently, in Indiana and throughout the United Sates, suppressants to employment include uncertainty over labor costs, payroll taxes and health insurance. Furthermore, small-business owners are unable or unwilling to assume legal burdens associated with the government’s enforcement of legitimate immigration, diversity and environmental concerns. Corporations place their capital investments in places where labor and the cost of doing business are cheaper. The victims of labor market rigidity are young entrepreneurs and low-skilled workers.

Keith Hall, commissioner of the Bureau of Labor Statistics from 2008 to 2012, notes that at the current pace of job recovery we are a decade away from a full labor market recovery. Hall cites taxes, government regulations and red tape as common responses by small-business owners when asked what are their most serious problems (exceeding labor quality concerns). Although Germany’s apprenticeship program is worth considering, vocational training alone is not the complete solution to youth unemployment.

Presently, the unemployment rate in the U.S. for those 25 years and under, is 17.3 percent, but many young people are absent from the labor force. The employment to total population ratio of teens 16 to 19 years old is about 26 percent compared with 40-50 percent in the 1975-2002 period. According to the Bureau of Labor Statistics, the proportion of adult men 20 and older working or seeking work dropped 13 percentage points between 1948 and 2008. In 2011, 9.7 million men and women who otherwise may have joined the labor force received Pell grants to attend college. An affluent society, such as the U.S., may be able to afford delayed entry into the labor force, and for many youths that is good.

However, the economist Art Laffer notes the danger and costs to societies in which unemployed youths become hostile as over time they become less employable. Support for the labor-freedom argument is shown in the table below given a sample of countries comparing youth unemployment rates with labor market flexibility.

Note in the above table that Germany, with the lowest level of youth unemployment, is characterized by relative labor-market rigidity, contrary to the argument expressed here that lower youth unemployment is associated with greater labor-market flexibility. A study by Abraham and Houseman suggests that German companies have developed strategies to cope with labor-market inflexibility by adjusting hours of work as compared with the United States’ reliance on hiring and firing to alter the level of employment. This suggests that policy reforms to advance labor-market flexibility may have unexpected consequences depending on type of industry in which a country has a trading advantage. In some cases, countries with rigid labor markets outsource production of intermediate goods to more-flexible labor markets. On the other hand, an analysis by Cuñat and Melitz shows that more-flexible countries tend towards specializing in and exporting goods and services associated with high-volatility industries.

The temptation, particularly for politicians seeking votes, is to favor firms with incentives to hire younger workers.  The flexible-market solution is to free all firms in order to hire more workers necessary to meet our private and public commitments. The share of those 16 years and older neither working nor looking for work appears to be higher in the U. S. than in any Western European economy, including Greece.

The statistical case for releasing companies’ employment decisions from regulatory encumbrances is mixed. The moral case for flexible labor markets, however, goes beyond economic incentives. It is a matter of human development for young people in any country seeking attachment to the labor force either as entrepreneurs or entry-level workers.

Maryann O. Keating, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell, 2009. A version of this article was distributed April 22, 2013.

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