Age-Adjusted Unemployment Rates: A New Look at U.S. and European Labor Markets - Prof. Rob, Study notes of Market economy

Download Age-Adjusted Unemployment Rates: A New Look at U.S. and European Labor Markets - Prof. Rob and more Study notes Market economy in PDF only on Docsity! Horn and Heap 102 Challenge/March–April 2006 Challenge, vol. 49, no. 2, March/April 2006, pp. 102–111. © 2006 M.E. Sharpe, Inc. All rights reserved. ISSN 0577–5132 / 2006 $9.50 + 0.00. ROBERT HORN is professor of economics, James Madison University. PHILIP HEAP is instructor of economics, James Madison University. The authors thank Ehsan Ahmed and J. Barkley Rosser for useful comments and suggestions in the preparation of this paper. They also acknowledge the late Lynn Turgeon, who first encouraged them to explore this topic. None of the above is respon- sible for any errors or misinterpretations contained in this paper. UNORTHODOX SOLUTIONS A New Look at U.S. and European Unemployment Robert Horn and Philip Heap Despite ongoing structural reforms, many European countries continue to suffer high rates of unemployment relative to the United States. The authors argue that reported unemployment statistics for both the EU-15 countries and the United States understate the degree of unemployment. Their work is based on an “age-adjusted” unemployment rate, which takes into account changes in the age and gender structure of the population. But they argue that without these factors, the reported unemployment rate is a misleading measure of the strength of the economy. THE PAST DECADE brought significant changes in the governanceof western Europe. Since the signing of the Maastricht treatyin 1992 and the subsequent adoption of the euro, the economic organization among member states has been restructured. On May 1, 2004, the European Union (EU) increased its membership from fif- teen to twenty-five countries. The euro, after getting off to a slow A New Look at U.S. and European Unemployment Challenge/March–April 2006 103 start, appreciated significantly against the dollar, only to slide back again over the past year. Despite its claims of serving to liberalize economic relations among members and mediating trade relations between the EU and the rest of the world, the EU remains an organi- zation of complex rules and regulations and a bureaucratic night- mare when significant reforms are on the table. The recent rejection of the new constitution by France and the Netherlands is only the most recent setback for the EU. The closing decade of the twentieth century was marked by signifi- cant economic growth in the United States. Real gross domestic prod- uct (RGDP) grew at an annual rate of 3–4 percent for most of the 1990s. The reported unemployment rate declined from 7.5 percent of the civilian labor force in 1992 to only 4.0 percent in 2000. Infla- tion rates remained low by historical standards, and the federal gov- ernment budget was actually in the black, albeit for a short time. Although the economy slowed during the first three years of this century, the performance of the U.S. economy has been stronger than Europe’s over the last decade. Annual growth in RGDP in the United States was almost 1 percent higher than in the European Union be- fore 2004 (EU-15)—3.23 percent versus 2.25 percent.1 Over the same period, the average unemployment rate in the United States was 5.1 percent compared with 8.6 percent in the EU-15. Although the unemployment rate in the EU-15 has fallen over the past ten years, it still remains well above the unemployment rate in the United States. The unemployment rate in France has hovered near or above 10 percent since the mid-1980s and has only recently fallen below 10 percent. Spain experienced even higher unemployment during the same period. During the mid-1980s and the1990s, unem- ployment rates were close to 20 percent. Even the largest economy in Europe, Germany, has been plagued by unacceptably high unemploy- ment rates. Numerous writers have argued that the institutional struc- ture of European economies results in greater labor market rigidities. Relative to the United States, employers in Europe generally have less freedom to hire and fire workers, unemployed workers receive ben- efits that are a larger percentage of their income and for a longer Horn and Heap 106 Challenge/March–April 2006 Ta bl e 1 A ge a nd G en de r D is tr ib ut io n o f th e L ab o r Fo rc e 19 84 19 90 19 95 20 00 20 03 A ge G ro up M en W o m en M en W o m en M en W o m en M en W o m en M en W o m en U ni te d St at es 15 –2 4 11 .2 9. 9 9. 5 8. 4 8. 6 7. 6 8. 3 7. 5 7. 9 7. 2 25 –5 4 37 .3 28 .5 38 .5 31 .7 38 .8 33 .2 38 .0 33 .1 37 .3 32 .0 55 –6 4 6. 2 4. 3 5. 3 3. 9 4. 9 4. 0 5. 5 4. 6 6. 5 5. 7 65 + 1. 5 1. 0 1. 6 1. 2 1. 7 1. 2 1. 7 1. 3 1. 9 1. 5 Eu ro pe an U ni on ( 15 ) 15 –2 4 11 .0 8. 9 9. 6 8. 0 7. 5 6. 1 6. 7 5. 6 6. 4 5. 3 25 –5 4 42 .5 25 .5 42 .5 28 .8 43 .5 32 .0 43 .0 33 .5 42 .3 33 .8 55 –6 4 7. 2 3. 6 6. 6 3. 3 6. 2 3. 5 6. 2 3. 8 6. 6 4. 3 65 + 0. 9 0. 5 0. 8 0. 4 0. 8 0. 4 0. 8 0. 4 0. 8 0. 4 So ur ce : T he r aw d at a us ed t o ca lc ul at e th e la bo r fo rc e sh ar e w as o bt ai ne d fr om t he O rg an iz at io n fo r Ec on om ic C oo pe ra tio n an d D ev el op m en t (O EC D ) “L ab or F or ce S ta tis tic s” d at ab as e (w w w .o ec d. or g) . A New Look at U.S. and European Unemployment Challenge/March–April 2006 107 fell by 15 percent, the labor force of people in that age group fell by 27 percent. The fact that the labor force share of older workers (fifty- five-plus) did not change in the EU-15 over this period, even though their population rose substantially, could reflect a desire to retire earlier in this region than in the United States due to generous pen- sions and health care. Age-Adjusted Unemployment Rates in the EU-15 and the United States What the data make clear is that the labor force in both the United States and the EU-15 has aged over the last twenty years. Since the labor force shares of those with above-average unemployment rates— young workers—have fallen over time, the effect should be to reduce the unemployment rate below what it otherwise would have been. If the labor force shares had not changed, the unemployment rate would actually be higher. The alternative “age-adjusted” unemployment rate (AAUR) that we develop here controls for the changes in the age and gender composi- tion of the labor force by weighting each age and gender group’s unemployment rate by its respective share of the labor force in a given base year.2 The AAUR provides an accurate description of what the unemploy- ment rate would have been had the age/gender composition of the workforce remained as it was in the base year. The AAUR in effect controls for changing demographic characteristics of a population such as a baby boom or bust, a change in retirement policies, or the influx of women into the labor force. If the AAUR is greater than the reported rate, then not taking into account changes in the age and gender structure of the labor force results in understating the unem- ployment rate. The results for the United States and the EU-15 are presented in Table 2. We opted for 1984 as the base year in order to have a consis- tent series for both the EU-15 and the United States. Since the mid- to late 1980s, the age-adjusted unemployment rate Horn and Heap 108 Challenge/March–April 2006 has exceeded the reported rate in both regions. This result indicates that the aging of the population has exerted a downward pressure on European and American unemployment rates, since the rates would have been higher had the age structure of the labor force remained constant. This effect is most apparent when one considers the labor force shares and unemployment rates of younger workers. In both 1984 and 2003, although the unemployment rates of young workers fell in both the EU-15 and the United States, young workers’ unemployment Table 2 Age-Adjusted Unemployment Rates (AAURs), 1984–2003 United States European Union–15 AAUR Rpted Difference AAUR Rpted Difference 1984 7.5 7.5 0.0 10.5 10.5 0.0 1985 7.2 7.2 0.0 10.6 10.6 0.0 1986 7.1 7.0 0.1 10.5 10.5 0.0 1987 6.3 6.2 0.1 10.3 10.3 0.0 1988 5.7 5.5 0.2 9.7 9.7 0.0 1989 5.5 5.3 0.2 8.9 8.9 0.1 1990 5.8 5.6 0.2 8.4 8.3 0.1 1991 7.1 6.8 0.3 8.8 8.6 0.2 1992 7.8 7.5 0.3 9.9 9.6 0.3 1993 7.2 6.9 0.3 11.1 10.7 0.5 1994 6.4 6.1 0.3 11.6 11.1 0.5 1995 6.0 5.6 0.4 11.2 10.6 0.6 1996 5.8 5.4 0.4 11.4 10.7 0.6 1997 5.3 4.9 0.4 11.2 10.6 0.6 1998 4.9 4.5 0.3 10.4 9.9 0.6 1999 4.5 4.2 0.3 9.7 9.2 0.6 2000 4.3 4.0 0.3 8.7 8.2 0.5 2001 5.1 4.7 0.4 7.8 7.4 0.5 2002 6.2 5.8 0.4 8.2 7.7 0.5 2003 6.5 6.0 0.5 8.6 8.1 0.6 Source: The data to calculate both the AAUR and the reported unemployment rate was obtained from the Organization for Economic Cooperation and Development (OECD) “Labor Force Statistics” database (www.oecd.org). For the EU-15, the reported rate is not the same as the “standardized” unemployment rate calculated by the OECD. A New Look at U.S. and European Unemployment Challenge/March–April 2006 111 To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535. 2. Formally, the adjusted unemployment rate u* in year t is calculated as: u t * = ∑ i LF i x u it , where LF i is the labor force share of group i in the base year, and u it is the unemploy- ment rate of group i in year t. Copyright of Challenge is the property of M\.E. Sharpe Ine. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.