Europe isn't working

Governments will be tempted by the wrong policies to tackle unemployment

A spectre will haunt Europe in 2010: not communism, but the return of mass unemployment. The European economies will recover slowly during the year. But unemployment is a notoriously lagging indicator. The OECD, a think-tank of rich countries, expects it to reach a post-1945 high of 10%, or some 57m people, for the whole OECD club in late 2010; by then some 25m jobs will have been lost since 2007. In several countries—Spain, Ireland, France, Germany and Poland—the rate will rise above 10%.

(...) The best answer to unemployment is neither more regulation, nor pushing people into early retirement, nor massaging the numbers down. These either do not work or they tackle the symptoms, not the disease. They are also perverse given Europe’s demographic future, in which working populations in most countries will be shrinking, not expanding. In the short run Europe may experience high unemployment; in the long term it will suffer from labour shortages.

A much better policy response is training and other measures to ensure that those thrown out of work stay in touch with the labour market so that they can quickly rejoin it as growth picks up. The Scandinavian countries have proved much better at this than most. They explicitly seek to protect and educate workers rather than preserving existing jobs and factories. Such investment in human capital is also likely to raise productivity, generating higher growth and more employment in the long run. Unfortunately the policies that are most likely to be pursued by many European governments will do precisely the reverse.