Europe Buys High Wages, But at Cost of Job Growth

EMPLOYMENT TRENDS

WHEN it comes to unemployment, the optimistic assumptions of the postwar era have vanished.

If at one time nations could offer their citizens more jobs and better wages, today they can only offer one or the other. For the past two decades, the United States has offered more jobs but stagnant wages. Western Europe has chosen the opposite path: higher wages but stagnant job growth.

Policymakers and economists are not at all sure what has caused this slow-growth dilemma and what will solve it. Consider Western Europe's plight. Since 1980, it has created far fewer new jobs than the US. From 1980 to 1985, for example, the European Union (EU) actually lost jobs while the US continued to expand employment by nearly 2 percent a year.

Part of the problem is short term. Western Europe's deep recession is pushing up unemployment to record levels, perhaps 11.5 percent by 1995. But the long-term trend is troubling, too. Every business cycle has saddled Western Europe with higher peaks and valleys of unemployment.

``If you are a young person entering the labor market ... it's very hard to get a job'' in Europe, says Paul Krugman, an economics professor at the Massachusetts Institute of Technology. ``In the US, we let the wages drop. We don't have much of a safety net, but by and large they [young people] have jobs.''

The result: little or no real prospect for rising incomes. From 1975 to 1992, the EU, Japan, and Sweden saw their average manufacturing wages and benefits rise faster than in the US when measured in US dollars. (See chart.) This measure can be misleading since currencies fluctuate. But even when manufacturing wages are counted in national currencies, factory workers in France, Germany, and Sweden have seen their wages and benefits rise faster.

America's poor performance is based on averages. But the averages hide a disturbing trend. High-skilled workers have seen their incomes go up over the past two decades, even after inflation. Low-skilled workers have seen the opposite.

Policymakers have no easy solution for this growing disparity. All the models the US could look to are disappointing. Japan's economy has slid into recession, and US economists doubt that the Japanese model can be copied here. ``I view the Japanese system as more of a carryover from the past,'' says Marvin Kosters, a senior economist at the American Enterprise Institute in Washington.

For a time, Germany was viewed as a model, but many economists now say its wages and benefits are too high to be sustainable. Until 1990, Sweden, too, seemed to have found a way to buck the wage-job trade-off with its so-called ``third way.'' But it is now in worse shape than Germany, and its government has set out to cut back welfare benefits.

But so far Europe is only trimming around the edges of its welfare state. Some Europeans deny that the jobs-wage trade-off even exists. ``I don't think the evidence that we have is hard and fast,'' says Andrew Chapman, acting head of the employment policy unit for the European Commission. ``Debate needs to focus on wider issues. What's happening to real wages and real unit costs?''

Even viewed this way, a recent study by McKinsey Global Institute suggests that European workers lag behind their US and Japanese counterparts. For example, Germans were less productive than Japanese in eight of nine industries studied. They lagged behind Americans in seven and only managed a tie in the other two (steelmaking and metal working). It is difficult to escape the conclusion that Western European companies are paying their workers higher wages for less output than their counterparts in the US.

``We have a wage level that is 30 percent above the average of the US, Japan, and other [EU] countries,'' says Rudolf Geer, chief economist of Gesamtmetall, Germany's largest employers' association. ``We lost a part of our international competitiveness.''

The solution lies in Germany's consensus-seeking model, rather than the more free-wheeling and confrontational American system, Mr. Geer says. ``All groups must give their part,'' he adds, ``and that is the main problem in Germany today. There is a lack of consensus to realize these goals.''

The Clinton administration is taking steps to address the growing income disparity between workers: training programs, universal health care, and increases in taxes for the rich. But the US remains far from the European model. Economists tend to think there is not another way out of this trade-off.

``It's pretty clear to everyone that the pie isn't getting any bigger,'' says labor economist Audrey Freedman. ``Everyone came [to the US] with the idea of material progress and a long time horizon - that life would be better for one's children and one's children's children. Now I think everyone realizes that's not going to be true.''