Why Employment Performance Differs

It is not only labor markets but also product market regulations that chiefly determine a nation's employment performance Unemployment is widely viewed as the gravest economic problem for most industrial countries. In Europe, it has climbed steadily for the past 25 years to reach a postwar high [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. In the United States, it has been cyclical, with an average below that of Europe for the past decade. Japan has so far experienced low unemployment, although the early stages of economic reform and the recent rise in the numbers of the jobless suggest there is a risk that it will grow in the future. Much research has attempted to determine the causes of unemployment. Most of it has focused on macro analysis of the labor market. Though its findings are based on sound economic principles, the evidence available to test them is not conclusive. Despite references to the possible impact on unemployment of the markets for goods and services (product market) and for capital, no work to date has been able fully to determine this impact. To test conclusions about the labor market's effect on unemployment, and to investigate the role played by product and capital markets, the McKinsey Global Institute studied employment performance in France, Germany, Italy, Spain, Japan, and the United States from 1980 to the early 1990s.(*) We conducted analysis both at the level of the national economy and within seven industries: automotive, computers, furniture, banking, general merchandise retailing, film/TV/video, and construction. (See pp. 9-15 for case summaries.) Our principal findings are: * Japan and the United States have lower unemployment than Europe because they have created jobs in the market part of their economy, whereas European countries have lost jobs in theirs [ILLUSTRATION FOR EXHIBITS 2 AND 3 OMITTED]. * Product market restrictions were as important, if not more so, than workforce rigidity in explaining why job creation in Europe was below that in the United States, especially in high-growth service industries. - The creation of large numbers of service sector jobs in the United States has harmed neither job quality nor wages. - The United States has created more high-skill jobs than Germany and France [ILLUSTRATION FOR EXHIBIT 4 OMITTED]. Those countries have improved their job skill mix primarily by destroying low-skill jobs. * The wage distribution of service jobs in the US is almost identical to that of manufacturing [ILLUSTRATION FOR EXHIBIT 5 OMITTED]. Our findings for each country are summarized in the insert on pp. 6-7. The causes Differences in employment performance ultimately stem from differences in the rates at which industrial economies evolve. All economies are driven by natural evolutionary forces. As agriculture developed beyond the point of providing for self-sufficiency in food, productivity increases released labor for employment in manufacturing and services. As a result, jobs in these sectors rose as a fraction of total employment in all industrial countries during the first half of the twentieth century. In the second half, manufacturing employment peaked in industrial countries. Service employment, however, continued to rise. Today, productivity gains from innovative new products and processes continue to drive economic evolution and turnover in the labor market. Contrary to popular wisdom, productivity gains do not generally bring mounting unemployment and a declining economy. Rather, they provide more income for workers in old jobs, and free other workers to fill new jobs created by entrepreneurs. These entrepreneurs, in turn, produce innovative new products and services, which workers with increased incomes want to buy. The supply/demand balance in the economy is not automatic. An imbalance in one direction can generate inflation; in the other, it can frustrate growth and usher in recession. …