The end of the American labour market model?

In a guest post from Declan Gaffney – shortened from a recent post at his blog L’Art Social – he shows that US employment rates are increasingly unimpressive in international context, despite the claims often made in the UK. Comments from both sides of the Atlantic are welcomed!

Only a few years ago the contrast between a dynamic, high-employment American labour market and stagnant, low-employment labour markets in Europe was a dominant theme in international political economy. While the low wages, inequality and precariousness associated with the American model were recognised and widely deplored, the U.S.’s low rates of unemployment and swift recovery from recessions during the 1980’s and 1990’s led even those on the left to query aspects of the European social model.

The most extreme expression of the U.S/European contrast- the withdrawal of minimal federal safety net provision for the poor under the Clinton welfare reforms of the 1990’s- even came to be taken seriously as a model for welfare reform among some social democrats. Thus in a promotional piece for Tony Blair’s ‘legacy’ programme of welfare reform in 2006, Will Hutton cited the falls in welfare receipt following the Clinton reforms and made the case for tough policy choices:

‘New Labour has tried hard, but has never felt able to reproduce the robustness of Clinton’s measures in a British context…….. Too many British live on benefit for no better reason than they don’t want to work….Part of the problem is that too many in progressive Britain still do not want to come to terms with the facts.’ []

Similar sentiments are still voiced today. But the advantages previously claimed for the American labour market model are now looking distinctly threadbare. Since the late 1990’s U.S. employment performance has been remarkably weak. The high rates of prime-age male employment of the late 1990’s have never even been approached in the new century, and uniquely among wealthy nations, theU.S.shows a long-term decline in employment and economic activity for prime-age women. These trends contrast with robust growth in employment for men and women in comparable European countries up to the 2008 financial markets crisis.

Even for welfare ‘doves’ unsympathetic to the case for ‘hawkish’ Clinton-style reforms, these findings come as something of a surprise. Economic theory predicts that minimal regulation and low social protection, other things being equal, tend to lead to higher levels of employment and more rapid adjustment to changes in demand for labour. The charts below show just how plausible this story was over much of the last three decades, and especially in the 1990’s. At the end of the twentieth century American and European labour markets seemed in their different ways to be behaving in exactly the way textbooks predicted.

The evidence on comparative employment rates

We concentrate on ‘prime age’ workers, aged 25-54, as their employment is less affected by education and retirement policy variables than other age groups. (Note that the scales on the charts are different and are set to make the changes over time more prominent.) For most of the 1980’s and 1990’s, the U.S. had higher rates of employment for men aged 25-54 than the European economies, and the gap grew over time, reaching its widest point in the mid-1990’s. However at the turn of the century U.S. employment rates for prime-age men shifted down, while European rates had risen during the late 1990’s. In the new century, there has been little to choose between the US and Europe.

Source: OECD: ALFS summary statistics database

For women aged 25-54, the story is one of more gradual erosion of the American employment advantage. In 1981, just under half of European women in this age group were employed compared to over 60% in theU.S.As the chart shows, despite these very different baselines, trends in women’s employment were extraordinarily similar in terms of the rate and tempo of growth up to the mid-1990’s, at which point growth theU.S.first levelled off, and then went into reverse. Meanwhile women’s employment continued its secular rise inEurope, converging with 2008.

Source: OECD: ALFS summary statistics database

What are the lessons from all this? We need to know more about the drivers- on both sides of the Atlantic- of this reversal in comparative performance before any firm conclusions can be drawn. But there is one obvious lesson for those who continue to believe the UK should take inspiration from the brutal welfare reforms of the Clinton era: cutting benefit rolls is not the same thing as raising employment. More tentatively, the U.S.employment performance since the turn of this century makes the previously unthinkable possibility that U.S. welfare reform had no positive economic impact in the medium term not only possible but plausible. If that turned out to be the case, economic failure could be added to political failure (as convincingly argued here) in the long-term judgment on the Clinton reforms.

3 responses to “The end of the American labour market model?”

  1. I enjoyed this post, and appreciate the use of cross national employment data.

    I think the farther in time we get from the 1996 passage of PRWORA, the messier it is to draw inferences about the causal effect of US welfare reform. In the narrowest sense, US welfare reform was targeted at very low-income lone mothers and their children, and so we shouldn’t expect to see very large effects on the labor force participation of men (except inasmuch as welfare changed patterns of family formation or support from single fathers, which undoubtedly it did, but modestly). So the first point is that welfare reform is unlikely to have been a major driver of overall unemployment rates in the United States, even in the late 1990s.

    To the extent that we might try to trace out the legacy of Clinton era reforms, I would more point to structural reforms (such as financial deregulation), which have had dramatic impacts on the volatility of the business cycle, hitting workers in low skilled occupations particularly hard. Also, we need to bring slowing gains in educational attainment in the US into the picture — high school graduation rates have only slightly crept up, and college graduation rates have stagnated, so the US labor force has been ill positioned to take advantage of a more technical, globalized economy in recent years.

    I don’t know about the European data, but I’d be interested to hear what others have to say.

  2. I agree- we certainly can’t draw any legitimate inferences about welfare reform from this data. In fact, the reference to the Clinton era reforms was polemical, motivated by a recent outbreak of uncritical appeals to Clinton’s record in the UK, particularly among Labour supporting commentators-so I thought it was relevant to draw attention to the weak employment performance.

    On reflection I think this might obscure the more general point about American vs. European- and indeed low-protection vs. high protection- labour markets, where the reversal of comparative performance raises a number of questions.What the cross-national comparisons show is a general weakening of the comparative performance of labour markets in English-speaking countries (Canada is an exception) compared to European, and specifically Western European nations (France, Germany, Austria, Benelux) over the last fifteen years.This is particularly marked for prime-age female employment, although no other nation is showing the sort of decline we have seen in the U.S. Difficult to get all this into a 700-word post unfortunately.

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