This paper argues there are two main problems holding back private sector employment creation in the stressed eurozone countries. First, there is a persistent competitiveness problem due to high labor costs relative to underlying productivity. Over the first ten years of the euro, wage developments relative to productivity diverged strongly across the eurozone. Between 1999 and 2008, Austria, Belgium, Finland, Germany, Luxembourg, and the Netherlands lifted their real productivity on average by 12 percent and nominal wages by 22 percent.And those are the more or less successful European economies. The stressed ones, France, Greece, Ireland, Italy, Portugal, and Spain collectively raised their real productivity by only 7 percent, but boosted nominal wages by 40 percent.
Half the productivity improvement, double the wages. Yeah, that could be a problem. On top of that, European governments have widespread structural barriers [that] make job creation in these countries far more arduous than in many other advanced economies, and even more arduous than in some key emerging economies and formerly planned economies.
Even the ex-Commies have better labor markets than the birthplace of democracy. And all anyone does is talk; the European Commission has devoted countless workstreams, committees, and reports to the topic. The European Central Bank constantly calls for structural reform, and there is hardly a speech by a leading European policymaker that does not include a reference to structural reforms.
But since the countries that jumped onto the Eurobandwagon were specifically promised they could maintain their social models, the honchos are powerless to force needed reforms. Back in the pre-EU days, countries would use monetary policy to relieve pressures on their employment and export-import markets. Now that option is gone. No more lira, drachma, peseta.
But the special interest groups, both labor and business, that matter to politicians remain. The Conversable Economist, Timothy Taylor (also editor of the JEP) has a blog post, in which he zeroes in on the worst offender in Europe;
My favorite story of the heavy hand of regulation in Greece is one that Megan Green told on her blog back in 2012 , but I've been telling it ever since. It's about finding yourself in a combination bookstore/coffee shop in Athens which, because of regulations, is not allowed at that time to sell books or coffee. Green writes:
This is best encapsulated in an anecdote from my visit to Athens. A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales. However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 18h and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee.One story like this is a comedy. An economy in which stories like this are commonplace--and which is locked into a free-trade zone with countries sharing a common currency, is a tragedy waiting to happen.