Wednesday, June 13, 2007

Why Unemployment is high in Germany, France and Spain

Discuss Reasons why Unemployment is higher in Spain, France and Germany than the UK. (40)

The UK is not in Euro therefore, it retains an independent Monetary policy. It can change interest rates according to state of economy. When inflation is not a problem the MPC can reduce interest rates to stimulate demand. However, Germany and France have an interest rate set by the ECB. This interest rate is set for the whole EURO zone, but this may not be appropriate. If growth in Germany is low, interest rates may not be able to fall to stimulate AD. Therefore, Germany may experience higher demand deficient unemployment. However, in Europe countries are less sensitive to interest rate changes. Also, France and Germany have broken the growth and stability pact to borrow more and pursue an expansionary fiscal policy.

There is also higher structural unemployment in Europe. For example, it is said labour markets are more inflexible, e.g harder to hire and fire workers. therefore, this discourages firms from investing.

Another cause of unemployment could be powerful trades unions, causing wages to be pushed above the equilibrium and therefore causing real wage unemployment. However, the UK has quite a high Minimum wage, which potentially could cause real wage unemployment but doesn't seem to.

Unemployment benefits are more generous in Germany, increasing the incentive to stay on benefits and decreased incentive to work. The UK is very strict about giving benefits. Arguably, government statistics underestimate the real extent of unemployment. The ILO labour force survey is higher than the government's claimant count.

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