Changing Unemployment Rates in Europe and the USA: Institutional Structure and Regional Variation

Abstract

Though one or the other of the familiar macroeconomic theories may explain fluctuations in unemployment over the business cycle, none of them explains the often substantial differences in unemployment rates in different areas of a country, or the dramatically different average long-run unemployment rates across countries, or the contrast between the extraordinary severity of unemployment in some historical periods and the near-absence of unemployment in others. All areas of a country, even if it is very large and diverse, experience the same monetary and fiscal policies, so these monetary and fiscal policies can hardly be sufficient to explain the often persistently different unemployment rates in different regions. Most familiar macroeconomic theories understandably focus on unanticipated changes in the money stock or in aggregate demand, but greatly different long-run average rates of unemployment in different countries are not likely to be adequately explained by unanticipated differences in the rate of growth of aggregate demand, because any such long-run differences eventually come to be anticipated. In any case, the observed differences in macroeconomic policies do not appear to be able to explain the long-run average differences in underutilisation of resources across countries without suspiciously elaborate or ad hoc supplementation; neither do they provide, by themselves, an adequate explanation of why average European unemployment rates were considerably lower than US rates in the first two decades after the Second World War, yet have been considerably higher than those in the USA for more than a decade.