Unemployment: Getting the Right People to Fix a Problem

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For once this week I had a number of issues I wanted to comment on, and wasn't sure which one to pick. It was today's newspaper headlines that caused the conundrum.

We had the new U.K. bank regulatory regime coming into being last month, and a comment about the "Financial Policy Committee" and its remit to undertake "macroprudential regulation" over the business cycle – surely a half-baked idea if ever there was one? And an item today that the U.K. was winding down overseas aid to South Africa, which prompted complaints from the South African government. But after over 50 years of the aid business and "development economics", it's time surely to re-open the debate about "trade not aid". There isn't a separate branch of economics for emerging economies, not when we're all part of a global free-market capitalist economy.

But let's leave those two topics for future weeks. Here is the headline that clinched this week's topic for me, from The Times on Thursday:

"Soaring unemployment in eurozone adds to pressure for interest rate cut"

Perhaps it's just the journalist making the connection? Unemployment is a serious problem in the entire EU, not just the euro zone. Youth unemployment in the southern euro zone approaches 50 percent and the long-term unemployed statistics are rising, not falling. This is a tremendous waste of human potential, as well as a serious failure of government.

But what does central bank monetary policy have to do with this? Precious little. Labor markets in the EU are extremely rigid due to employment legislation covering restrictions on reducing staff, the high cost of redundancy, red-tape associated with hiring staff and high payroll tax rates. Union rules in certain countries (although the expression "Spanish practices" does tend to give it away a bit) add to the employment creation bottleneck.

With all these issues acting as a drag on jobs growth, can anyone explain to me how a 25 basis point cut in interest rates by the ECB is going to help? But the headline above encapsulates all that is inadequate about governments' response to the crash of 2008: they left solving the problem to the central banks, in the hope that the economy would pick up and they wouldn't have to make difficult decisions. Like freeing up labor markets or cutting welfare expenditure. But five years after 2008, central banks have deployed monetary policy easing in strength, with zero interest rates and quantitative easing in the billions. And we are still at virtually zero growth in most of the EU. So now what?

There is no short-cut to restoring growth: it centers on productivity, jobs growth and reduced public sector spending. The right people to help facilitate that? The ones currently shouting at central banks to do more.


Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012).