Academic Forum

and Europe:
A Time For
Unity, A Time
For Vision

21-22 Feb. '97

Panel One: Sharing Hopes and Ambitions: The Economic Agenda (1)

"Sustaining Growth
and Creating Employment"

Executive Summary

This paper is intended to provide the panel participants with a suggested basis for discussion on the issues of strengthening growth and creating employment. It consists of a short background section and an additional section in which specific issues are offered for the participants to discuss.

The United States and Europe face a number of similar problems with respect to maintaining sound growth levels in the economies and providing job opportunities for their populations. Both parties face the unprecedented pressures implicit in the ongoing process of economic globalization, particularly in the area of employment. Both sides must adapt to the monumental changes in economic activity brought about by advances in technology and information flows. And both sides face the prospect of a demographic bubble that will translate into the retirement of a large segment of their respective populations early in the next century. These bubbles will create additional downward pressures on growth and employment.

There are profound differences in the short-term challenges that the United States and the European countries must confront, however. Economic growth in the United States suggests that the country is operating close to an estimated full capacity, and unemployment rates are relatively low. Europe, by contrast, is experiencing more anemic growth combined with higher unemployment rates. With regard to unemployment, the United States must address the issue of underemployment on a qualitative basis while the European states must confront its higher jobless levels on a quantitative basis.

In this context, it is suggested that discussion focus on the relationship between growth and employment, the sources of unemployment and underemployment, the impact of and responses to globalization, the issue of productivity, the role of labor markets and rigidities, and the respective approaches of the United States and Europe in addressing the unemployment issue. In addition, it is suggested that the participants focus on the extent to which cooperation between the two sides could help alleviate the current pressures, and what strategies if any might be formulated to help manage the pressures associated with the impending retirement challenge.

There are few more pressing political and economic challenges to both the United States and Europe than the difficulties they face in promoting macroeconomic growth and addressing the issue of joblessness. The consequences of stagnant or negative economic growth and persistently high unemployment rates are, of course, significant. They serve to magnify social divisions, add pressures to politically-charged debates on immigration and other related areas, fan the flames of economic protectionism, and generate political turbulence on a number of other important national issues such as public spending and the range of entitlements provided by governments to their citizenry.

For these reasons, identifying ways to strengthen growth and provide employment are, and will continue to be, major priorities for the mature economies. In the G7 context, these priorities were expressed most directly at the Tokyo Summit in 1993, when the member states stated their concern over "insufficient growth and inadequate job creation" in their economies, and suggested that over 23 million people in their countries were unemployed.

On the issue of macroeconomic growth, on both sides of the Atlantic countries face a dynamic global economy marked by continued increases in trade relative to output growth and accelerated financial market integration. Among the many implications of this changing world economy:

  • the gradual shift in the global balance of economic production to high-growth developing countries, whose dynamism (assuming that it persists at current levels) will move some of what we now call "developing" economies into seven of the ten largest economies by the year 2020;

  • the dislocation of economic sectors (for example, textiles) in mature economies that can no longer compete with their counterparts in other countries owing to lower factor costs and other reasons;

  • the shift in international trade patterns to account for trade liberalization both through the GATT/WTO framework and the constellation of regional trading structures-changes that are gradually overtaking the "iron triad" in trade of the United States, Europe and Japan; and

  • the development of international financial flows (especially portfolio investment flows) that are of such a volume and velocity that they can serve to undermine national monetary policies by creating offsetting financial pressures.

When viewed from a more general perspective, the changing nature of the global economy suggests two important trends. First, according to the International Monetary Fund the share of the mature economies in global economic output could decrease from its current level of about 55% (in purchasing-power-parity adjusted terms) to some 40% by the year 2020. Second, we can anticipate further movement in the mature economies in the ongoing transformation of their economic activity. As analysts from both the United States and Europe have suggested, the nature of economic activity in the mature economies is increasingly oriented to information- or knowledge-based work.

These changes-in the global balance of economic production and the nature of economic activity in the mature economies-suggest the overarching challenge for the United States and the European countries alike in "retooling" their economies to meet the realities of the early 21st century. To promote growth and employment in a dramatically transformed global economy, they must respond effectively by exploiting areas of comparative advantage and finding ways to cushion the dislocations in sectors that cannot stand up to increased international competition. That implies developing an infrastructure writ large, to include human resources as well as physical infrastructure, that will allow countries to adapt better to the changing global economy by providing for, among other things, better education, retraining, and a more flexible labor market.

The United States and the European countries also face another common challenge: a demographic structure that will place significant financial pressures on their systems early in the next century. Both have demographic "bubbles" in which a large segment of their respective populations will reach retirement age over the next 15-20 years. This implies a declining worker-retiree ratio, increased entitlement and health care obligations, rising pressure of public accounts, and new strains on output growth and employment.

While both sides of the Atlantic have these short- and longer-term challenges in common, it must also be stressed that there are significant differences in the current problems they face in regard to output and growth:

  • In the United States, IMF projections for GDP growth are 2.4% in 1996 and 2.3% in 1997. This reflects an improvement from the slowdown in economic growth that occurred in 1995, when the level of output fell to 2.0% from 3.5% in the previous year (1994). As the IMF suggests, the United States stands out as the only major industrial economy now operating close to an estimated full capacity.

  • By contrast, growth in the EU states has registered consecutive declines since 1995, from an aggregate GDP growth level of 2.8% in 1995 to an estimated 1.6% for 1996. The IMF is projecting signs of renewed growth in Europe based on an easing of monetary conditions triggered in large part by successive interests cuts in Germany, France and several other European countries, a slowing in the drawdown of inventories, fiscal consolidation in selected EU countries, and the stabilization of industrial order and consumer confidence levels.

United States And Europe:
Recent Trends In Unemployment Rates

(% change previous year)

Unemployment Rates: 94 95 96* 97*
Industrial Countries
of which:
of which:












    * projected.

    Source: International Monetary Fund, World Economic Outlook: October 1996.

As a result of these differing conditions, there are corresponding differences in the current priorities attached by the governments in the United States and Europe in addressing the issue of strengthening growth. Furthermore, equally profound differences in unemployment rates (more on this below) and the process of fiscal consolidation underway in the EU must also be highlighted as significant elements in explaining the divergence in approaching the issue of growth.

On the issue of joblessness, many economists agree that technological change and economic globalization have created unprecedented pressures on workers in the mature economies. While the G7 countries emphasized during their last summit in Lyon that "globalization provides great opportunities for the future" and that "history shows that rising living standards depend crucially on reaping the gains from trade, international investment and technical progress," they also stressed that the potential benefits from globalization "must be translated into real opportunities in [their] own societies."

As with perspectives on economic growth, the rates of unemployment between the United States and Europe now differ significantly. As the table on the previous page suggests, the EU member states are confronting a significantly higher unemployment rate than the United States. According to IMF projections, EU unemployment reached 11.4% in 1996 and is expected to decline marginally to 11.0% this year. By contrast, the corresponding rate in the United States is expected to remain somewhat steady at 5.6% over the same period.

It follows, then, that the EU states are facing a more pronounced quantitative, or "structural," challenges with respect to unemployment. They must confront the issue of large, long-term unemployment. The dilemma confronting the United States, by contrast, is more qualitative. Currently, the issue is more underemployment than unemployment.

It has now been nearly three years since the G7 held its special summit on employment, the objective of which was to afford the seven countries the opportunity to compare strategies aimed at confronting the issue of joblessness. The problem, as indicated, has been more pronounced in Europe since that meeting. But there are a number of persistent issues that are of mutual concern to leaders on both sides:

  • Experience shows that strengthened economic growth does not necessarily imply an improvement in unemployment rates. The potential for "jobless recoveries" has been brought into sharp focus.

  • Productivity gains are recognized by many as an essential element in addressing the unemployment issue, despite perceptions among workers that productivity gains are the basis for job losses rather than expansion. This recurrent theme at the G7 jobs summit was advanced to deflect the growing view that improvements in productivity and technology are dangerous for countries seeking to create and maintain jobs.

  • The effectiveness of training programs to "re-engineer" sectors brought under the pressure of economic globalization is by no means clear. The challenge implicit in converting workers to other sectors is daunting-despite the importance of extending a "lifeline" to workers whose livelihoods are threatened by the effects of technology and globalization. The task of "preparing our people for a world of work that offers high wages, but demands high skills," as President Bill Clinton characterized in at the jobs summit, is an elusive goal.

In the light of the foregoing considerations on the subjects of strengthening growth and addressing employment, the following issue areas are suggested as the basis for general discussion:

  • What is the relationship between macroeconomic growth and employment? Are the two connected implicitly, or do countries now face the prospect of "jobless recoveries" in which economic growth is stimulated without a commensurate increase in employment?

    The answers to these questions will have an enormous impact on the kinds of policies that governments have fashioned, and will fashion, to address the challenges of growth and employment. The more recent evidence suggests that the two are not necessarily connected, but that government efforts to tackle the issue of unemployment are more easily carried out in an environment of positive real growth.

  • What are the sources of unemployment? To what extent are technological development and economic globalization contributing to unemployment? What other factors are at work?

    It is a truism that the sources of unemployment need to be identified and understood in order for governments to respond effectively to both structural and more transitory pressures on their labor pools. It implies an analysis of the determinants of economic change not only within the countries concerned (such as the effects of technology) but a developed understanding of the global economic forces that are transforming the world economic topography. Although the process of globalization is defended on both sides of the Atlantic as a net job creator, the question of how to handle sectors embattled by globalization remains unaddressed.

    The G7 summit in Lyon, as mentioned, was used by the member states to trumpet that economic globalization was a positive factor in improving prospects for future living standards. Yet it remains to be seen what specific policies and approaches can ensure that the process of globalization can indeed be translated, as the G7 states suggested, into "real opportunities."

    In this vein, the participants may wish to compare the respective staging points and strategies that their countries are employing to diagnose and then treat the problem of unemployment.

  • How important is improving labor productivity to attenuating unemployment, and how can productivity be increased?

    The issue of productivity centers on the role of technology and on the growing public perception that the advance of technological innovation generates quantitative and qualitative downward pressures on employment. Much of the effect of technology is contingent on the capacity of governments to lift up the capacity of workers through retraining (to increase skill levels) and improving their basic educational infrastructures. Many leaders, including President Bill Clinton, are emphasizing that the view of productivity as a source of job elimination and degradation must be corrected. At the 1994 Detroit jobs summit, he argued that "we have got to make our people believe that productivity can be a source of gain, not pain." The question is how they can and should espouse that belief.

    The panel offers the opportunity for participants to exchange views on how productivity gains can be realized, what has worked and what has not, and what new approaches are either under consideration or implementation.

  • What role do labor market rigidities play? How can governments create conditions such that labor markets can adapt more effectively to changing macroeconomic conditions? What is the appropriate role of government?

    These questions obtain to fundamental differences that exist between the United States and many of its European partners with respect to the social safety net that governments can and should maintain. Can governments, through extensive regulatory frameworks, precipitate the kind of structural labor market rigidities that Europe is now experiencing? What is the appropriate threshold for governments to maintain social security and other future obligations, such as the "invisible debt" that pension obligation exposure now represents?

  • What are the principal differences between the United States and Europe in terms of the growth and employment problems they confront?

    In the United States and Europe, the make-up of the government, the nature of government programs, the size of the public sector, the scope of social security nets, the nature of corporate governance, and the anatomy of financial systems and regulatory structures are all vastly different. As a result, the composition of the problems they now face is also different.

  • What lessons were drawn from the March 1994 G-7 jobs summit? How applicable are the experiences of the United States and Europe to the other?

    Apart from reaching a number of generalities, the participants in the jobs summit were unable to identify overarching solutions to the employment challenges faced in the United States and the EU member states. The Ministers' Statement concluded that "we agreed that there is no single solution, no one idea or action that will work for every country." Nevertheless, systematic views were exchanged on approaches to the issue of unemployment and underemployment, and there has been evidence of some limited fiscal consolidation on both sides of the Atlantic over the past two years.

    How have the respective positions in the United States and Europe changed over the past three years? An exchange of views on this question by panel participants would be instructive to assessing future strategies and policies.

  • How can and should the European countries address the structural unemployment they face? How should the United States respond to the issue of underemployment?

    Here, a comparison of the divergent policies would be instructive. On the American side, the efforts to maintain strong interest rate discipline and the right mix of taxing and spending are at the heart of the U.S. strategy. By contrast, prospects for growth and employment in Europe are inextricably intertwined with the EMU and the fiscal consolidation implicit in that process.

  • Are there joint policies that the United States and Europe can pursue in response to slow growth and employment pressures?

    The Detroit jobs summit seemed to suggest that apart from sharing strategies and results, there may not be room for formal U.S.-EU joint action to address the issues of growth and employment. By definition, the respective economic systems are linked by interest rates and public-sector balances, and actions designed to stimulate economic growth through fiscal consolidation, if undertaken in concert, could have a positive impact.

    Another layer of potential transatlantic cooperation is in the area of bilateral and global trade liberalization. By further reducing barriers to U.S.-European trade, the effect on growth and employment would rise on a net basis; on a corresponding basis, continued U.S.-EU cooperation in global trade liberalization would continue to strengthen growth and provide new employment opportunities on a net basis with third-party trading partners.

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