NYT Warns that Southern Europe Suffers from a Disastrous Shortage and Surplus of Labor

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Saturday, 01 January 2011 22:28

The NYT can't quite decide whether the southern European countries (Spain, Portugal, Italy and Greece) suffer from too many or too few workers, but it is anxious to tell readers that the situation is disastrous. The article begins by telling the story of a young Italian lawyer who can't find a job commenting that:

"the most highly educated generation in the history of the Mediterranean hits one of its worst job markets."

This is the story of too many workers and too few jobs. It sounds and is really bad.

But then the NYT flipped 180 degrees and decided that the real problem is the opposite, too few workers:

"experts warn of a looming demographic disaster in Southern Europe, which has among the lowest birth rates in the Western world. With pensioners living longer and young people entering the work force later — and paying less in taxes because their salaries are so low — it is only a matter of time before state coffers run dry."

Okay, is the problem too many workers with too few jobs or too few workers, with too much demand? Either one of these stories is possible, but both are not, or at least not at the same time.

To help clarify matters, the NYT gives us this quote from Boston University Economist Lawrence Kotlikoff:

"If these [low] fertility rates continue through time, you won’t have Italians, Spanish, Greeks, Portuguese or Russians, ... I imagine the Chinese will just move into Southern Europe.”

According to Professor Kotlikoff, there should be a huge shortage of young workers, which would drive up wages, and plunging demand for homes, which will make housing cheap. This sounds like a great story for young people in southern Europe, as long as they are not prejudiced against the Chinese.

But then we get back to the labor surplus story:

"'This is the best-educated generation in Spanish history, and they are entering a job market in which they are underutilized,' said Ignacio Fernández Toxo, the leader of the Comisiones Obreras, one of Spain’s two largest labor unions. 'It is a tragedy for the country.'”

Then we shift back to a simultaneous surplus and shortage of labor with another quote from Professor Kotlikoff:

"For Dr. Kotlikoff, the solution is simple: 'We have to change the labor laws. Not gradually, but quickly.'” But the piece then complains that changes are coming slowly:

"New austerity measures in Spain, where the unemployment rate is 20 percent, the highest in the European Union, are further narrowing the employment window. Spain has pledged to raise its retirement age to 67 from 65, but incrementally over the next 20 years.

"'Now people are being sent into early retirement at age 55,' said Sara Sanfulgencio, 28, who has a master’s degree in marketing but is unemployed and living in Madrid with her mother, who owns a children’s shoe store."

Okay, so if the retirement age were instantly raised to 67, as this article is advocating, how is this supposed to create more jobs for young people like Ms. Sanfulgencio? In a context of an economy operating well below full employment it would seem her job prospects are improved by reducing the competition from older workers, which means keeping the retirement age low.

In short, the NYT clearly does not like the economic policies in southern Europe and it is anxious to tell readers that they are disastrous, it is just not sure why.

One important item missing from this picture is the European Central Bank (ECB). It could be buying up large amounts of public debt from Spain and other European countries both to boost demand and to alleviate their debt burden. (The interest on debt held by the ECB could be refunded back to European governments, thereby imposing no burden on their taxpayers.) This could help to increase employment. Also, if it leads to a modest increase in the inflation rate from its current new zero level, it would alleviate debt burdens and help to facilitate the necessary process of real wage adjustments between countries. 

It is also worth noting that the current downturn is the result of the incompetence of the ECB which opted to ignore the growth of dangerous housing bubbles in Spain, Ireland and elsewhere. Remarkably, no one at the ECB lost their job or probably even missed a promotion as a result of this disastrous policy failure.