U.S. Underemployment in Mid-December Similar to a Year AgoUnemployment is at 8.7%, with 9.7% working part time but seeking full-time jobs

U.S. Underemployment in Mid-December Similar to a Year Ago

Unemployment is at 8.7%, with 9.7% working part time but seeking full-time jobs

by Dennis Jacobe, Chief Economist

PRINCETON, NJ -- Underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, is 18.4% in mid-December, as measured by Gallup without seasonal adjustment. This is up slightly from 18.1% at the end of November and similar to the 18.5% of a year ago.

Unemployment, one of the two components of underemployment, is at 8.7% in mid-December -- up from 8.5% at the end of last month, but down from 9.3% a year ago. Gallup's unemployment measure suggests the government is likely to report essentially no change for December 2011 in its seasonally adjusted unemployment rate, though this is even more difficult than usual to predict at this time of year.

The second component of underemployment is the percentage of U.S. employees who are working part time but want full-time work. It is now at 9.7% -- essentially the same as the 9.6% at the end of November. However, the current reading is significantly higher than the 9.2% of mid-December 2010.

December Job Creation Index Down in Most Recent Week
Gallup's Job Creation Index for the week ending Dec. 11 is +12, based on 30% of workers nationwide saying their employers are hiring and 18% saying their employers are letting workers go. Just a week earlier, Gallup's Job Creation Index tied its weekly high for the year (+16). Still, Gallup's latest weekly results contrast sharply with the government's recent report that jobless claims fell to a three-year low during the week ending Dec. 10.
Gallup's Job Creation Index and the government's jobless claims report tend to have an inverse relationship and generally tend to align. Although this alignment does not necessarily happen on a weekly basis, it tends to be more erratic around the holidays as seasonal adjustments and processing issues make weekly jobless claims more volatile.

Growing Unemployment Optimism May Be Premature
The sharp drop in the government-reported unemployment rate for November and the sharp drop in jobless claims during the most recent reporting week have combined to create the perception that the job market may be improving. Economists are wondering whether this means the economy is stronger than previously estimated. Political observers are wondering how fast and how far the unemployment rate needs to fall to significantly improve the president's re-election prospects.
In contrast, Gallup's data suggest little improvement in the jobs situation. December unemployment is up slightly on an unadjusted basis. In fact, the government is likely to report essentially no change in the unemployment rate when it issues its report on December unemployment in the first week of 2012. Of course, this assumes that the labor force doesn't continue to shrink at so rapid a pace that it drives down the unemployment rate, as it did last month.
Gallup's most recent weekly job creation numbers also suggest little improvement in the jobs situation. As a result, it may be wise to exercise caution in interpreting the drop in the government's most recent jobless claims numbers.
Further, one reason unemployment is often seen as a lagging indicator has to do with the way people enter and leave the workforce. Even if the recent seeming improvement in the job market is more real than Gallup's data imply, signs of a better job market are likely to bring new job seekers into the workforce. The result could be a reversal of last month's drop in the unemployment rate as the workforce increases in size.
In sum, while pleasant thoughts about the job market may be nice for the holidays, caution is clearly warranted -- at least as far as too much job market optimism is concerned -- until the data unfold over the next couple of months.

Gallup.com reports results from these indexes in daily, weekly, and monthly averages and in Gallup.com stories. Complete trend data are always available to view and export in the following charts:
Daily: Employment, Economic Confidence and Job Creation, Consumer Spending
Weekly: Employment, Economic Confidence, Job Creation, Consumer Spending
Read more about Gallup's economic measures.
View our economic release schedule.

Survey Methods Gallup classifies American workers as underemployed if they are either unemployed or working part time but wanting full-time work. The findings reflect more than 18,000 phone interviews with U.S. adults aged 18 and older in the workforce, collected over a 30-day period. Gallup's results are not seasonally adjusted and are ahead of government reports by approximately two weeks.
Results are based on telephone interviews conducted as part of Gallup Daily tracking from Nov. 16 to Dec. 14, 2011, with a random sample of 18,258 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia, selected using random-digit-dial sampling.
For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±1 percentage point.
Interviews are conducted with respondents on landline telephones and cellular phones, with interviews conducted in Spanish for respondents who are primarily Spanish-speaking. Each sample includes a minimum quota of 400 cell phone respondents and 600 landline respondents per 1,000 national adults, with additional minimum quotas among landline respondents by region. Landline telephone numbers are chosen at random among listed telephone numbers. Cell phone numbers are selected using random-digit-dial methods. Landline respondents are chosen at random within each household on the basis of which member had the most recent birthday.
Samples are weighted by gender, age, race, Hispanic ethnicity, education, region, adults in the household, and phone status (cell phone only/landline only/both, cell phone mostly, and having an unlisted landline number). Demographic weighting targets are based on the March 2010 Current Population Survey figures for the aged 18 and older non-institutionalized population living in U.S. telephone households. All reported margins of sampling error include the computed design effects for weighting and sample design.

Does Globalization Lower Wages and Export Jobs?

Does Globalization Lower Wages and Export Jobs?

Globalization—the international integration of goods, technology, labor, and capital—is everywhere to be seen. In any large city in any country, Japanese cars ply the streets, a telephone call can arrange the purchase of equities from a stock exchange half a world away, local businesses could not function without U.S. computers, and foreign nationals have taken over large segments of service industries. Over the past twenty years, foreign trade and the cross-border movement of technology, labor, and capital have been massive and irresistible. During the same period, in the advanced industrial countries, the demand for more-skilled workers has increased at the expense of less-skilled workers, and the income gap between the two groups has grown. There is no doubt that globalization has coincided with higher unemployment among the less skilled and with widening income inequality. But did it cause these phenomena, as many claim, or should we look to other factors, such as advances in technology? This paper seeks to answer that question.
Basic Facts
It is best to start with the facts. Are economies around the world becoming more integrated? Have increased unemployment and widening income disparity in fact coincided with increased economic integration?
Global Integration
The share of imports and exports in overall output provides a ready measure of the extent of the globalization of goods markets. Although foreign goods are available in every country now more than ever before, the expansion of product market integration has not been continuous over time. World trade in relation to output grew from the mid-1800s to 1913, fell from 1913 to 1950 because of the two world wars and protectionist policies implemented during the Great Depression of the 1930s, and then burgeoned after 1950. Only in the 1970s, however, did trade flows reach the same proportion of output as at the turn of the century, a result of the easing of tariffs and quotas, more efficient communications, and falling transportation costs.
For many advanced economies the most important decade for globalization since World War II was the 1970s, when the ratio of trade to output rose markedly in both advanced and developing economies in the wake of the two oil shocks. In the developing countries, exposure to international trade picked up again in the late 1980s, coinciding with their movement toward trade liberalization.
The rise in the ratio of exports to total output likely understates the degree of product market globalization. More and more output in the advanced economies consists of largely nontradable services: education, government, finance, insurance, real estate, and wholesale and retail trade. Perhaps it would be more accurate to measure the importance of international trade by considering merchandise exports as a share of the production of tradable goods only. This alternative measure shows a much larger role for trade. However measured, globalization has occurred and gives no sign of slowing down.
Labor Market Developments
An important trend in labor markets in the advanced economies has been a steady shift in demand away from the less skilled toward the more skilled. This is the case however skills are defined, whether in terms of education, experience, or job classification. This trend has produced dramatic rises in wage and income inequality between the more and the less skilled in some countries, as well as unemployment among the less skilled in other countries.
In the United States, for example, wages of less-skilled workers have fallen steeply since the late 1970s relative to those of the more skilled. Between 1979 and 1988 the average wage of a college graduate relative to the average wage of a high school graduate rose by 20 percent and the average weekly earnings of males in their forties to average weekly earnings of males in their twenties rose by 25 percent. This growing inequality reverses a trend of previous decades (by some estimates going back as far as the 1910s) toward greater income equality between the more skilled and the less skilled. At the same time, the average real wage in the United States (that is, the average wage adjusted for inflation) has grown only slowly since the early 1970s and the real wage for unskilled workers has actually fallen. It has been estimated that male high school dropouts have suffered a 20 percent decline in real wages since the early 1970s.
In other countries, the impact of the demand shift has been on employment rather than on income. Except in the United Kingdom, the changes in wage differentials have generally been much less marked than in the United States. Countries with smaller increases in wage inequality suffered instead from higher rates of unemployment for less-skilled workers.
What explains the differences in outcomes for wages and employment across countries is differences in labor market structures. In countries with relatively flexible wages set in decentralized labor markets, such as the United States and, increasingly, the United Kingdom, the decline in relative demand for less-skilled labor has translated into lower relative wages for these workers. In contrast, in countries with relatively rigid wages set in centralized labor markets, such as France, Germany, and Italy, it has meant lower relative employment.
Two other facts about these labor market trends shed some light on the impact of trade. The first is that about 70 percent of the overall shift in U.S. labor demand in manufacturing was a change in skill demands within industries, not across industries from less skill-intensive to more skill-intensive. At all levels of industrial classification, the majority of U.S. manufacturing industries during the 1980s employed relatively more high-skilled workers than in the 1970s, even though wages of these workers had risen.
The second finding is that income gaps have widened in a number of developing countries as well as in the advanced economies, and evidence suggests that labor demand in developing countries has also shifted toward workers with high skill levels relative to the average. For example, research reveals that trade liberalization in Mexico in the mid-to-late 1980s led to increased relative wages of high-skilled workers. We might have expected trade liberalization to boost the demand for unskilled labor and raise unskilled wages, but in fact the opposite has happened in some developing countries.
Does Import Competition Affect Wages?
Not surprisingly, people often link increased globalization to the decline in relative wages of less-skilled workers in the advanced economies. But does increased international trade, especially with developing countries, in fact worsen income inequality? There are two approaches to answering this question. One focuses on the role of the price of imports in lowering the prices of products and thus lowering wages. The second uses the quantity rather than the price of imports as a measure of the intensity of import competition.
Effect of Import Prices on Wages
Economic theory suggests that international trade affects the prices of products in both exporting and importing countries and this in turn affects the price of labor—that is, wages—within countries by influencing the demand for labor. Changes in product prices brought about by competition from imports alter the profit opportunities facing firms. Firms respond by shifting resources toward industries in which profitability has risen and away from those in which it has fallen. Trade flows thus give rise to shifts in the demand for labor, as more workers are needed in newly profitable sectors and fewer in unprofitable sectors. If the supply of labor is fixed, these demand changes lead to a rise in wages, since workers will demand a premium for switching into more profitable industries.
Theory also suggests that import competition lowers the price of products (such as apparel and footwear) made by low-skilled labor relative to the price of products (such as office machines) made by skilled labor, so that domestic firms shift toward producing skill-intensive goods. But have product prices in the advanced economies in fact changed in this way? If so, trade might have contributed to rising income equality, but it must first be shown that changes in product prices are the result of trade rather than other, purely domestic, influences.
A great deal of research has been done on this question, and although the conclusions are not robust, there appears to be little evidence of larger price increases in skilled-labor-intensive products in advanced countries; if anything, price increases were larger in the unskilled-labor-intensive industries. Rapid technology change seems to have led to relative price declines in skill-intensive industries rather than the price decreases in unskilled-labor-intensive industries one would expect in the face of import competition from developing countries. In most cases, trade with developing nations has played only a small role, if any, in raising income inequality in the advanced economies.
Effect of Import Volumes on Wages
A second way of measuring how trade affects wages is to focus on the volume of trade and to analyze the factors embodied in these flows rather than the prices of imports. Trade can be viewed as effectively shipping from one country to another the services of the workers engaged in the production of traded goods. All else equal, imports add to the labor endowment of the recipient country and reduce the labor endowment of the shipping country.
Data on U.S. trade flows have been analyzed to infer the quantities of labor embodied in trade flows. The United States tends to export skilled-labor-intensive products and to import unskilled-labor-intensive products, so that the growing importance of trade in the U.S. economy has increased the effective supply of unskilled labor in that country relative to the supply of skilled labor. Analysis suggests that trade accounted for around 15 percent of the total rise in income inequality during 1980–85, but that effect diminished in later years. Further studies have shown, for the advanced economies as a whole, that trade with developing countries has led to about a 20 percent decline in the demand for labor in manufacturing, with the decline concentrated among unskilled workers. The results of these latter studies are subject, however, to some uncertainty because of the influence of labor-saving technology in the advanced economies. Other studies have estimated that shifts in product market demand, including the effect of imports, account for less than 10 percent of the increase in wage differential.
Synthesis
Whether analyzed in terms of import prices or of import volumes, nearly all research finds only a modest effect of international trade on wages and income inequality. The average estimate of the effect of trade on wages and employment is not zero—most research finds some role for trade—but it is certainly lower than what might be expected from purely anecdotal evidence, and certainly far from the claim that import competition makes a "giant sucking sound."
This conclusion might seem puzzling in light of the presumption that the advanced economies have become more open to international trade since the 1970s. There are at least two explanations. First, it is possible that on balance the advanced economies have not become substantially more open to trade because, although tariffs have fallen, they have been replaced with nontariff barriers (for example, voluntary export restraints in autos and steel). Second, firms in the advanced economies might have upgraded their product mix—producing higher value-added goods—in the face of low-wage foreign competition. If this is true, foreign competition has been blunted and need not lead to large changes in relative product prices.
The issue of how to measure properly the impact of trade on labor markets is still largely unresolved—if anything, the disagreements are becoming more contentious. What is remarkable, however, is the common finding across both literatures of only a small impact of trade on wages and income inequality.
Other Links
The previous section addressed only one aspect of the link between globalization and labor markets: whether international trade has directly contributed to increased income inequality and to lower wages and higher unemployment for unskilled workers. Does trade influence the labor market in other ways, and what effects do capital mobility, movements of workers from country to country, and the spread of technology have on that market?
Other Influences of Trade
Trade can affect labor markets beyond shifting demand from unskilled to skilled workers and thus changing wages. One such effect is the influence of import competition on interindustry wage differentials, a phenomenon in which seemingly equivalent workers are paid more in some industries (for example, aerospace and petroleum) than in others. While the existence of these wage differentials is well established, there is less consensus about their cause. One explanation is that wage differentials reflect unobserved worker characteristics and are thus consistent with competition in the labor market. For example, Boeing may attract mechanics who are in fact more highly skilled, even though they appear to have substantially the same education and experience as mechanics in lower-paying industries. Another explanation—which applies particularly to such unionized industries as autos and steel—is that higher wages reflect profits shared with workers by firms earning above-normal profits in imperfectly competitive product markets, where union bargaining power allows workers to extract these benefits.
If this latter explanation is correct, international trade can affect wages by influencing product market competition and the profitability of firms. Depending on the nature of wage bargaining, import competition that squeezes firms’ profits can lead not only to smaller wage premia in high-wage industries, but also to a reordering of the differentials across industries as unskilled workers in declining industries, such as steel, find their wages falling behind the wages of unskilled workers in more successful industries. If an industry becomes more competitive worldwide, this would be expected to result in both lower wages and smaller wage differences across countries.
This is important because many who oppose free trade do so not because of its redistributive effects within countries but because they worry about its equalizing effects across countries. For example, opponents of the North American Free Trade Agreement are concerned that import competition will force wages for unskilled workers in the United States down to the level of Mexican wages. The idea is that each country exports the services of labor with which it is well endowed and imports the services of labor that is scarce. Trade thus increases the relative supply of each country’s scarce labor, thereby decreasing its price (that is, wages), and decreases its relative supply of abundant labor, thereby increasing its price (wages). This leads to a convergence of labor costs across countries. In principle, therefore, NAFTA might be expected to lower the wages of less-skilled workers in low-skilled-labor-scarce United States and raise wages of less-skilled workers in low-skilled-labor-abundant Mexico until the same wage structure prevails in both countries.
In practice, there is a critical caveat. This is that the theoretical possibility of wage convergence is subject to many restrictive assumptions, such as identical consumer tastes and identical production technologies across countries, perfect labor mobility across industries within each country, and production of the same mix of goods across all countries. The assumption that labor, even unskilled labor, is as productive in Mexico as in the United States is unlikely to be substantiated.
Capital Mobility and Labor Markets
Capital flows that change a country’s stock of capital relative to labor potentially affect the relative price of labor. The volume of capital flows across borders has increased rapidly since about 1970, growing at a rate much higher than that of international trade in products. The claim is often made that outflows of capital from advanced economies have lowered wages in the advanced economies as multinational firms establish or expand overseas affiliates, to which the firms then "export" or outsource jobs.
While this process of outsourcing can generate a shift in demand toward more skilled labor within firms, as has happened in most U.S. industries, the process apparently has not yet been large enough to add noticeably to income inequality. Home and foreign labor are at best weak substitutes for each other and might even be complements, so that employment rises and falls together at home and abroad. When firms outsource to independent contractors rather than affiliates, the results appear to have only a modest effect on wages of unskilled workers in the United States. Even the combined effects of trade flows and capital movements remain smaller than the share of changes in inequality explained by technological advances.
Labor Mobility and Wages
Movements of labor from one country to another can also affect wages. An important issue in the advanced economies is whether immigration of less-skilled workers from the developing countries depresses the earnings of less-skilled natives. For the United States, one study has estimated that as much as a third of the overall increase in U.S. wage inequality can be attributed to increased immigration during the 1980s, an effect two to three times as large as that attributed to imports of goods. By contrast, other studies have found only small effects of immigration, but such studies have been criticized as investigating too restricted a geographical area. For example, although research had concluded that the 1980 boatlift of Cubans into Miami did not depress wages of less-skilled workers in that city relative to nearby cities, a later analysis revealed that in fact less-skilled natives adjusted to the influx of immigrants by moving out of Florida altogether.
In recent years, many European countries have experienced larger flows of labor (both inward and outward) relative to the size of their populations than has the United States. Immigrants in European countries are typically blamed for increases in unemployment rather than for declines in wages as in the United States. But studies have found that both wage and employment effects are in general small. Unfortunately, rigidities in European labor markets limit the speed of adjustment to migration and import competition, so that any adverse effects may tend to be longer lasting than in the United States.
Immigration can also lead to increased growth, particularly if, as in the case of Israel, immigrants such as scientists and engineers bring with them significant human capital. In this case, immigration potentially leads to increased investment and higher wages and output. In recent years, however, immigrants to most advanced economies have had on average lower levels of human capital than natives do, suggesting that economy-wide growth effects from recent flows of immigration will be less immediate.
Technology Flows and Wages
An inflow of technology can raise labor prices by increasing productivity. In general, one would expect wages across countries to equalize as technology and production techniques spread. Increased trade may contribute to innovation and the spread of technology, and thus indirectly affect wages.
One potential channel through which technology flows from country to country is the transfer of technology by multinational firms from the parent to its affiliates. Higher foreign investment in a particular industry is usually associated with higher wages in that industry. A recent study of Mexico and Venezuela, however, indicates that foreign direct investment appears to raise wages only within the plants of the foreign affiliates; there is no evidence that the technology spills over to increase wages or productivity in domestically owned firms.
Public Policy Issues
Increased globalization has been viewed with concern in many advanced economies. There is a common belief that globalization harms the interests of workers, especially unskilled workers, either directly through immigration or indirectly through trade and capital mobility. Particularly with respect to import competition, these beliefs appear to be at odds with the empirical evidence that globalization has only a modest effect on wages, employment, and income inequality in the advanced economies. (By contrast, changes in technology have led to a pervasive shift toward more-skilled workers to the detriment of less-skilled ones.) Moreover, the belief that globalization threatens wages and jobs is contradicted by the historical evidence that free trade and the mobility of labor and capital improve global welfare and tend to improve national welfare for all countries involved.
Still, despite the overall benefits of globalization for national welfare, there are adjustment costs for particular groups within a nation: globalization produces winners and losers. The adjustment of those groups of workers displaced by import competition occurs slowly and with significant costs, such as the need to obtain information about new opportunities, relocation, and the loss of firm- or industry-specific knowledge. Policymakers must keep in mind potential dislocations and ensure that those who are displaced do not become marginalized.
It is important, however, that any policy actions do not impede adjustment but provide incentives for workers and firms to adjust and therefore gain from changes in the economic environment. The adjustment costs can be minimized by encouraging flexible labor markets and by reducing structural rigidities facing firms, such as onerous work rules, staffing requirements, and hiring and firing costs. Other policies might include gathering and spreading information about labor market conditions, standardizing professional certification procedures across countries, and enhancing training and educational opportunities so that workers in the advanced economies can upgrade their skills to match the demands of the changing global economy.
Unfortunately, policymakers with short political time horizons might be more concerned with avoiding these short-term adjustment costs than with nurturing the long-term benefits of free trade, increased mobility of labor and capital, and labor market reforms. This view is misguided. The world economy has never been healthier than it is today. A good deal of the credit for this higher standard can be traced to globalization.

Job Creation:

Job Creation:
Why Some Countries Do Better
Over the past decade, the United States has been very successful at creating jobs. Some other industrial countries have clearly lagged behind. But what is the reason why some countries are more successful than others at creating employment? Are there common factors that explain job creation?
The challenge for many European countries is to create more jobs. The unemployment rate has been notoriously higher in Continental Europe (10 percent in the Euro area in 1999) than in the United States (4½ percent), but there have also been considerable differences within Continental Europe, where the unemployment rate recently ranged from 4½ percent in Portugal to 16 percent in Spain.
Many studies have attempted to explain why some countries have higher unemployment rates than others, but less attention has been devoted to countries' relative performance in job creation, or net employment growth. This paper presents the findings of a new study by IMF staff that has systematically analyzed job creation over the past two decades in the industrial countries, focusing particularly on differences within Europe.
Advantages of Approach
Shifting the focus to job creation has four advantages:
Employment is much easier to measure than unemployment. Measuring unemployment involves subtle distinctions between individuals who are in the labor force and those who are not: those counted as unemployed must say they are actively looking for a job; yet in high-unemployment countries in particular, so-called discouraged workers stop looking for work and remain uncounted. Conversely, many who claim to be looking for work may be half-hearted about it, the more so as their prospects dwindle.

A second reason for trying to understand job creation better is that for any given level of unemployment, faster job creation increases a country's output, and, among other things, raises the ratio of workers to pensioners, thereby lowering the cost of its social safety net.

Third, the insights gained from studying unemployment do not necessarily hold up when the focus shifts to job creation. For example, laws, programs, or labor agreements making it relatively difficult or expensive to lay off workers seem to have no effect one way or the other on the unemployment rate. However, strong systems of job protection appear to have a big effect in holding down job creation.

Finally, analyzing employment growth instead of experience with unemployment offers richer results. Data on unemployment, for example, tell us nothing about the kinds of jobs available in the workplace, or the terms under which workers hold them, such as whether they are permanent or temporary, or full-time as opposed to part-time. A look at these factors lets us assess, among other things, whether faster job creation in the United States than in Continental Europe comes from historical conditions, such as a much lower proportion of farm jobs or traditional manufacturing jobs, which have been stagnant or declining in all advanced countries. This approach can also examine the effects of women entering the workforce in larger numbers in recent years, and can shed light on important policy questions, such as whether promoting part-time work leads to higher overall job creation or merely cannibalizes full-time jobs.
A legitimate argument against this approach is that over very long periods of time, employment growth should simply equal the growth of the working-age population. However, in the medium term--20 years or so--government policies and institutional differences can have a big impact on the share of the working-age population that decides to participate in the labor market. Furthermore, the pace of job creation affects the growth of the working-age population itself, since countries adding jobs fastest will tend to attract more immigrants.
Over the past two decades, net growth of employment varied widely among advanced countries. Outside Europe, the United States, Canada, Australia, and New Zealand created far more jobs than most European countries. And within Europe, France, Italy, and some of the Nordic countries lagged in job creation, while the Netherlands and Ireland were high-fliers, especially in the 1990s.
The study by IMF staff applies standard statistical methods to a wide variety of data reflecting these countries' varied experiences with job creation. For each country, it studies age and gender groups, economic sectors, and type of contracts (part-time versus full-time, and temporary versus permanent), and how they relate to employment growth. These factors dominate the public policy debate about overall job market performance, even though most theories of the labor market focus on aggregate employment and unemployment.
This appears to be the first attempt at a detailed cross-country comparison of job creation over a medium-term period among 21 members of the Organization for Economic Cooperation and Development (OECD), but far more study is needed to confirm some of the policy implications of the work. Simple statistical correlations and accounting techniques can be highly misleading in identifying cause and effect, for example.
Caution is also warranted by the fact that this study deals throughout with numbers of jobs rather than the level or flexibility of wages. Some studies of pay argue that the stronger job performance of the United States compared with Europe may be due to greater U.S. wage flexibility, a factor not assessed here.
A look at job creation in all the advanced countries over the past 20 years shows that some countries did especially well in a limited number of sectors, such as the large U.S. gain in retail jobs, or that some countries with fast job growth over the period began with a favorable mix of jobs, such as relatively small shares in agriculture or manufacturing.
Further analysis, however, shows that these special factors account for only a small portion of the superior employment performance of the non-European countries. Instead, the data indicate that a policy package consisting of low dismissal costs and low taxation may have been far more important in producing rapid job creation, and accounted almost entirely for the difference between Europe and the high-performing non-European countries.
When the focus is narrowed down just to the European countries, the statistical evidence is much less conclusive in accounting for country differences. Notably, the Netherlands' success is largely explained by a remarkable surge in part-time employment. And while the Netherlands' experience is impressive and merits further study, throughout Europe it is also evident that the growth of part-time work has had a high cost in the loss of full-time jobs.
These issues are explored below in five sections:
Section I ranks the performance of 21 OECD countries by job creation over the past two decades, taking into account their growth in output, capital investment, and increase in working age population.

Section II studies job creation by sector, using data on employment in agriculture, four industrial sectors, and six service sectors.

The next section examines the relationship between job creation and institutional variables such as taxation, prevalence of labor unions, cost of laying off workers, and unemployment benefits.

Section IV considers job creation within Europe, especially the extent to which part-time jobs have crowded out full-time jobs, and the role played by temporary (versus permanent) contracts. It also explores interactions of job creation with age and gender groups and different kinds of employment.

The final section provides some conclusions.
I. Slow and Fast Job Creators
The contrasts in job creation over the past two decades are remarkable among the 21 countries considered. The study's sample period--1980 through 1997--eliminates shorter term economic ups and downs from the comparisons. In this perspective, non-European countries including Australia, the United States, Canada, and New Zealand outstripped most Continental European countries, except the Netherlands and Switzerland. The non-European high-fliers raised their total number of jobs an average of 1½ percent a year, compared with less than ½ percent a year in Continental Europe (See Figure 1).

In absolute terms, these differences are huge: for a country the size of Italy, for instance, a 1 percentage point difference in employment growth amounts to a difference of some 200,000 jobs a year, or 3½ million jobs over the 17-year period.
Do such sharp differences reflect a need for countries to reform their labor markets, or does the explanation lie in other factors, such as increases in working-age population, total output, or investment in capital? The data offer some insights, starting with changes in working-age population.
If a country's job creation keeps pace with the growth of its working-age population, it is usually considered to be doing well. Indeed, countries with more rapid working-age population growth typically end up creating relatively more jobs. By this yardstick, the United States has truly experienced an employment miracle, creating many more jobs than needed to keep pace with population growth and bringing a dramatic decline in unemployment. Over the last 20 years, the country's ratio of employment to working-age population rose by more than 7 percentage points, despite sizable immigration.
Applying this same yardstick, the ranking of Australia, Canada, Ireland, and New Zealand is somewhat lower, while that of the United Kingdom and Belgium is somewhat higher. But the overall picture remains similar, as it does when growth in output is examined.
Output growth and job creation are intrinsically linked. If it were assumed (probably unrealistically) that labor and capital are used in production in the same proportions regardless of the level of output, job creation and output growth would simply be mirror images of each other. In reality, the proportions vary, and increases in productivity are reflected in differences between employment and output growth.
Over long periods, these differences provide clues to the sources of employment growth. For example, a country developing a new product or becoming more competitive internationally for any reason experiences greater demand for its output, and thus its employment rises to meet the new demand. Some of Ireland's rapid job growth, with briskly rising investment particularly in high technology, may thus make it more an output growth miracle than an employment miracle. The reverse, low output growth, may have hampered job growth performance in countries such as Greece and Sweden.
The study finds that a majority of the European economies substituted capital for labor to a greater extent than the non-European economies with dynamic job growth. Countries with flexible labor market institutions may thus create more jobs because they meet rising demand through hiring as well as through additional capital investment. Some analysts conclude that heightened demands by trade unions in Europe beginning in the late 1970s led to substantial substitution of capital for labor. Canada also increased its capital stock far more rapidly than the number of its employed workers, which suggests that some potential to create jobs was left unexploited.
Focusing only on the 1990s, the performance of some European countries, especially Ireland and the Netherlands, becomes more impressive. Ireland led all advanced countries with 3 percent average annual employment growth for 1990–97. More recently, since 1995, Spain's job creation has been this brisk, too, but it is too early to tell if this simply reflects a business upswing. By contrast, Switzerland's employment growth, rapid until 1990, has turned sluggish, consistent with a slowdown in output. For most other countries, however, the ranking based on 1990–97 is similar to that for 1980–97.

II. Do Sectors Matter?
Recent studies argue that historical variations between countries in the mix of jobs by economic sector--particularly farming and manufacturing--play a large role in their different rates of job growth. One suggests that the United States enjoys higher job creation than France because of rapid U.S. gains in retail trade jobs. This is in line with the popular view that most U.S. job creation has been in low-skill, low-wage jobs. Indeed, IMF research confirms that retail job growth added considerably to total employment growth in all the fast job creators, amounting to an annual average of ½ a percentage point over 1983–94 not only in the United States, but also in Australia and Canada.
The study by IMF staff analyzed employment data for 11 economic sectors in 11 countries between 1982 and 1994. Although this is fewer countries than in Section I, it includes rapid job creators such as Australia, Canada, the United States, and the Netherlands as well as some of the slowest: Italy, France, and Sweden.
The analysis supports the possibility that the initial mix of jobs by economic sector is a determinant of overall job creation. In 1982, for instance, several slow job creators, including France and Italy, had large shares of employment in agriculture and industry, where most industrial economies have lost jobs.
But while sectoral factors are significant, for most countries they explain only a small portion of overall job creation, and do not much affect country rankings based on total employment growth. Nor do the results support the idea that retail trade accounts for most of the differences in job growth. If countries' job creation is computed under the extreme assumption that no jobs were created in the retail trade sector at all, the high-performing non-European countries remain by far the most rapid job creators, and the overall ranking is unchanged.
The effects of historical differences in the mix of jobs were tested using an accounting approach that estimates what each country's overall job creation would have been if its job composition in 1982 were the same as the average for all the countries in the sample. The results show that all slow job creators suffered from adverse historical conditions, just as the high-fliers benefited from favorable circumstances, such as relatively low employment in farming and manufacturing. Nevertheless, the country rankings remain broadly unchanged.
Exceptions showed up in a few countries, especially in southern Europe, which had lots of jobs in agriculture at the start. Taking the rough accounting results at face value, if Italy's sectoral mix of employment had been the same as the sample average in 1982, by 1994 it would have had at least 1,200,000 more jobs, and its ranking among countries would have been noticeably better.
The advantages some countries got--and the burden for others--can also be assessed through a similar accounting exercise, estimating what overall job creation would have been in each country if each of its sectors had grown at the same rate as the average for all the countries. This shows that differences in job composition by sector at the start explain only about one fifth of the total differences among countries.
A final illustration that differences in the functioning of individual country job markets may tell much more about their performance than their different historical patterns of employment by sector is that, for example, the United States created more jobs than Italy in all of the 11 sectors considered (See Figure 2). Even though Italy is the country where sectoral effects appear to be the starkest, the chart shows that these effects are unlikely to explain why Italy did worse than the United States.

III. Job Creation and Economic Policies
Since sector differences only partly explain variations in employment growth, the key explanations must be sought elsewhere.
A promising area for investigation is the relationship between employment growth and labor market policies and institutions. The IMF study examined such factors as unemployment benefits, the strength of trade unions and their bargaining practices, and the level of taxation. It also looked at a group of practices that affect the costs of dismissal, also referred to as employment protection legislation. These include the amount of notice an employer must give an employee and how many months' wages must be paid to laid-off workers, as well as the complexity of the procedures required before layoff.
Earlier studies, both theoretical and empirical, have generally focused on unemployment trends, and they have reached a variety of conclusions about the role of such factors.
Higher unemployment benefits, for example, result in higher unemployment and lower job creation in most theoretical models of the labor market, and in practice are associated with higher unemployment. Trade union strength, measured by the proportion of workers covered by union contracts, leads to higher wages and higher unemployment--but less so when unions and firms coordinate their bargaining activities.
The role of taxation and the various kinds of employment protection legislation is less clear-cut, as witnessed by continuing sharp public debate about them. Theory suggests that the effects of changes in taxation on unemployment depend largely on the extent to which higher taxes are shifted to labor in the form of lower compensation, together with how responsive the supply of labor is to changes in pay. For example, one study shows that tax cuts increase employment only if they raise the ratio of net wages to unemployment compensation.
A separate analysis argues that, in the long run, any tax on labor is borne by the employees, as seen by the absence, in practice, of any connection between total taxation and labor costs. Other research, by contrast, argues from both theory and labor market experience that higher taxes raise unemployment and lower output. This study compiles evidence that European unions have had the power to shift part of the increases in the tax burden onto firms. Unemployment has also been seen to rise with total taxation, but not with higher payroll taxes.
Most theoretical studies predict that high dismissal costs will not affect unemployment. The logic here is that since employment protection increases the cost to a company or an industry of making changes in its labor force, both hiring and firing will be lower, but the net effect on average employment will be ambiguous. That view is supported by the small flows into and out of unemployment in European countries compared with those observed in North America. However, another view is that increases in dismissal costs may lead entrepreneurs, over a decade or two, to substitute capital for labor, which is consistent with the decline in the labor share of income in the major advanced countries.
A focus on growth in employment over the medium term confirms several empirical relationships identified by earlier studies of unemployment. The IMF research finds less job creation where unions are relatively powerful, as well as a close link between working-age population growth and job creation. By contrast, country differences in unemployment benefits seem to have negligible effect on their job creation.
More suggestive from a policy perspective, extensive employment protection appears to dampen job creation, and so does a higher level of overall taxation. Further tests to try to quantify these relationships confirmed a stronger association between employment protection legislation and job creation, but the relationship with total taxation is also fairly robust.
Specifically, measurements for this study suggest that, on average, if we drop a country down by five positions in the ranking of all countries in the strength of their employment protection legislation, its average job creation rises by 0.1–0.2 percentage point. For Italy, for example, this amounts to some 20,000–40,000 jobs a year, or some 400,000–800,000 jobs over 20 years. A cut in total taxation by 1 percentage point of output is associated with higher average job creation of some 0.05 percentage point.
How strong are these conclusions? The study's statistical results must be interpreted with caution, especially given the small number of observations and the high degree of association among some of the policy variables. Trying to identify cause and effect is particularly hazardous, yet the results fit better with some earlier findings than with others. For example, a finding that high dismissal costs are associated with weak job creation appears consistent with the idea that they also lead employers to substitute capital for labor.
The findings might, in principle, also be consistent with the traditional view that employment protection reduces both hiring in upswings and dismissals in downswings, with no net impact on employment. This interpretation would be more convincing if 1980–97 could be seen as a cyclical upswing, with employment increases smaller in countries with high dismissal costs, as in Continental Europe, and larger in countries such as the United States with low dismissal costs. Both Europe and the United States have, however, experienced cyclical ups and downs over the last two decades, so it is harder to accept that higher dismissal costs had no impact on employment.
The relationship found between the overall taxation and employment growth is consistent with the view that, as taxes rose in Europe, more and more of the additional burden was shifted onto employers, who reduced payrolls as a result. In this instance, however, researchers had expected higher payroll taxes to hold down employment more than the overall tax burden. Yet the IMF study found no statistical support for this expectation.

IV. Inside Europe
Higher taxes and dismissal costs may help explain differences in job creation between high-performing non-European countries like the United States and Australia and most of Continental Europe, but the wide variations within Europe remain unexplained. For insights into Europe, the study looked at differences among 11 European Union countries over 1983–97. It examined the composition of job creation by type of contract (part-time versus full-time, and temporary versus permanent), the broad economic sectors in which jobs were created, and the age and gender of the newly hired. It also looked at interactions among these factors, such as the extent to which full-time jobs were filled by young men. The most striking finding is that the best European performer, the Netherlands, has had about half of its job creation since the mid-1980s in part-time jobs taken by women aged 25–49, typically in the service sector.
The study found that the kinds of jobs created are mainly determined by developments in technology or labor supply. In virtually all European Union countries, employment growth was much faster for women than men, mirroring much higher increases in labor force participation by women. Declines in youth employment seem to be related partly to more years spent in schooling, as well as to labor market conditions such as high firing costs.
While all countries increased employment for workers aged 25–49, their performance was mixed for the 50–64 age group, partly reflecting the trend toward early retirement in a number of countries. Economic sector changes also affected employment by age and gender, notably generating rapid employment growth for women aged 25–49 as all countries' service sectors expanded.
Contracts and Job Creation
A key policy question is whether increases in the share of part-time jobs are associated with higher overall job creation. The Netherlands clearly stands out, with half its employment creation attributable to part-time contracts. Reforms undertaken by the Netherlands in the early 1980s seem to have spurred overall employment through a sharp rise in part-time work. At the same time, for the 11 European countries as a whole, the study found no clear evidence that a bigger share of part-time jobs led to higher total job creation, either for Europe as a whole or for any of the three broad economic sectors: agriculture, industry, and services.
In an effort to estimate the extent that increases in part-time jobs are associated with the loss of full-time jobs, the study by IMF staff compared overall employment growth in Europe with the increase in the share of part-time jobs.
What, the study asked, is the employment creation associated with a country's addition of 100 part-time jobs? It looked at three benchmarks. First, if overall employment also rose by 100 jobs, there was no crowding out of full-time jobs at all. Second, if overall employment rose by 50 jobs, there was no net gain or loss of total hours worked--given that the average weekly hours of part-time jobs is about half that of full-time jobs. Third, if overall employment remained unchanged, the addition of 100 part-time jobs completely crowded out full-time jobs.
The results of this approach suggest that increases in part-time employment have typically been associated with some crowding out of full-time jobs, yet also with some increase in the total number of jobs.
Looking at part-time job creation by sector in individual countries--for example, at France alone by industry, agriculture, and services--provides a richer set of data, letting us estimate the relationship between increases in part-time jobs in a given sector to total employment, and the contribution of that sector to overall job creation in the country. This highlights the extent to which technological considerations may determine how much part-time jobs substitute for full-time jobs.
In the services sector, the study found that increases in part-time employment were associated both with increases in the overall number of jobs and also with partial crowding out of full-time jobs. The results strongly suggested the possibility that there had been no net increase in the number of hours worked, but clearly, more investigation is warranted here.
Turning from part-time to temporary work, Spain stands out: its net job creation over the past two decades was entirely in temporary jobs. Here again, reforms in the early 1980s, allowing temporary employment against a background of extremely high dismissal costs, seem to have sparked the dramatic rise in temporary jobs, while overall employment grew very slowly. Spain's share of temporary employment now stands at one-third, by far the highest among advanced countries.
Given that Spain and Italy have the highest dismissal costs among advanced countries, it is tempting to surmise that countries with high dismissal costs have more temporary employment or that they have a rising share of temporary jobs. However, statistical evidence for this idea is not strong, especially when Spain is dropped from the sample.
The strikingly different experiences of the Netherlands and Spain suggest that part-time contracts may be a more promising avenue of job creation than temporary contracts--a conclusion strengthened by evidence that workers tend to be happier with part-time contracts than with temporary contracts.
Surveys in the European Union in 1997 found that about 58 percent of part-time workers did not want a full-time job instead, and in the Netherlands, 72 percent of part-time workers did not want a full-time job instead. By contrast, only 7 percent of temporary workers in Europe said they did not want a permanent job instead of temporary work, while in Spain, 87 percent of temporary workers were unable to find permanent jobs and the share who did not want a permanent job was negligible.

Conclusion
Some of the main findings from this research are:
A policy package consisting of low worker dismissal costs and low taxation may have an important role in producing rapid job creation and appears to account almost entirely for the difference between Continental Europe and the high-performing non-European countries.

Extensive employment protection appears to dampen job creation, as does a higher level of overall taxation. The finding that high dismissal costs are associated with weak job creation appears consistent with the idea that they also lead employers to substitute capital for labor.

Within Continental Europe, a move toward more part-time work may help explain why certain countries have been more successful than others at increasing employment.

As the success of the Netherlands suggests, part-time contracts are likely to be popular, especially with working women. Further research is needed, however, to determine whether this results in a significant net gain in the number of jobs. In contrast, as the case of Spain shows, the use of temporary work contracts is more likely to result in job substitution rather than a real net gain in employment.

While it is sensible to reduce obstacles to adopting more part-time contracts, this should not be used to postpone other needed labor market reforms.

Sectoral factors, whether a small initial share of farming and manufacturing, or good performance in a limited number of sectors, such as retail trade, only explain a small portion of differences in total job creation across countries.