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  • To Cut Unemployment, Opt for Economic Freedom

    The Fundacion para el Análisis y los Estudios Sociales of Spain recently sponsored presentations on the 2010 Index of Economic Freedom (www.heritage.org/index) in Madrid and Barcelona. Discussion centered on Spain’s 18 percent unemployment rate, the highest in Europe, and its labor market regulations that are among the most severe in Europe.

    According to the Index of Economic Freedom, the average labor freedom score for the members of the European Union is 60.0, on the Index’s 0-100 scale. Spain’s score, by contrast, is only 47.3.

    The average unemployment rate for EU members was 6.2 percent in 2008 (the latest year for which we have complete data). Those with more labor freedom had lower unemployment rates (at 5.8 percent compared to a 6.6 percent rate in less free countries) The contrast in recession-plagued 2009 was even starker: EU members with more flexible labor markets averaged 7.9 percent unemployed; those with more rigid labor regulations averaged 10.1 percent unemployed.

    Various economic studies have documented the negative employment impact of laws that restrict labor markets by setting minimum wages, restricting layoffs, or requiring excessive severance payments. For example, a recent National Bureau of Economic Research study, which reviewed about 90 empirical papers from the early 1990s to the present, reports that two-thirds of those papers conclude that the effects of the minimum wage are negative. Further, among the most methodologically rigorous of those papers, “almost all point to negative employment effects.”

    Contrary to popular opinion, the U.S. recession did not cause a spike in layoffs. It did lead to much slower job creation than usual in the U.S. economy, and much higher unemployment. Increased government spending over the past two years has not created jobs, and Congress should be reminded that private-sector investment, entrepreneurship, and trade are the best engines of economic growth and job creation. All flourish in an environment of greater economic freedom.

    Let’s hope U.S. politicians get the message before we have to dig out of a labor market hole the size of Spain’s.

    Posted in International [slideshow_deploy]

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