May 21, 2013 - No.

367

Unemployment in the euro zone: A

problem due to excessive austerity or a
problem due to poor competitiveness and
a lack of structural reforms?
Rising unemployment in the troubled euro-zone countries (France, Spain,
Italy and Portugal) has triggered a debate on the causes of unemployment
and the economic policies that might reduce it.
-

It is sometimes argued that fiscal and wage austerity in the euro zone is
the crucial cause of unemployment, and one has to change over to
policies that do not depress demand to such an extent;

On the other hand, there is the view that structural problems in euro-zone
countries (competitiveness, profitability, operation of the labour market)
are the major causes of unemployment, and therefore that the necessary
structural reforms have to be carried out.

This long-standing debate in fact boils down to determining the weight of the
cyclical and structural components of unemployment in euro-zone countries.
We show in this Flash that in all likelihood:
-

Unemployment is above all structural in France and Italy (fiscal austerity

is not its crucial cause);

ECONOMIC RESEARCH
Author:
Patrick Artus

Unemployment is above all cyclical in Spain and Portugal.

Increase in
unemployment in the
troubled euro-zone
countries and its
possible causes

We look at the situation in France, Spain, Italy and Portugal.

In these countries, the weakness of activity (Chart 1A) has led to a steep rise in
unemployment (Chart 1B).

Chart 1A
Real GDP grow th (Y/Y as %)

Chart 1B
Unem ploym ent rate (as %)
30

France

Spain

Italy

P o rtugal

6
25

30

France

Spain

Italy

P o rtugal

25

20

20

15

15

-2

-2

10

10

-4

-4
-6

-6

Sources: Datast ream, Nat ixis forecast s

Sources: Dat astream, Eurost at, Natixis

-8

-8
02 03 04 05 06 07 08 09 10 11 12 13 14

0
02

03

04

05

06

07

08

09

10

11

12

13

This rise in employment has triggered a controversy between two groups. On the
one hand, we have those (Keynesian economists, left-wing political parties) who
believe that unemployment has increased above all due to the weakness of
demand (Chart 2A), owing to restrictive fiscal policies (Chart 2B) and wage
policies (Chart 2C). On the other hand, there are those (supply-side economists,
right-wing political parties, German public opinion, etc.) who believe that the
increase in unemployment is mainly due to the structural problems of the
troubled countries: insufficient competitiveness (Chart 3A shows the level of
unit labour costs in comparison with Germany), insufficient profitability (Chart
3B), and lack of flexibility in the job market.

Chart 2A
Dom estic dem and
(in volum e term s, 2002:1 = 100)
France
Italy

130

Spain
P o rtugal

Chart 2B
Fiscal deficit (as % of nom inal GDP)

130

120

120

110

110

100

100

90

90

France

Spain

Italy

P o rtugal

-2

-2

-4

-4

-6

-6

-8

-8

-10
Sources: Datast ream, INSEE, INE, Ist at , NSO, Nat ixis

04 05

Flash 2013 367- 2

06 07 08

09 10

-10
Sources: Dat astream, Natixis f orecasts

80

80
02 03

11 12 13

-12

-12
02 03

04 05 06 07

08 09 10 11

12 13 14

Chart 2C
Real per capita w age (deflated by consum er
price deflator, Y/Y as %)
France

Chart 3A
Unit labour costs (Germ any = 100)

Spain

Germany

France

Italy

P o rtugal

Spain

110

105

105

100

100

95

95

90

90

-2

-2

85

85

-4

-4

80

80

-6

-6

75

Italy

P o rtugal

75

Sources: Datast ream, Nat ixis

Sources: IHS Global Insight, Nat ixis

-8

-8
02

03

04

05

06

110

07

08

09

10

11

12

70

13

70
02

03

04

05

06

07

08

09

10

11

12

13

Chart 3B
Profits after tax, interest and dividends
(as % of nom inal GDP)
16

Germany

France

Italy

P o rtugal

Spain

16

14

14

12

12

10

10

Sources: Datast ream, INE,

Ist at, NSSG, Nat ixis

2
02

03

04

05

06

07

08

09

10

11

12

13

Table 1 shows the degree of job protection; Table 2 the correlation between real
wage growth and the unemployment rate.
Table 1
OECD job protection index
Scale from 0 to 6,
with values increasing
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
in line with the degree
of stringency of regulations
United States
0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17 0.17
..
United Kingdom
0.95 0.95 1.12 1.12 1.12 1.12 1.12 1.12 1.12 1.12 1.12
..
Germany
2.68 2.68 2.68 2.68 2.68 2.68 3.00 3.00 3.00 3.00 3.00
..
France
2.34 2.34 2.34 2.47 2.47 2.47 2.47 2.47 2.47 2.47 2.47 2.45
Spain
2.61 2.61 2.61 2.61 2.61 2.46 2.46 2.46 2.46 2.46 2.46
..
Italy
1.77 1.77 1.77 1.77 1.77 1.77 1.77 1.77 1.77 1.77 1.77
..
Portugal
4.33 4.33 4.33 4.33 4.33 4.33 4.17 4.17 4.17 4.17 4.17 3.63
Sweden
2.86 2.86 2.86 2.86 2.86 2.86 2.86 2.86 2.86 2.86 2.86
..
Sources: OECD, Natixis

Table 2
Correlation between quarterly series:
Real per capita wage (deflated by household consumer price deflator) and unemployment rate

1998-2012

United States United Kingdom Germany France Spain Italy Portugal Sweden
-0.37
-0.73
-0.76
0.33
-0.34 -0.20
-0.54
-0.02

Sources: Datastream, BUBA, INSEE, INE, Istat, Natixis

Flash 2013367- 3

Indeed, there seems to be labour market rigidity in euro-zone countries in

comparison with the United States and the United Kingdom. In particular, France
does not show any negative effect of unemployment on increases in real wages.
An age-old issue: How
does unemployment
break down between
cyclical unemployment
and structural
unemployment?

The debate between those who see austerity policies as the main cause of
the high level of unemployment in OECD countries and those who believe
structural problems explain this situation is based on an age-old question:
how does unemployment break down between cyclical unemployment (due
to the low level of demand) and structural unemployment (due to structural
problems)?

Inset 1
Cyclical unemployment and structural unemployment
We denote:

p the growth rate in prices;

the profit margin of companies or the tax rate on companies;

w the growth rate of the nominal per capita wage;

the growth rate of per capita productivity;

the rise in the real equilibrium wage;

the unemployment rate.

We have, for the formation of prices (with inertia):

(1)

p w 1 p 1

For the formation of the nominal wage (with lagged indexing to inflation that represents the inertia of expectations, or the
slow pace at which wages adjust):
(2)

w p 1 u

If the job market becomes less competitive,

increases, the real equilibrium wage increases.

Resolving (1) and (2), we obtain in the near term:

(3)

p p 1 u 1

Hence, in the long term

(4)

p p1 the structural unemployment rate.

u * 1

and in the near term:

(5)

p p 1 u * u

and w p u

Inset 1 shows that structural unemployment depends on the intensity of

competition in the product market, the degree of flexibility of the labour market,
productivity gains and taxation. When unemployment is equal to structural
unemployment, inflation and the sharing of income between wages and
profits remain stable.
If unemployment is higher than structural unemployment (there is,
accordingly, cyclical unemployment to some extent), inflation slows down and
the share of wages in GDP shrinks.
To ascertain the size of cyclical unemployment, we can therefore look at
changes in (underlying) inflation and income sharing.

Flash 2013 367- 4

In France, underlying inflation is not lower than in 2005 or 2010, income

sharing, in 2011-2012, was distorted in favour of wages (Charts 4A, B and C),
and unemployment is therefore probably entirely structural.
In Spain, underlying inflation has sunk to a far lower level; income sharing is
noticeably tilted in favour of companies (Charts 5A, B and C): the weight of
cyclical unemployment is therefore probably substantial.
Chart 4A
France: Unem ploym ent rate and underlying
inflation
12

Chart 4B
France: Unem ploym ent rate, real per capita
w age and per capita productivity
3.0

Unemplo yment rate (LH scale)

Co re CP I* (Y/Y as %, RH scale)

Unemployment rate (LH scale)

Real per capit a wage (deflat ed by GDP deflat or, Y/Y as %, RH scale)
Per capit a productivit y (Y/Y as %, RH scale)

(*) Excl. food and energy

13

11

2.5

10

2.0

1.5

1.0

12

11

10

-1

-2

7
0.5

7
03

04

05

06

07

-3
Sources: Dat astream, INSEE, Nat ixis

Sources: Dat astream, Eurost at, Nat ixis

02

08

09

10

11

12

13

-4
02

Chart 4C
France: Unem ploym ent rate and profits
after tax, interest and dividends

03

04

05

06

07

08

09

10

11

12

13

Chart 5A
Spain: Unem ploym ent rate and underlying
inflation
12

28

11

11

24

10

10

20

16

12

Unemplo yment rate

P ro fits after tax, interest and dividends (as % o f GDP )

Unemplo yment rate (LH scale)

Co re CP I* (RH scale)

4
3
2

(*) Excl. f ood and energy

12

Sources: Datast ream, INSEE, Natixis

Sources: Datast ream, Nat ixis

6
02

03

04

05

06

07

08

09

10

11

12

13

-1
02

Chart 5B
Spain: Unem ploym ent rate, real per capita w age
and per capita productivity
Unemplo yment rate (as %)
Real per capita wage (deflated by GDP deflato r, Y/Y as %)
P er capita pro ductivity

30

03

04

05

06

07

08

09

10

11

12

13

Chart 5C
Spain: Unem ploym ent rate and profits after tax,
interest and dividends
Unemplo yment rate (as %)

30

P ro fits after tax, interest and dividends (as % o f no minal GDP )

30

25

25

20

20

15

15

10

10

25

25

20

20

15

15

10

10
Sources: Datast ream,
INE, Natixis

Sources: Datast ream, INE, Natixis

-5

-5
02

03

04

05

06

07

08

09

10

11

12

13

30

5
02

03

04

05

06

07

08

09

10

11

12

13

Flash 2013367- 5

In Italy, underlying inflation has not slowed down, in 2012 income sharing
was distorted in favour of wages (Charts 6A, B and C): unemployment is
primarily structural.
In Portugal, underlying inflation has sunk to nearly zero, the share of wages
in GDP has declined since 2010 (Charts 7A, B and C): unemployment is above
all cyclical.
Chart 6A
Italy: Unem ploym ent rate and underlying
inflation

Chart 6B
Italy: Unem ploym ent rate, real per capita w age
and per capita productivity

12

12
Unemplo yment rate (as %)
Co re CP I* (Y/Y as %)

10
8
6

Real per capit a wage (deflat ed by GDP deflat or, Y/Y as %)

Per capit a productivit y (Y/Y as %)

12.5

10

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2.5

0.0

0.0

6
(*) Excl. food and energy

Unemployment rate (as %)

12.5

-2.5

-2.5

Sources: Datast ream, Nat ixis

Sources: Datast ream, Ist at, Nat ixis

0
02

03

04

05

06

07

08

09

10

11

12

-5.0

-5.0

13

02 03 04 05 06 07 08 09 10 11 12 13

Chart 6C
Italy: Unem ploym ent rate and profits after tax,
interest and dividends

Chart 7A
Portugal: Unem ploym ent rate and underlying
inflation

Unemplo yment rate (as %)

P ro fits after tax, interest and dividends (as % o f no minal GDP )

12

20

20
12

11

11

10

10

Unemplo yment rate

Co re CP I* (Y/Y as %)

15

15
10

10
(*) Excl. f ood and energy

5
0

0
Sources: Dat astream, Istat , Natixis

Sources: Datast ream, Nat ixis

5
02

03

04

05

06

07

08

09

10

11

12

-5

-5
02

13

Chart 7B
Portugal: Unem ploym ent rate, real per capita
w age and per capita productivity
Unemplo yment rate
Real per capita wage (deflated by GDP deflato r, Y/Y as %)
P er capita pro ductivity

03

04

05

06

07

08

09

10

11

12

13

Chart 7C
Portugal: Unem ploym ent rate and profits after
tax, interest and dividends
Unemplo yment rate
P ro fits after tax, interest and dividends (as % o f GDP )

20

18

15

15

15

15

12

12

10

10
9

5
6

20

0
Sources: Dat astream, Natixis

Sources: Dat astream, Natixis

-5

-5
02

03

04

Flash 2013 367- 6

05

06

18

07

08

09

10

11

12

13

0
02

03

04

05

06

07

08

09

10

11

12

13

Conclusion: Where is
the problem primarily
cyclical
unemployment?

A debate is under way as to whether ending the increase in unemployment requires

first and foremost:
-

An end of austerity (stimulation of demand);

Or structural reforms.

An equivalent question is whether cyclical unemployment is significant or not

in comparison with structural unemployment.
With regard to the situation in France, Spain, Italy and Portugal, we can see that:
-

Unemployment is above all structural in France and Italy;

Unemployment is above all cyclical in Spain and Portugal.

Flash 2013367- 7

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Flash 2013 367- 8