Up until the 1970s, the European Union had very low rates of unemployment. It was even referred to as the 'European unemployment miracle' But, after the supply side shocks of the 1970s, unemployment rose and remained stubbornly high until the mid 1990s. Recent improvements in unemployment have been set back by the current recession which has caused unemployment to rise to 8.9% with forecasts for the rate to go above 10% soon.

Also it is worth pointing out Unemployment rates vary across the EU area. Spain has the highest rates, yet the Netherlands have quite low rates.

What is Cause of Unemployment in Europe?

High Unemployment Benefits. European states tend to have generous welfare benefits which decrease incentive to get a job. However, countries like the Netherlands have seen low unemployment rates despite similar benefit rates.

Labour Market Rigidities. European economies often have generous protection for workers. e.g. hard to hire and fire workers, maximum working week. Protection for trades unions. This gives protection for 'insiders' but not outsiders. It also could explain why European unemployment could be for a longer duration. Within the political systems there is often reluctance to reform labour market policies which protect certain workers at the expense of the unemployed. (Bean 1994)

Skills Based Changes. Factors such as globalisation and increased specialisation have led to rapid changes in demand for skilled workers. The consequence is that unskilled workers have found it more difficult to gain employment. (Lawrence 1994, Krugman 1995, Baldwin and Cain 1997)

Conservatism of ECB. The ECB has a strong reputation for keeping inflation low. The target of monetary policy is low inflation and arguably this holy grail of low inflation means they are willing to sacrifice growth and investment. It explains the contrast in response to the ECB and Bank of England to the current recession. (Theodore Peligidis 1998 link)

Rigidities in the Euro. The Euro prevents individual countries - cutting interest rates, devaluing currency to improve competitiveness and even places limits on fiscal policy. This has reduced the competitiveness of fringe Euro members such as Greece and Spain and explains some unemployment.

Unemployment is underestimated in the US. US unemployment rates are lower, but arguably there is a higher disguised rate of unemployment including low paid part time jobs.

Conclusion

The more you look into European unemployment the more you realise there is no simple answer. It is unsatisfactory to explain it all away with blaming labour market rigidities and generous welfare benefits. O.J.Blancard (2004) states "High social protection is not inconsistent with low unemployment. However, it must be provided efficiently."

It is also important to consider both demand and supply side policies. The scale of the German recession illustrate how the ECB's conservatism in Monetary policy could adversely affect unemployment in both the short term and longer term

Further Reading

• Causes of Unemployment
  
• Explaining European unemployment
• European Unemployment - myths and realities