The unremittingly grim August labor market report contained, in addition to the stubbornly high measured unemployment rate, a more ominous piece of (old) news: continued erosion of the labor force participation rate. Here it is:
Labor market participation hasn’t been this low since 1981.
The data give lie to the idea of a distinctly American work ethic—distinct, that is, from Europe, where people while away their meaningless lives as pleasantly as they can. Here’s the labor force participation rate for the U.S., the EU, and selected European countries:
Proposition: Germany’s resurgence and America’s decline have nothing to do with demographic or global economic forces that just wash over you; they are political and institutional.
Maybe Germans are Germans who will work no matter what. Then again, maybe not: the problem in the 1990s was that had stopped doing so—and what with those social benefits, what sentient human being wouldn’t? Recognizing the problem, the government hacked away at the entitlement state, from unemployment benefits to higher education to labor market regulation. Trade unions exercised wage restraint and, during the financial crisis, accepted flexible labor arrangements (such as temporary part-time work at reduced pay) that violated existing bargaining agreements but saved jobs over the long haul. Germany’s resurgence from the sick man of Europe to economic engine and political player was built on these reforms.
Because it is hard to interest Americans in European stuff unless it involves bond rates or brown shirts, it is difficult to convey how policy-driven and traumatic Germany’s transformation really was. The reforms at issue were undertaken by a Social-Democratic chancellor (Gerhard Schroeder) who told his own constituencies: You cannot have what you ask for; and you must give up some of what you have. The reforms produced howls of outrage and agitation over galloping “neo-liberalism” and the demise of Germany’s commitment to a “social market economy.” They produced a raft of constitutional challenges, some of them successful. Above all, the reforms split the SPD and produced a hard-left party (Die Linke), which has since become a fixture in the political landscape. To get a sense of the dark memories that stirs up, consult books on the early years of the Weimar Republic; on the SPD’s split at that time, and on Rosa Luxemburg.
There you have some ingredients of successful welfare state reform: a responsible social-democratic party; a responsible labor movement; a political establishment that is prepared to look beyond the next election and willing to bring and demand sacrifice; and an electorate that, while understandably grumpy about the whole business, comprehends and accepts that long-term prosperity demands considerable discipline upfront.
It’s an interesting question whether one can run or reform a big transfer state without any of those conditions. One way or the other, we’re about to find out.