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Finance & Development, March 1979
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Labor market developments in the major industrial countries: An analysis of recent labor market conditions in Canada. France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1979
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Michael Deppler and Klaus Regling

The economic forces affecting recent unemployment rates have been generally similar among the seven major industrial countries (Canada, France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States). First, on a long-term basis, various structural changes in labor markets have tended to push up national unemployment rates in most of these countries. Second, the impact of cyclical developments on unemployment rates in the past several years has resulted in a number of broadly parallel movements among countries, as might have been expected. However, this semblance of uniformity masks a very considerable diversity of developments in the supply and demand for labor underlying national unemployment rates.

Unemployment

The overall unemployment rate in the major industrial countries has declined only slightly since the trough of the 1975 recession. In that year, reported unemployment in these countries reached 5.1 per cent of the combined labor force, a rate substantially above the rates (varying between 2.3 and 3.5 per cent) that prevailed during the 1960s and early 1970s (see Table 1). Overall, the unemployment rate for the larger industrial countries hovered close to 5 per cent from 1976 through 1978.

Behind this virtual constancy of total unemployment in the industrial countries since 1975, however, were some contrasting developments for individual countries. In the United States, the unemployment rate declined by about ¾ of a percentage point per annum from 1975 to 1978. Within-year developments have not been very even, but the cumulative decline of 3 percentage points in the U.S. unemployment rate from the monthly peak of 9.1 per cent reached in May 1975 is certainly the most impressive performance among the industrial countries. In both the Federal Republic of Germany and Japan, unemployment rates were substantially unchanged from 1975 to 1977; for 1978, however, an increase in unemployment occurred in Japan, while the German unemployment rate edged downward. In Canada, France, Italy, and the United Kingdom, unemployment rates increased 1–2 percentage points from 1975 to 1977 and (on a year-over-year basis) worsened further or remained high in 1978. (See Table 1 for a note on the data for Italy.)

In reviewing the major factors behind these developments, one is impressed by the importance of purely cyclical influences. The increase of more than 1½ percentage points in the overall unemployment rate between 1973 and 1975 is hardly surprising in light of the stagnation of aggregate output over this period. Similarly, the small overall decline in unemployment since 1975 is consistent with the concurrent moderateness of the average rate of growth in output (reflecting the slow pace of recovery outside the United States). The importance of purely cyclical considerations is further borne out by the intercountry differences in growth rates, especially in relation to the countries’ respective potentials: the country with an average growth rate well above potential (the United States) has enjoyed a noticeably improving labor market; those countries with growth rates close to potential (the Federal Republic of Germany and, to a lesser degree, Japan) have had unchanged labor markets; and those which, for various reasons, restrained growth to rates averaging well below potential have experienced deteriorating labor markets. Clearly, the cycle has been the main factor behind changes in unemployment rates since 1973.

Partly offsetting shifts

Be that as it may, the “well-behaved” cyclical movements in unemployment rates in the major industrial countries have been a result of unusual—and partly offsetting—developments both within and among countries in the demand for and the supply of labor. The larger industrial countries as a group have experienced unusually rapid growth in both the labor force and total employment since 1975; that is, shifts on the supply side have been partly neutralized by shifts on the demand side of the labor market. However, these movements have stemmed from diverse developments in individual countries, and the shifts which have not been completely offsetting have affected the unemployment rates themselves.

Chart 1 highlights the distinct outward shift in the unemployment/vacancy relationship evident in most countries for which relevant data are available. In each of the three cases illustrated, achieving a given unemployment rate today appears to require a relatively greater unsatisfied demand for labor (a larger number of vacancies) than was needed 10–15 years ago. Or, to put it the other way, a given unsatisfied demand for labor (as measured by vacancies) is now accompanied by a larger number of unemployed than was true a decade or so ago. More generally, the chart illustrates the increased mismatch at the margin between the supply of and the demand for labor. For the most part, this change in the relationship between unemployment and vacancies is thought to have stemmed mainly from the supply side. That is, the jobs that are available are less likely than they once were to be taken by the job-seeker because his alternatives—unemployment compensation or alternative sources of income—have improved. It is possible, however, that the difficulties may have stemmed from the demand side as well—for instance, where new technology has caused compositional shifts in job-skill requirements.

Chart 1Selected industrial countries: relation between the unemployment and vacancy rates

Source: OECD Labour Force Statisties and Fund staff estimates.

1The conference Board’s index of help-wanted advertising in newspapers, scaled by the ratio of the labor force in 1967 to the labor force in each year.

2 Vacancies notified to employment offices or labor exchanges as a per cent of the labor force

A major exception in the general pattern of shifts just described is the Federal Republic of Germany where there is no clear-cut evidence of an increasing mismatch between vacancies and unemployment, except perhaps for a rather small shift in this regard between the early 1960s and the late 1960s-early 1970s. This comparative absence of structural impediments in the German labor market may be due to the large flows of migrant workers, which may have enabled a better matching of demand and supply than would otherwise have been possible.

Table 1Seven industrial countries: selected indicators of labor market developments, 1960–78 1(Annual changes in per cent, unless otherwise indicated)
1960–73

Average
19741975197619771978 2
CanadaUnemployment rate5.25.36.97.18.18.4
Labor force2.84.13.72.53.03.7
Employment2.94.41.92.21.93.4
Productivity 32.6–0.8–0.63.20.80.1
United StatesUnemployment rate4.95.68.57.77.06.0
Labor force1.82.61.82.32.82.9
Employment1.91.8–1.33.23.54.2
Productivity 32.2–3.12.41.4–0.3
JapanUnemployment rate1.21.41.92.02.02.3
Labor force1.3–0.50.91.01.41.5
Employment1.3–0.60.40.91.31.2
Productivity 38.8–0.72.15.13.84.4
FranceUnemployment rate1.82.84.04.45.05.4
Labor force0.90.90.10.60.10.6
Employment0.70.7–1.10.1–0.50.2
Productivity 34.92.11.44.53.52.9
Germany,Unemployment rate1.02.64.74.64.54.4
Fed. Rep. ofLabor force0.2–0.4–0.9–1.00.3
Employment0.2–1.8–3.4–0.50.10.4
Productivity 34.32.20.96.72.72.8
Italy4Unemployment rate3.32.93.33.74.34.3
Labor force–0.71.51.01.11.30.7
Employment–0.62.20.50.70.80.6
Productivity 35.82.0–4.05.00.91.4
United KingdomUnemployment rate2.32.63.95.45.85.7
Labor force0.30.20.71.20.90.2
Employment0.20.4–0.5–0.70.50.3
Productivity 32.7–1.9–1.13.71.23.0
Major industrialUnemployment rate 52.83.55.15.04.94.7
countriesLabor force1.11.11.01.31.61.7
Employment1.10.6–0.71.41.71.9
Productivity 33.7–0.93.92.21.9
Major EuropeanUnemployment rate 51.82.43.74.44.74.7
countriesLabor force0.20.40.40.50.4
Employment0.20.2–1.3–0.30.10.4
Productivity 34.41.0–0.45.12.12.6
Source: national statistical publications and Fund staff estimates.

The figures shown in this table are not comparable among countries since they are based on the differing labor force definitions and concepts used by the respective national statistical agencies.

Partially estimated by the staff.

Real GNP per person employed.

A large-scale methodological revision in the Italian labor force statistics was initiated in 1977. The figures shown here for 1977 and 1978 are staff estimates corresponding to the old definitions.

Unemployed as a per cent of total labor force.

Source: national statistical publications and Fund staff estimates.

The figures shown in this table are not comparable among countries since they are based on the differing labor force definitions and concepts used by the respective national statistical agencies.

Partially estimated by the staff.

Real GNP per person employed.

A large-scale methodological revision in the Italian labor force statistics was initiated in 1977. The figures shown here for 1977 and 1978 are staff estimates corresponding to the old definitions.

Unemployed as a per cent of total labor force.

Labor force developments

For the larger industrial countries as a group, labor force growth fluctuated rather narrowly around 1 per cent per annum throughout the 1960s and the first half of the 1970s. The only exception was a spurt to a 2 per cent rate in 1973, at the cresting of a strong cyclical upswing in economic activity. Since 1975, however, labor force growth, despite historically high rates of unemployment, has accelerated to about 1½ per cent per annum. From 1975 to 1978, the labor force grew faster than in any other three-year period since the 1950s.

This acceleration in the growth of the labor force is not accounted for by the growth of the working-age population, which has, if anything, slowed down in recent years to about 1 per cent per annum, compared with an average of about 1¼ per cent per annum in the 15 years prior to 1973. Rather, the accelerated growth reflects a rise in the participation rate—the proportion of the working-age population that is holding, or looking for, jobs. This rate dropped by about 1½ percentage points in the first half of the 1960s (because of structural shifts, noted later); it remained unchanged at about 68 per cent of the working-age population during the rest of the 1960s and the first part of the 1970s. The participation rate then increased in 1973 and 1974 in response to boom conditions, but fell back somewhat in 1975 as labor market conditions deteriorated sharply.

This cyclical pattern is a classical one. The main feature is simply that high unemployment rates “discourage” potential employees so that, in effect, they drop out of the measured labor force; conversely, low unemployment rates “encourage” such persons once again to look for work, thus returning to the labor force. In contrast to this traditional pattern, participation rates have risen rather than fallen over the past several years, despite the high rates of unemployment. Indeed, without these increases, the overall unemployment rate of the major industrial countries in 1978 would have been about 1 percentage point lower.

Among the major factors that may explain the increased participation rates, is the ongoing (noncyclical) increase in the participation rates of women in several countries (see Table 2). A second factor is the significant and prolonged downward pressure on real incomes of households arising from the inflation and recession of 1974–75. This factor is thought to have accelerated the trend toward multiple-income-earner households; that is, partly in response to the faltering purchasing power of many household incomes and/or to the unemployed status of the traditional income earner, many women entered the labor force for the first time.

Table 2Labor force participation of women 1(In per cent)
1958196519701977 2
Canada30.036.041.152.0
United States41.444.348.955.5
Japan60.855.855.452.9
France46.1 348.250.3
Germany, Fed. Rep. of49.049.048.148.4
Italy38.5 431.129.130.9
United Kingdom47.148.850.556.9
Source: OECD Labour Force Statistics and Fund staff estimates.

Women in the labor force as a percentage of the female working-age population.

Or latest year available (1975 for France; 1976 for Italy).

1968.

1959.

Source: OECD Labour Force Statistics and Fund staff estimates.

Women in the labor force as a percentage of the female working-age population.

Or latest year available (1975 for France; 1976 for Italy).

1968.

1959.

A third factor encouraging participation has been the combination of improved benefits and reduced opprobrium attached to unemployment. Most countries have liberalized their unemployment compensation systems, initially as part of a general upgrading of social security arrangements and later as a response to the high and persistent levels of unemployment. These improved benefits have had the effect of tending to raise unemployment since they reduce the opportunity costs of being unemployed. Since these benefits also raise the opportunity costs of not seeking employment, however, they are thought to have affected participation rates as well. For instance, the prolongation of unemployment benefits has the effect of extending the stay in the labor force of those who would otherwise withdraw.

Finally, participation rates are thought to be bolstered by the array of job-creating and job-preserving programs recently introduced by many governments. While these programs have been generally successful in sustaining employment, they have also had the secondary effect of attracting into the labor force individuals who would not otherwise actively seek employment. Indeed, the conclusion of one study for France on this subject is that such countervailing increases in participation rates may have largely negated the effects on unemployment of some of the public sector employment programs.

Varying trends

These generalizations with respect to the overall labor supply are not equally consistent with the experience in each of the major industrial countries. Indeed, there is a considerable diversity of experience among countries, a diversity that is rooted in the first instance in contrasting historical trends in labor force growth (see Chart 2). In the United States and Canada and, to a lesser extent, Japan, the growth of the labor force has been far greater than in Europe, where the trend has been relatively flat.

Developments within Europe have also been quite divergent, with moderate growth rates in the United Kingdom and France, but flat or shrinking labor forces in the Federal Republic of Germany and (through 1972) Italy. In the main, these differences reflect corresponding differences in the growth rates of the working-age populations. In this respect, the much lower growth rates in Europe can be traced to lower birth rates during World War II and to migration from Europe to North America. Among the major European countries, population growth has been highest in France—partly the result of an array of fiscal incentives—and lowest in the United Kingdom. In the Federal Republic of Germany, only an influx of migrant workers prevented a decline in the working-age population after the closing of the eastern border in 1961.

The contrasting labor force developments are also rooted in divergent trends of participation rates. For the span of years shown in Chart 2, these rates increased rapidly in the United States and Canada and, to a lesser extent, in the United Kingdom, but tended to decline, particularly during the earlier years, in the other countries. These differences can be explained in part by the different starting positions. In the late 1950s, participation rates in most European countries and Japan were noticeably higher than those prevailing in North America; by the mid-1970s, these differences had been largely eliminated.

Chart 2Seven industrial countries: labor force, participation rates, and productivity

1 Real GNP per employee.

2 Labor force as a per cent of working age population.

3 Because of incomplete coverage of the Italian labor force statistics, the participation rate data available for Italy underestimate the actual rate of participation.

This convergence of participation rates is particularly evident for the female component of the labor force (see Table 2). In the United States and Canada, participation rates for women increased dramatically throughout the 1960s and into the 1970s, but have only recently become comparable to those prevailing in France, the Federal Republic of Germany, and the United Kingdom. By contrast, Italy and Japan experienced sharp declines in female participation rates, particularly in the early 1960s. These declines were mainly due to structural shifts within the respective economies from agriculture (in which female participation rates were quite high) to industry (where they were much lower); that is, as families shifted from one sector to the other, many women dropped out of the labor force.

Movements in the male participation rates have been less pronounced and more uniform; such rates declined in all countries except Japan, but considerably more so in Europe, where they had been at higher levels. The steeper decline of male participation rates in Europe is due to the trend toward more education, which has led to a large drop in the participation rate of teenagers, and to earlier retirement. In the United States and Canada, where a relatively long education has been well established for some time, teenage participation increased.

As was mentioned earlier, the acceleration of labor force growth over the past several years has stemmed from a marked increase in participation rates, after almost a decade of near stability. It may be deduced from Chart 2 that this development has resulted from (1) a continuation of past trends in Canada, France, and the Federal Republic of Germany; (2) a deceleration, and indeed some reversal, of earlier negative trends in Italy and Japan; and (3) noticeable gains in participation rates in the United States and the United Kingdom. The increase in the overall participation rate for these countries is thus seen to be due partly to the cessation of past negative trends; only in the Federal Republic of Germany have such trends continued—mainly because of the reduced number of migrant workers, who generally have above-average participation rates. A noteworthy aspect of these developments in participation rates, however, is the uniform lack of any sizable and lasting decline (like the ones observed, for instance, in the Federal Republic of Germany and the United States during their recessions of 1967 and 1971, respectively) in reaction to the exceptional unemployment rates of the past several years.

Employment

Given the unusually rapid growth of the labor force, and the small rise in real gross national product (GNP) in the industrial countries since 1975, one may wonder why unemployment has not risen more than it has. For the major industrial countries as a group, the explanation is that employment growth has also been unusually rapid—estimated at some 1½ per cent per annum for each of the years 1976–78. Although these increases followed a year in which aggregate employment fell sharply for the first time in many years, they are nevertheless surprising in relation to the corresponding pace of output. Indeed, the implied average rate of productivity growth (on a real GNP-per-person-employed basis) from 1973 to 1978 was only 1½ per cent per annum, compared with the average annual rate of 3.7 per cent for the 1960–73 period (see Table 1). For the seven-country group, employment declined less than output from 1973 to 1975, as might have been expected during a recession; but, despite the implied redundancy of part of the employed labor force in 1975, employment responded promptly to the rebound of output in 1976. This was followed by a further increase in employment of 1.7 per cent in 1977 and a similar increase for 1978, despite below-average rates of output growth in both years.

The experiences of individual countries have varied—sometimes markedly—from the overall trend (see Table 1). Employment in the Federal Republic of Germany, for instance, has declined substantially since 1973; cumulatively, the drop in employment from 1973 to 1977 amounted to 5½ per cent. In the United States, on the other hand, employment increased by 3.2 per cent and 3.5 per cent in 1976 and 1977, respectively, and it is estimated to have increased by a further 4 per cent in 1978. In part, these differences reflect corresponding differences on the supply side of the labor market, as discussed above. Differences on the demand side of the market, however, are equally important.

There are two aspects to this question. First, there are the different rates of output expansion. For example, growth of output has been noticeably higher in the United States than in the Federal Republic of Germany since 1973, and it is therefore not surprising that the demand for labor has been more buoyant in the United States than in the Federal Republic of Germany. However, these differential rates are not sufficient to explain the contrasting developments in employment. Thus, while output growth in the United States from 1973 to 1977 was only about ½ per cent per annum larger than that in the Federal Republic of Germany (2 per cent versus 1½ per cent), employment in the United States increased at an average rate of about 1¾ per cent per annum, while employment in the Federal Republic of Germany declined at an average rate of about 1½ per cent.

This contrast reflects a second principal factor behind intercountry differences in the demand for labor: the prevalence of marked differences in underlying rates of productivity growth, which are evident in Chart 2. Since the late 1950s, productivity growth in the United States, Canada, and the United Kingdom has averaged about half that of the continental European countries and about one third that of Japan. To put it another way, the maintenance of existing levels of employment required annual rates of output growth of the order of 2–2½ per cent in the United States, Canada, and the United Kingdom, 4–5 per cent in the continental European countries, and 8–9 per cent in Japan. Thus, given the rates of output growth, it is the differences in trend rates of productivity growth that explain, for the most part, the large differences among countries in the demand for labor. Employment has been weak in the Federal Republic of Germany because output growth has been disappointing relative to the trend rate of productivity growth, and conversely for the United States.

The other striking feature of Chart 2 is the remarkable extent to which, over the past several years, all the major industrial countries have experienced slower rates of productivity growth. In several cases, most noticeably that of the United States, there are indications that the deceleration began prior to 1973. Since then, however, every country has experienced a marked slowdown in productivity growth, that in the Federal Republic of Germany being the least pronounced.

From the perspective of employment, the question is whether this slowdown in recorded productivity growth is due to a redundancy of part of the presently employed labor force or to a deceleration of the underlying productivity trend. In view of the sluggish pace of output growth, the slowdown in productivity growth since 1973 can be at least partly regarded as a normal cyclical phenomenon reflecting the natural propensity of employers to limit the various tangible and intangible costs associated with the firing and hiring of employees. Indeed, this “hoarding” of labor has become a widespread phenomenon in recent years, especially in Japan and some European countries. In these countries, traditional, contractual, and/or legislated agreements between management and labor have made it increasingly difficult for an employer to lay off redundant workers. A long-standing example of such practices is Japan’s traditional “lifetime” system of employment which accounts for the relatively low level of unemployment in that country. It has been estimated that, if U.S. labor market practices prevailed in Japan, the Japanese unemployment rate would currently be around 6 per cent (instead of 2½ per cent). Similarly, in Italy, government regulations and agreements between employers and unions have sustained employment by reducing overtime and normal weekly working hours. Finally, in all of the major industrial countries, employment has also been sustained (to the detriment of productivity) by a host of government employment programs, such as the public service employment programs, and the wide variety of fiscal incentives designed to entice employers into hiring (or at least not firing) employees.

To a certain extent, therefore, the recent slowdown in productivity growth is a normal cyclical phenomenon that may be unusually persistent in the present cycle, for the reasons just mentioned. If so, the implication is that there may be some significant underutilization of labor that needs to be worked off through above-average rates of output growth before one can expect to witness widespread declines in unemployment rates—and a return to more normal rates of productivity growth. This explanation seems hardly satisfactory, however, for countries (such as the United States) where large increases in employment have occurred over the past several years. In face of the rapidly increasing demand for labor in such countries, it seems implausible to suppose that there is much redundancy in the employed labor force. Given the path of output growth, the strong employment gains in these countries would appear to have been the result (rather than the cause) of the decline in the rate of productivity growth.

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