Taking Another Look at the US-Europe Gap

Conventional wisdom has long been that the US and the advanced European economies represented different models of capitalism.  Not better or worse, necessarily, but divergent in the choices they made about how to construct their society.  America had higher wages, lower unemployment, and more jobs.  It was easier to start a career after college, and easier to make enough money at a young age to move out of the parents' house.  Europe had better job security, a stronger social safety net, and better benefits.  Unions protected workers, which had the effect of making companies more cautious in hiring.  Older workers weren't unceremoniously dumped out of work, but young workers had trouble getting into the labor market, and unemployment was naturally higher.  Each side was convinced its model was better: American politicians warned about European "big government", high taxes, and "Eurosclerosis".  Europeans equally warned about the dismal American safety net, unceremonious dumping of workers, and meager support for the poor.  Ultimately, both sides' claims were rooted in a reality-- to get the benefits of job security, a high minimum wage, and a strong safety net, you sacrifice take-home pay, ease in getting hired, and social services.

The New York Fed's Liberty Street blog, though, has an interesting post about that phenomenon.  Namely, it's been closing.  Europeans decided that rigid labor markets weren't all that great after all, and started loosening labor market restrictions and weakening their unions.  The US, meanwhile, went even further in the deregulatory direction.  As a result, Europe has closed the gap in employment-population ratio pretty dramatically.  While the gap hovered right around 10% between 1980 and 2000, it spent the last decade converging, and has almost closed entirely.  It was over 10% in 2000, under 5% by 2007, and under 2% now.  The trend has been pretty clear-- Europe's employment to population ratio has been on an upward trajectory since about 1992 (likely a rsesult of them loosening their labor market), while the US's has been falling since 2000 (I don't really have a hypothesis for why it's happened here; poring through those statistics is above my pay grade..), but either way the ratio has more or less converged at this point.

The piece of the puzzle I'm trying to piece together is why the US employment to population ratio started dropping in 2000.