Why does Europe have high unemployment?

As stated in my Feb. 4 economic forecast “the two biggest visible players on the economic front in 2012 are the teetering European Union and the US elections.” This remains true today. These next few posts will be about Europe and the challenges it faces. Let’s talk about some economics. Why do Spain, Italy and a number of other European countries  have unemployment as high as 25-30% ? Unfortunately there is a reason. Let’s look at Italy.

What if you are a young entrepreneur desiring to start a business? In Italy labor laws written to favor the working class make it difficult to start and sustain new businesses. Before the new business can make a profit it will have to pay at least two-thirds of each employee’s social security costs. Let’s say the business gets off the ground and starts to hire employees. Once the 11th employee is hired, an annual business self-assessment to the national authorities outlining every possible health and safety hazard is required.

Once the 16th employee is hired, this triggers provisions making it nearly impossible to dismiss any employee. Also, with the 16th employee national unions can come in and set up shop. I wonder how many business owners’ stop hiring at fifteen workers and start another company? As the company grows, so does the number of required employee union reps, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties (WSJ, 2012).

Employee number sixteen also means that your next recruit must qualify as disabled. If the business grows…by the time the 51st worker is hired, 7% of the workers must be handicapped in some way. Once the 101st employee is hired, you must submit a report every two years on the gender dynamics within the company. All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage. Sadly the employee never even knows how much of his wage is missing.

Many employers give in to the temptation to keep as much of their business as possible off the books. This gray- and black-market accounts for more than a quarter of the Italian economy and compounds national economic problems by contributing to low tax collection and high government budget deficits (WSJ, 2012). Government regulation and labor laws similar to Italy’s are one reason the southern tier of Europe is struggling financially.

The Wall Street Journal, US edition June 26, 2012, Employment, Italian style: the rules and burdens that explain Europe’s economic crisis.

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