A World of Difference

Rebecca M. Blank

In "Equity with Employment," Robert Haveman notes the very different economic experiences of the United States and Europe over the past two decades. Flexible US labor markets have produced the great American job machine, but along with job growth has come declining wages among less-skilled workers and steadily rising inequality. More constrained European labor markets have not created jobs fast enough for their population, leading to persistently high unemployment, but those workers who kept jobs have seen little erosion in their absolute or relative wage levels. Presented this way, the US/European comparison of the past two decades appears very different from much of the more popular discussion that has decried "Eurosclerosis" and pointed to the US experience as a better model. As Haveman's discussion correctly indicates, it is not at all clear that the United States provides a better model for the labor market; it provides a different model, with a different set of problems.

Haveman seeks a "middle way," attempting to define policies appropriate on both sides of the Atlantic that will increase employment in European labor markets but provide some wage protection to US workers. I am unconvinced that there is a single set of social assistance and labor market policies that are appropriate to all industrialized countries. While I do not disagree with the policy principles that Haveman outlines, I think they ignore some fundamental differences between countries.

Several years ago, I headed a project sponsored by the National Bureau of Economic Research that was designed to investigate the extent to which greater labor market flexibility or lower income protection produced faster employment growth or lower unemployment rates. Researchers looked at countries that had explicitly changed their labor market and social protection policies over the 1980s, or compared similar countries with slightly different policy configurations. The results were surprisingly unanimous: Short-run differences in labor market policies or social protection policies seemed to bear little relationship to labor market flexibility measures. Short-run marginal changes in these policies resulted in few measurable changes in the labor market. The results suggested that different countries had developed different institutional configurations that produced a certain set of behaviors on the part of employers and workers. Marginal changes in one set of regulations were not enough to result in major behavioral changes.

To restate this in a broader way: "History matters." For whatever set of past economic, social, and political reasons, different countries have consistently chosen different approaches to both labor market policy and social assistance policy. Given the persistence of behavior in the face of policy change, those consistent policy patterns make sense. It is highly likely that some set of countries will continue to select more universalist income redistribution policies, greater centralized bargaining and labor regulation, and higher tax rates, even while recognizing that the price of this may be permanently higher unemployment.

In contrast, the United States will continue to pick quite a different set of policies, and is not likely to follow Haveman's advice about implementing a more universal guaranteed-income support system. In fact, over the past two decades US public policy has steadily moved from cash-based redistributive programs toward more targeted programs, with more behavioral mandates aimed at encouraging specific behaviors, or with subsidies only for particular products (such as food or medical care). This satisfies a different set of goals in a country that is much more suspicious of centralized government programs, has much greater resistance to higher taxes, and has always insisted on linking assistance payments with "deserving" behavior, in part because of the enormous heterogeneity of its poor populations.

I am not convinced that large-scale national tax and transfer programs are always the best policy choice for dealing with poverty and unemployment problems. I do believe that targeted programs, with more behavioral mandates and more direct service provisions, may be useful for certain populations. Just as the comparison between the US and European labor market experiences of the last two decades leads me to believe that neither is obviously superior, comparison of US and European public assistance systems leads to a similarly agnostic conclusion. It is not immediately clear to me that a targeted public assistance system that provides a mix of in-kind and cash services to low-income families and that mandates certain behavioral responses is necessarily better or worse than a more universal system of tax incentives and income guarantees. By some measures the former set of policies are worse--they certainly produce more poverty. But by other measures they are better--they cost less and generally push workers back into the labor market more quickly.

For instance, one missing strategy on Haveman's list of policy options is direct labor market policies. His recommendation is to provide incentives for employment through employer tax subsidies and worker tax credits. While this sort of employment incentive system may not be a bad idea, I suspect for at least some populations it will not be enough. There will be a need for direct placement and training programs. Job search and job training programs are typically more costly than tax subsidies--they often require both managerial as well as financial inputs. They also intervene more directly in workers' lives, mandating particular behaviors while tax incentives only provide behavioral "nudges." But in a labor market where (as in both the United States and Europe) a growing number of prime age adults are opting out or have been pushed out of the mainstream labor market for a significant period of time, it may take more than policy "nudges" to get some of these populations back to work. While the cost of large-scale job programs may be prohibitive, well-targeted programs aimed at particular populations may be necessary to get some people back into mainstream employment.

Like Haveman, I would like to see US public assistance and labor market policies look a bit more European along some dimensions. And I think it would be a good idea for certain European nations to nudge their labor market and social assistance policies a bit closer to those here. But I don't believe there is truly a "middle way" which will be acceptable across the board. There are still likely to be large country-specific differences in emphasis, cost, and design. This is appropriate and inevitable.

Just as the United States has made different choices--and accepted very different outcomes--in its labor market policies, it has done the same for public assistance policies. The recent welfare reform legislation here suggests that this nation will continue to select a different path for the foreseeable future, with even greater program fragmentation and less national uniformity. Those, like Haveman, who want to move in another direction face some very difficult political battles to persuade Americans that centralized cash-based redistribution systems, even when linked to work subsidies, are the best way to provide support for the poor.