Thinking about Estonian Unemployment
The official unemployment rate in Estonia stands at 14% plus. There is pressure to do something about it (come up with a policy) but what? The first step I think is to put the problem in perspective. This quote from TomPeters.com (where Tom in turn quotes Forbes Magazine) may help
Between September 2008 and September 2009 (the US economy) lost about 6 million jobs. …
Question: How do you (we!) arrive at a loss of 6 million jobs?
(The US economy) added … 51 million jobs. And (it) lost 57 million jobs.
As Tom points out, this means a “churn” of over 100 million jobs. It is a staggering number for such a short period. And it helps us to see that the rate of unemployment at any given moment is only one part of an underlying dynamic. From a policy perspective, one might try to bring down the rate of unemployment by slowing down the rate of job loss, or speeding up the rate of job creation.
Slowing down the rate of job loss might make sense if the firms who provide jobs are themselves in a relatively strong competitive position. So, for example a company like BMW or Daimler might decide that it is worth holding on to workers in the short term (even if they are not needed now) because these firms have reason to be confident that the demand for their products and services will grow as economic conditions improve. As Knowledge at Wharton points out, it may make sense for these firms to employ this long term thinking even without policy incentives.
On the other hand, policies that keep people in jobs within weak firms could be disastrous over time. Propping up firms that have no competitive advantage is a losing proposition. Making it more difficult or expensive to shed workers assumes that the firms can bear the added costs. The “bottom line” is that a policy maker providing either positive or negative incentives to firms to hold onto workers is placing a long term bet on the competitive strength of the firms involved. I would welcome argument that I am mistaken, but I do not see the justification for making such a bet in Estonia now as the basis for unemployment policy.
Alternatively, one might think of policies targeted to speeding up job creation. How to do this? Stay tuned, this post is already too long.
FOLLOW - The above argument assumes that Estonian policy makers cannot bring down the unemployment rate by a significant amount through job training programmes. If one could target sectors where the Estonian economy is likely to see significant growth in the next period, and demonstrate that there is a huge amount of potential structural unemployment in those sectors, this approach might make sense. I have not seen evidence, however, that this type of targeting would be possible. To the contrary, one of our problems is that our major “growth engines” have sputtered out and are likely to stay sputtered out for the foreseeable future. Of course, there is value in supporting training for reasons other than reducing unemployment.