Unemployed In Europe—No Longer A Great Deal

Judy Olian

Traveling in France last week I met a man who, four years ago, lost his job as an accountant at a large French utility company. At that time he was eligible for 45 months of unemployment compensation. Payments lasted until he found another job as a guide in the travel industry. Had he been over 55, benefits would have stretched for 48 months. Not a bad parachute.

This spirit of largesse may be changing as many European countries realize they can’t afford the economic drag and insurance costs of their high unemployment. They are also looking to eliminate any job-search disincentives embedded into their systems.

Though there is significant variability among the European Union countries, historically the emphasis has been to provide the unemployed with a financial safety net rather than to spur them toward re-employment, offering generous benefits and few requirements for job search or retraining. Months could pass before jobless workers registered with the local unemployment agency, since benefits were awarded retroactively. They were not obligated to accept alternative job opportunities and with little linkage to job search or retraining efforts, workers had few incentives to terminate their state of unemployment. It was a pretty good deal.

In the Netherlands, displaced workers generally earn 70 percent of their salary for a minimum of six months (for those with at least four years tenure) and a maximum of five years (for those with 40 years tenure). In Germany, people over 57 are eligible to receive unemployment benefits for up to 32 months. In Belgium, the unemployed never fully lose their benefits.

According to the Paris-based Organization for Economic Cooperation and Development, in the first month of unemployment, German workers take home 70 percent of their pre-unemployment earnings, and 62 percent in the 60th month after loss of their job, suffering little reduction in income over a five-year unemployment period. In contrast, unemployment replacement income in the U.S. is 58 percent in the first month, plunging to 7 percent in the 60th month.

Insurance for those who have lost their jobs generally is viewed as an earned right, proportionate to the length of prior employment. However, some European countries add the concept of need into their unemployment insurance philosophy, extending benefits for older workers as acknowledgement that their re-employment prospects are lower. Some European countries offer higher benefits to unemployed parents, versus those who are childless.

Such approaches take care of the unemployed but do little to incentivize re-employment or economic revitalization. With the rate of unemployment hovering at an average of 9.1 percent among the 25 members of the EU and as high as 18.9 percent in Poland (it’s 5.6 percent in the U.S.), some EU leaders are exploring fundamental changes.

German Chancellor Gerhard Schroeder’s new policy, introduced in 2004, will shorten unemployment benefits to 12 months, with a maximum of 18 months for unemployed individuals over 55. He is beginning to shift the focus of Germany’s 90,000-person unemployment department, the largest government agency in the country, from processing benefit checks to job retraining and employment placement.

In France, President Jacques Chirac is determined to make jobs the focus in 2004. Triggering howls of protest and large strikes of the French unions, he has vowed to limit unemployment benefits to 22 months, instead of 30 months currently in effect.

Reforms in the U.K. created a system that more closely parallels that in the U.S. The British Employment Rights Act of 1996 requires employers to provide displaced employees with a lump-sum “redundancy payment,” though payment levels vary with the age of the recipient. For example, for each year of employment, employees between the ages of 22 and 40 receive one week’s pay up to a maximum payment of 18 weeks. For those 41 to 55, payment can cumulate to a lump sum of 27 weeks.

Certainly, there is much more than benefit policies underlying the disparity between the unemployment rates of Europe and the U.S. However, with their long-lasting benefits and with fewer requirements to demonstrate job-search activities, unemployed Europeans experience much less urgency to locate alternative employment than their American counterparts.

There are also traditional differences in the mobility of Americans versus Europeans. When the Midwest manufacturing belt suffered massive layoffs in the 80s, unemployed workers migrated in droves to the South and West. Traditional Europeans are not as ready to pick up and move in search of a job. In Southern Italy the unemployment rate is quadruple that of the prosperous North. Despite that, few Sicilians are willing to leave their birthplace for work in Milan.

With European economies cracking under the weight of excessive unemployment and costly social protection systems, a few European leaders are finally attacking the sacred cows of unemployment entitlements. This may be one area where they will come to appreciate the American system.

Judy Olian is dean of Penn State's Smeal College of Business and a leading expert in strategic human resources management.

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