UNEMPLOYMENT in Britain now exceeds 3 million people, pushing the rate up to a staggering 12.7 percent of the labor force. On top of its own longstanding troubles, Britain is also caught in the wider recession in full force throughout the industrial world on both sides of the Atlantic.
Europe provides a sort of testing laboratory for different national policies. The British case is well known to Americans. The economy there has a long record of low growth. Wages run about two-thirds the American level or less, just as they did a generation ago. The rise in productivity has been very slow, and inflation has been rapid. So it follows that the Thatcher government's drastic anti-inflation policy, imposed on a weak economy, has sent unemployment soaring--or at least some say this is what happened. But is it?
Perhaps so, but look across the English Channel to Belgium. There you will find an economy of extraordinary wealth and efficiency. Inflation has been low, and the rise in productivity has been rapid. And yet here again unemployment is extremely high--higher even than in Britain. Why should two such different economies produce the highest unemployment in northern Europe?
The answer seems to lie in the ways in which their labor markets adjust, or fail to adjust, to changing circumstances. A low unemployment rate is usually the sign of a flexible labor market. People can shift from one industry to another without undue hardship and, equally important, wages can move down as well as up. When a country runs into economic trouble and national income drops, sometimes the loss can be spread over a lot of people of whom each takes a small reduction in earnings. But when wages are held up rigidly--by law, labor contracts or political tradition--the drop in income has to result in unemployment.
Nobody likes taking wage cuts, and they certainly aren't a cure for a recession. But once a recession arrives, there is an important choice between lower wages and fewer jobs. Very different in most other respects, Britain and Belgium both have extremely sticky labor markets, even by Europe's sticky standards. In Britain, it has a lot to do with the unions in the huge nationalized industries and their conviction that wages are a wholly political matter. In Belgium, wages are indexed by law to the inflation rate --although the new government is moving hastily to change the formula.
Here in the United States, these European examples deserve careful attention. In some of the high- wage industries, working people have accepted a degree of erosion in earnings. Where they have refused, the threat of layoffs has risen. That's why it is a pity that negotiations between General Motors and the United Auto Workers broke down last week. That's also why a lot depends on the negotiations that continue between the UAW and Ford.