South-Western College Publishing - Economics  

The Immobility of it All
Subject International Economics, Macroeconomics
Topic Employment, Unemployment, and Inflation
Key Words Unemployment, Unemployment Rate, Labor Mobility
News Story Labor mobility is critical to the success of the European Monetary Union (EMU). Immobility of labor raises a country’s unemployment rate because the unemployed do not move to where the jobs are. In order to reduce the unemployment rate, governments often try to stimulate their economy by using monetary and/or fiscal policy. However, with the adoption of the euro, individual countries have a reduced capacity to stimulate their economy by either of these two policies. Popular and political support for the EMU could wane because of this problem.

Before the EMU, governments might employ monetary policy to lower interest rates or use fiscal policy to increase government spending in order to reduce unemployment. Economic and monetary union will change all that. With the EMU, a European Central Bank will be responsible for setting one interest rate for all participating countries, thereby reducing the ability of an individual country to implement its own monetary policy. Fiscal policy options will also be limited because individual governments will be prohibited from significantly increasing their deficits.

Suppose that unemployment were to increase in Spain. In order to reduce unemployment, the Spanish government would have the option to increase government spending and face stiff penalties, or do nothing and blame the country’s economic plight on the economic union. Both options could be disastrous for the success of the union.

An alternative, which would be better for the countries and the economic union, would be if the unemployed were to follow the jobs. Employment and unemployment vary considerably from country to country. Unemployment in Spain is 19.5% and just 2.2% in Luxembourg. If the unemployed could move to the areas where labor is in increased demand, both the individual and the country would benefit. There is a significant impediment to increased mobility?language and cultural differences make moving more difficult among European countries than between areas in the U.S.
(Updated August 12, 1998)

  1. Describe the different types of unemployment.
  2. What are some possible reasons for differences in unemployment rates between countries?
  3. What effect will increased mobility have on the unemployment rate of participating countries?
Source Helene Cooper, “European Jobless Remain Loath to Move, Posing Pitfall for EMU,” The Wall Street Journal, June 24,1998.

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