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Far-reaching labor market reformsincluding wage moderation and the tightening of unemployment benefitshave helped both Ireland and the Netherlands cut their unemployment rates dramatically, according to Fed economists Cédric Tille and Kei-Mu Yi. Other European countries would benefit from adopting similar reforms, according to Tille and Yi, but the scope for improvement in the unemployment rates of these countries is smaller.
Tille and Yi report that Irelands unemployment rate fell from 17.5 percent in 1987 to 4.2 percent in 2000, and the Netherlands rate dropped from a high of 11.0 percent in 1983 to 2.8 percent in 2000. The average unemployment rate for the European Union as a whole, by contrast, has remained high, hovering near 10 percent for most of the 1990s before dropping to 8.2 percent in 2000.
Tille and Yi, drawing on existing academic research, contend that the ambitious labor market reforms enacted by Ireland and the Netherlands account for much of the sharp decline in the countries unemployment numbers. Wage moderation was the key reform, although the tightening of unemployment benefits and reductions in barriers to part-time work also contributed to the recovery.
The effectiveness of wage moderation, according to Tille and Yi, owes much to the consensual nature of the wage agreements. The terms that were worked out had the backing of the unions, the government, and employers. Also contributing to the success of this initiative was the decision to include provisions for income tax cuts that would offset the adverse effects of wage limits on workers net earnings.
Tille and Yi conclude that other European countries could lower their unemployment rates by enacting reforms modeled on those in Ireland and the Netherlands. However, they caution that because many of the advances brought about by the Irish and Dutch reformssuch as the increased participation of women in the workforcehad occurred earlier in other European Union countries, these countries are unlikely to see the same degree of improvement in their unemployment numbers.