Friday, March 24, 2006

Firings Good for the Economy?

Have you been following the latest riots in France? Led by the Movement of Young Socialists, more than half a million young people have been protesting a new law which would give some flexibility to the hiring and firing of young people under the age of 26. The rigidity of France, Germany and other European countries labor markets is one of the reasons that their unemployment rates are twice what we have in the USA. The youth unemployment rate in France is 23%!

The Federal Reserve Bank of Dallas ( recently released a report that looked at flexible labor markets and the impact of outsourcing upon international economies. It is one of the best ones I’ve seen.

The Dallas Fed estimates that over 150 million Americans lost their jobs from 1980 thru 2005, but the U. S. economy grew its employment base from 90,936,000 to 134,371,000 during that period of time. Unemployment fell from 7.2 percent to less than 5 percent today as productivity increased by 72%! This caused real per capita income to jump from $25,309 to $41,257 today and average household income more than doubled to $431,000. And, during that period of time we have had only 16 months of recession, less than any other major country.

One of the keys to our success is how flexible our economy has become. While other countries impede changes in companies, imposing draconian costs on lay offs, the U. S. has cut these costs dramatically over time. As a result companies are more willing to hire new employees, which encourages efficiency, productivity and economic growth—all contributors to higher incomes. The graphic shown on this blog from their study is very revealing.

It might seem counterintuitive, but the ability to hire and fire quickly is a major advantage for our economy because it gives us the flexibility to move quickly, taking advantage of ever-changing opportunities and is one of the reasons why we are the envy of the rest of the world.

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