Limitations in Comparing Unemployment Rates Across Countries

Minimum Wages Do Not Correlate With Higher Total Unemployment

Minimum wages have a weak correlation between higher minimum wages and lower unemployment for OECD countries around the world. The result is not statistically significant, though.

A recent post from the American Enterprise Institute (AEI) used unemployment rates from European countries to make a flawed argument against minimum wages. While it is clear from this data that minimum wages do not lead to lower or higher unemployment, there was a weak (i.e. not statistically significant) correlation between higher minimum wages (or equivalents) and lower unemployment in Organisation for Economic Co-operation and Development (OECD) countries. While this is an interesting result, there are limitations even in comparing harmonized unemployment rates between countries.

First, unemployment rates might not be the best measure of the health of a labor market or an economy in general. For the U.S. for example, the employment rate, or employment-population (EPOP) ratio, is a much better measure, and it’s likely that alternative measures of the labor market are better for various other countries.

Second, unemployment rates do not convey the quality of employment or unemployment. For example, the quality of employment is likely to be better in many European countries as they have higher employment protection, near-universal adoption of sick leave, paid leave, maternity leave, paid vacation policies, and a generous social welfare state (this is especially true for Nordic countries). The quality of unemployment is also likely to be better in countries with more generous unemployment insurance or, on average, a shorter duration of unemployment.

Third, there are very likely other qualitative reasons behind higher or lower unemployment (this point is related to the first). The unemployment rate for Nordic countries might be low because of their large public sectors, while the rates for Greece and Spain are high due to the austerity imposed on them after the Great Recession. Norway’s might be the lowest of all because of its oil wealth, directly or indirectly. France’s youth unemployment rate is relatively high because most French youth study full-time, while the U.S.’s is low because Americans tend to work part-time to cover very high education costs.

None of the three factors are evident from a simple unemployment rate. It’s an even further stretch to claim causation (as AEI did) between unemployment rates and other dimensions, like the value of a country’s minimum wage.

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