Why is unemployment so high in Europe? Economists have borrowed a term from physics, hysteresis (pronounced his-ter-eé-sis), to argue that the natural rate of unemployment depends in part on the recent history of unemployment. The longer the actual unemployment rate remains above what had been the natural rate, the more the natural rate itself increases. For example, those unemployed can lose valuable job skills, such as the computer programmer who loses touch with the latest developments. As weeks of unemployment stretch into months and years, the shock and stigma may diminish, so the work ethic weakens. What’s more, some European countries offer generous unemployment benefits indefinitely, reducing the hardship of unemployment. Some Europeans have collected unemployment benefits for more than a decade.

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While you are right to lay a good deal of the blame on generous unemployment compensation, that is by no means the only reason for Europe’s trouble with high unemployment.  Another major factor is the barriers that many European governments put in the way of hiring.  Specifically, many governments make it very hard to fire workers.  They sometimes require firms to show why they are firing someone.  They sometimes require extremely generous severance packages for fired employees.  Because of this, firms are often reluctant to hire people because of the large costs associated with either firing unsatisfactory employees or laying off employees if demand drops.

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