I. INTRODUCTION

Unemployment in Europe has risen during the 70s and early 80s to double digit rates, rates which are not considered likely to fall much in the remaining years of the 80s. This is so in enough countries to encourage some to speak of a ‘European disease’. Those of us who live in Britain have long been familiar with the ‘British disease’, as have the Dutch with their ‘Dutch disease’ (supposedly related to North Sea energy resources). This paper suggests that these earlier national ailments are precursors of the general European one to which attention has more recently been drawn — notably by Professor Giersch who has spoken of a ‘market sclerosis’ in Europe, especially in the labour market (Giersch, 1985). (Also see OECD (1985, p. 38)).

However, in spite of this provocative general opening we wish to focus in this paper on West Germany, and thus to highlight a specific case of what may well be a general phenomenon. Our motivation is fourfold: to widen the analysis of the possible disease to a country in which there is wide interest; to stimulate other European researchers to work along the lines of analysis portrayed here; to follow up the echoes sounded in the comments of authoritative national students (e.g. Giersch, op. cit., and de Grauwe, Fratianni and Nabli, 1985), and finally, to utilize a full macroeconomic model of the Federal Replublic of Germany in this direction of research.

This paper represents an attempt to construct a simple classical model of the aggregate labour market from which it is nevertheless possible to draw certain Keynesian conclusions about the desirability of intervention, in the form of a conventional counter-cyclical fiscal policy, in order to maintain full employment. The starting point of the paper is the observation, based on recent studies of the simulation properties of two macroeconomic models of the United Kingdom, (Brooks et al [1983], Peterson [1984]), that it appears to be possible to devise policies which start from current levels of output, employment and inflation and which represent an unambiguous improvement in all welfare indicators. Such policies have become known as «free lunches», apparently after the habit of 19th century American barkeepers in providing their customers with free, but thirst provoking, food in order to stimulate sales of drink : similar incentives are offered by Nevada casino proprietors. In these contexts the catch is obvious, but in the case of expansionary macroeconomic policies there is scope for more controversy.

INTRODUCTION

With an election year in France and in the Netherlands, a national collective convention in Belgium and high unemployment rates in most European countries, an economic reflection on the effectiveness and efficiency of the pursued job creation policies is certainly meaningful.

The main purpose of the job creation policies, as conceived in most European countries, is the promotion of an effective and fair fine tuning of supply and demand of labor.

The instruments traditionally used, can be divided into five categories, namely :

1. Wage-cost subsidies

2. Educational and vocational measures

3. Direct job creation measures

4. Reduction of labor supply

5. Promotion of entrepreneurship.