Friday, August 5, 2011

Structural Unemployment in Southern Europe

Daniel Gros explains why the collapse of cheap credit in southern Europe has led to structural unemployment, as import intermediation service workers are left without imports to service.

1 comment:

Seth Ackerman said...

His analysis is highly questionable.

Gros claims that half of an import's retail price is accounted for by local distribution. Therefore he concludes that an import surplus of 10% of GDP will result in an expansion of local distribution industries by 10% of GDP.

This confuses the average retail margin with the marginal margin. Even if it's true that $100 of imports are supported by $100 of distribution, that doesn't mean moving up to $110 of imports will increase distribution fully to $110. Saying otherwise ignores the undoubtedly huge fixed costs involved in distribution.

Think of it this way: suppose your local Best Buy employs 50 workers. Now let's say there's an import boom and the store's sales rise by 10% (there's a boom in sales of foreign-made electronics, let's say). Do you really think this will force Best Buy to increase its sales staff by a full 10% - i.e. another 5 workers? I doubt it would increase its staff at all.

But this is an excellent rationale for imposing austerity on the European working class: "The debt crisis will end only when they have shown that they have understood this and accepted the inevitable sacrifices."

Who is failing to understand?