Representative REUSS. Mr. Galenson.

STATEMENT OF WALTER GALENSON, PROFESSOR OF ECONOMICS,

CORNELL UNIVERSITY

Mr. GALENSON. Mr. Chairman, the prepared statement that I prepared for the committee which deals with unemployment in Western Europe and Japan makes two basic points: First, the official unemployment statistics for most of Western Europe that I set out in my prepared statement, and for Japan as well, cannot be compared meaningfully with those for the United States.

This is quite apart from the adjustment for different concepts and methods of measuring employment and unemployment. The Department of Labor has in fact made adjustments for such differences in concept. It presents them in the Monthly Labor Review occasionally. Second, what makes the comparisons difficult is the fact that policies and the institutions that have been established to handle unemployment in other countries differ greatly from those of the United States. A large number of people who would be included among the unemployed in the United States do not enter into the unemployment category in other nations.

The prepared statement includes a review of these policies and institutions. Let me begin with this second point first. Using Japan, Germany, France, Great Britain, Italy, and Sweden as the basis of our comparison, it is clear that the United States is much more prone than any of the others to use what might be termed a pure market solution to handle unemployment.

By this I mean that firms simply dump their redundant employees on the labor market and that those laid off are supported by unemployment compensation until they are called back or find other jobs.

We have had some manpower employment programs over the years but these have been relatively small. All the countries in my sample. have some form of unemployment compensation, of course, but they use a variety of other measures as well.

The emphasis in many of them appears to be on measures that make it possible for business enterprises to retain on their payrolls employees for whom they have no immediate need. These measures are intended to be temporary, though continuing depression has tended to stretch the time duration in some cases.

No. 1, direct payroll subsidy schemes have been employed extensively in Japan and Great Britain. Beginning January 1, 1975, hard hit Japanese employers have been eligible for wage subsidies equal to half of 90 percent of the compensation of employees who are clearly redundant, or whom they determine to be redundant. These employees may or may not show up for work but they are not counted as unemployed.

I might add at this point that Japanese employers have been imaginative in using some of these people. Hitachi, a large concern that manufactures tractors, among other things, has sent some of these people around the country to consult with the owners of their tractors to inspect them and to discuss their operation with the farmers and with the other people who are driving them, the idea being to create good will among the consumers.

This has worked very well. There have been other schemes of this kind to try to use people who could not be used for direct production. Government loans in the form of payroll subsidies have been provided in Great Britain since August, 1975 for similar purposes up to a maximum of about $20 a week per employee.

No. 2, there has been a good deal of work sharing in Western Europe with the Government making up the wage deficit of employees on short time. This has been a common practice in France and in Italy.

Indeed a good proportion of Italian industrial employees during the past year, 1975, have been on some sort of short-time employment. No. 3, there have been many forms of indirect subsidies through credit guarantees and special contracts that have constituted another approach used in Japan and also very extensively in France.

No. 4, on some occasions, large injections of capital have been given to firms, particularly in Great Britain, to keep them from going under. This is largely for employment considerations. The outstanding cases there are British Leyland and Chrysler, but these are not the only cases. These two large automobile concerns going under would have meant 125,000 jobs lost and the British Government could not afford that.

I might also point out that recorded unemployment would have been much higher in Germany and France if there had not been a substantial pool of so-called guest workers, migrant laborers from outside the Common Market, who were available to cushion the shock. Some of these people were induced to return to their home countries by golden handshakes, while others were forced to leave by withdrawal of their working permits.

The only country in my sample that has used a well formed panoply of measures thought out in advance to avoid unemployment is Sweden. It is no surprise that this Nation has the lowest rate of unemployment in the survey. These measures include counter cyclical investment funds, which are very well known and have been operating for a long time; Government subsidies, fairly large, for environmental improvement; foreign inventory accumulation, for energy expansion; and the more traditional expanded public works programs. Sweden is one of the few countries that has resorted to direct public service jobs. This has not been a major method of attempting to cushion the unemployment shock in these countries.

Reverting to my first basic point, I have made some extremely rough and ready estimates of what unemployment might have been in these countries if American practices had been used.

If they had simply followed the policy of firing people for whom there was no immediate need and putting them on unemployment compensation, and also if the migrant workers could not have been shipped out in Germany and France.

Japan's unemployment rates for 1974 and 1975 were under 2 percent according to the official statistics. They should in fact be raised to somewhere between 312 percent and 5 percent. At the present time, as many as 3 million employees in Japan are without a job. The Ministry of Trade and Industry estimates that another 3 million may be redundant, which would imply an unemployment rate in the vicinity of 11 percent for Japan.

The German unemployment rate for the first quarter of 1975 would have risen from 3 percent to 5 percent, while the British rate of 32 percent for the same period might well have exceeded our rate of 8.4 percent.

It is also very doubtful whether the Italian unemployment rate, regardless of the statistics, has really been lower than ours during 1975. It is difficult to make any judgment for France except to say that the French have had long practice with concentrating unemployment on foreign workers. This was done on a substantial scale in the 1930's during the Great Depression.

The conclusion that one might draw from looking around the world depends in large measure on one's economic preconceptions. Many Americans would tend to regard the European and Japanese schemes as unwarranted and inefficient interventions in the labor market.

Others perhaps, who are less addicted to pure market solutions, might be prepared to look with greater interest at the various alternatives that other free enterprise economies have adopted. I do not think that anyone will be prepared to question the fact that West Germany and Japan are free market economies.

For myself, I can see considerable virtue in a firm's preserving intact, skilled, loyal manpower during cyclical downswings rather than risk the loss of good people by putting them on the dole. There is almost always something they can do if the financial resources can be found.

I have not gone into the administrative problems, but they have proved to be by no means insurmountable, no more so, I would say, than the proper administration of an unemployment compensation system.

Indeed, it strikes me that solutions of this nature make more sense than simply putting people in ad hoc public service jobs which are not likely to be very productive in any event, or than just detaching them from their firms and supporting them out of a central unemployment compensation pool.

It may be too late in the business cycle for us to consider such measures. Let us hope so. I submit that if it is not, we might do well to consider a variant of some of these plans as alternatives to layoffs. This also as pertains to those who exhaust their unemployment benefits and have to go on welfare.

For the future, it might be well to plan early for the next bout of unemployment rather than resorting to ad hoc measures that are costly, and in my opinion, less effective.

Thank you, Mr. Chairman.

Representative REUSS. I was following every word you spoke. Were the last words you spoke in your prepared statement?

Mr. GALENSON. No. The oral statement differs a bit from the pre

pared statement I submitted.

[The prepared statement of Mr. Galenson follows:]

PREPARED STATEMENT OF WALTER GALENSON

UNEMPLOYMENT IN WESTERN EUROPE AND JAPAN

Recent rates of unemployment for the major industrial nations of the West are shown in Tables 1 and 2. For higher rates, one must go back to the 1930s.

Surprisingly little attention has been devoted to the diverse ways in which various countries have attempted to handle the problem in the short run. The purpose of this paper is to describe the manner in which nations have attempted to mitigate the severity of the unemployment burden placed upon the individual worker. What is particularly interesting is that unlike the 1930s, when the problem was generally met simply by laying workers off, a number of new institutional devices have now come into operation. The nature of changing attitudes toward the problem is scarcely appreciated.

The precise means chosen to alleviate unemployment depend upon a number of circumstances: the power and influence of trade unions, the prevailing view of the extent to which the government should involve itself in the labor market, the political consequences of adopting one or another program, among others. It is difficult to discern any simple cause and effect relationships that have determined the nature of the solution. It would be necessary to dig deeply into the political and economic history of each nation in order to make solid judgments. All that can be attempted here is a very brief analysis so that the variety of alternatives can be appreciated.

TABLE 1-PERCENT OF UNEMPLOYMENT, MAJOR DEVELOPED MARKET ECONOMIES, 1970-74

Source: Joyanna Moy and Constance Sorrentino, "Unemployment in Nine Industrial Nations," Monthly Labor Review, June 1975, p. 12.

TABLE 2-PERCENT OF UNEMPLOYMENT, MAJOR DEVELOPED MARKET ECONOMIES, 1975
[As published by each nation]

All of the nations included in this survey are committed to the maintenance of high levels of employment. Nevertheless, all found themselves in difficulty as depression spread across international lines. All have systems of unemployment compensation as the first line of defense. None, however, has been as prone as the

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