What Hides Behind an Umemployment Rate: Comparing Portuguese and U.S. Unemployment

Abstract

Over the last 15 years, Portugal and the United States have had the same average unemployment rate, about 6.5%. But behind these similar rates hide two very different labor markets. Unemployment duration in Portugal is more than three times that of the United States. Symmetrically, the flow of workers into unemployment in Portugal is, in proportion to the labor force, less than a third of what it is in the United States. Relying on evidence from Portuguese and U.S. micro data sets, we show that these lower flows come in roughly equal proportions from lower job flows, and from lower worker flows relative to job flows. We then argue that these differences plausibly come from high employment protection in Portugal. We finally show how, looking across countries, higher employment protection is associated with lower flows and higher unemployment duration. In short, high employment protection makes economics more sclerotic; but because it affects unemployment duration and flows in opposite directions, it has an ambiguous effect on the unemployment rate.