American, European Governments Worlds Apart in Tackling Recession

Faced with tightening credit markets, plunging consumer spending and mounting inventory stocks, American and European employers and governments pursued starkly divergent policies over the last year -- and that could make all the difference in terms of which region of the world recovers sooner.

These distinct responses were apparent in the disparate figures for the two regions published in the most recent report by The Conference Board, the widely respected global economic analysis firm.

The report showed that while productivity in 2009 grew by almost 3 percent in the United States -- even as U.S. employers shed some 4.2 million jobs -- productivity fell in Europe and across the rest of the industrialized world, where unemployment rates held more steady, by about 1 percent.

Why the disparity? Because, economists say, American entrepreneurs moved swiftly to cut jobs and work hours for their employees, while European business owners and governments were willing to accept a decline in productivity in order to keep greater numbers of workers employed.

"The American was a more brutal approach, I guess you would say -- dismiss people," said Barry P. Bosworth, a senior fellow in economics at the Brookings Institution and former adviser to President Jimmy Carter. "Here in the United States, firms were much more alarmed about the potential for a very severe economic collapse. And from the beginning, they responded with severe cutbacks in employment. Thus we had this peculiarity that, in the midst of a recession ... we had some of the biggest productivity gains that we've had in recent times."

But across the Atlantic, major industrialized powers took pains to keep workers on their jobs, even at reduced hours and at the expense of productivity, in order to minimize joblessness.

"For example, in Germany the government actively encouraged firms to try to share the work among the workers," said Bosworth. "So lots of people went part-time in the hours they were working, and the government made contributions to pay for that. So the firms were willing to keep the workers on because they weren't paying -- the government was."

France, too, pursued a work-sharing agreement, in which the government essentially paid firms to keep workers employed at least on a part-time basis.

Analysts contacted by Fox News said the differences between the U.S. and European approaches stemmed largely from historical and cultural differences. In Europe, where memories of sharp economic downturns in the 1980s and 1990s persist, unemployed workers have tended to remain without work longer than American job-seekers. This, in turn, leads to a more enduring underclass, since the longer a worker remains out of work, and his or her skills atrophy, the less likely the worker becomes ever to return to the working world. As well in European cities, festering unemployment has led to social unrest and riots far more frequently than in the United States.

The use of government subsidies in Europe to bolster employment levels "was a short-term political calculus," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. "There's no doubt that this is a very clear social policy choice that European governments have made ... saying, 'We cannot survive politically a backlash of rapidly rising unemployment rates; therefore, we prefer to pay businesses to keep people employed, to avoid the political fallout of rising unemployment rates.'"

Kirkegaard argued the American approach -- cutting back on workers' hours and jobs, with the expectation that they will find another job, or develop new skills, before the passage of 26 weeks, the point at which one is defined as "long-term unemployed" -- has usually paid off.

"Historically, there's no doubt that in the case of the United States that has been a superior approach," he said. "Because unemployment rates traditionally in the United States have, at least for the last 25 to 30 years, been far lower than is the case in Europe."

But the Danish-born economist, author of "The Accelerating Decline in America's High-Skilled Workforce," said he is "a little less certain this time around" that the classical American approach will pay dividends. That, Kirkegaard said, is because of the historically high rate of long-term unemployment afflicting Americans in this recession -- nearly 40 percent of the unemployed have been jobless longer than 26 weeks. He said those statistics seem "to suggest that the model that the United States has relied on so far, since World War II at least ... is no longer applicable. ... I fear that this time there might have to be some kind of change in labor market policy in the United States."

Bosworth took a different view, suggesting European governments may be caught flat-footed when recovery finally hits full swing.

"I think the problem the Europeans are going to face -- even if gross GDP starts to turn up -- they have a lot of excess workers. And so I don't think you'll see a turnaround in Europe in employment as quickly as you will see it in the United States," Bosworth said.