America's employment model is the envy of the world for its ability to create jobs nearly as fast as its population expands. Old Europe, on the other hand, tangles its labor force in so much red tape that high unemployment and molasses-slow job creation are inevitable. Right?
So much for the conventional wisdom. Since the beginning of this decade, the average annual rate of job growth in the United States has been 0.7 percent. In Western Europe, it's averaged a significantly higher 0.9 percent, with highly regulated Spain topping the charts at 4 percent. These new figures, released by the OECD last month, put Europe's long-term job-growth rates further ahead of America's than ever in recent history. What's more: Europe's jobs machine has almost closed the transatlantic employment gap. Just six years ago, 81 percent of America's population was actively engaged in the work force, compared with 76 percent of Europe's. Now that gap is down to 1 percent. In other words, around 80 percent of both American and European 25- to 54-year-olds are gainfully employed. Says John Schmitt, senior economist at the Washington, D.C.-based Center for Economic and Policy Research: "The argument is that European countries should be basket cases [when it comes to creating jobs], but they're actually doing better than us."
The conventional wisdom wasn't always wrong, of course. In America's roaring 1990s, the average annual job-growth rate was a whopping 1.4 percent, compared with Europe's 0.4 percent. But then, at the beginning of the decade, America's GDP growth halved from 4.4 to 2.2 percent, which hit jobs hard. While Europe also suffered from a slump in GDP growth, it never had the heights of America's 1990s boom to fall from. At the same time, Europe was buoyed by the fact that its high-cost, high-value work model began to produce jobs in cutting-edge fields like IT, environmental technology and R&D. In the United States, by contrast, permanent losses in manufacturing, among other factors, made an easy rebound impossible.
Today, the three prime industries driving Europe's jobs engine are software, life sciences (like hospital systems) and alternative energy technology. "These are high-value-added industries where Europe can still be competitive on the world stage," says Mark Lhermitte, a Paris-based partner at Ernst & Young consulting. As the emerging economies of China and India monopolize the labor-intensive industries that Europe has traditionally focused on, this represents an important—and overdue—shift to sectors where modern Europe has a natural edge. "They're reinventing what it means to be a 'European company'," says Lhermitte. In the second quarter of this year, European companies created a total of 702,000 new jobs.
The 2006 ranking of Europe's 500 hot growth companies, released last month by Brussels nonprofit group Entrepreneurs for Growth, highlights some of the continent's stars. French software maker Gameloft took the No. 1 spot for designing mobile-phone games. To date, Gameloft has deals with cell-phone companies in 70 countries, with hits like Derek Jeter Pro Baseball in America and Prince of Persia in Asia. The company has expanded from just 81 employees at the beginning of 2003 to more than 2,000 today. Its annual revenue has rocketed from €3 million in 2002 to €46.8 million last year. Says Dee O'Sullivan, a director at Entrepreneurs for Growth: "The results show that even in a highly regulated environment like France, you can have extraordinary job growth."
Indeed, even American corporations are cashing in on Europe's strength in software development. A new study from IDC global market research estimates that when Microsoft's new Windows Vista operating system launches in January, it will create 50,000 new IT jobs in Germany, Britain, France, Denmark, Spain and Poland. Last year, foreign direct investment, mostly from the United States, funded 363 software projects across Europe. In total, federal direct investment (FDI) created more than 197,000 jobs last year on a record number of projects.
The Hot 500 list also highlights growth in environmental energy companies. Entrepreneurs have been encouraged by generous tax incentives to develop green technologies, as well as by legislation that imposes steep penalties on companies and individuals for carbon emissions. In Germany, three solar-energy companies, Q-Cells, Iliotec Solar and Conergy, have seen their revenue grow by an average of 920 percent to €884 million in total over the past three years. Austria's EVN, an energy and environmental services group that distributes gas across the country, has increased its staff by more than 200 percent in the same period to almost 7,000 and boasts revenue of €1.6 billion, up 44 percent.
The growth in biotechnology, medical devices and life-sciences research and development has been bankrolled largely by private equity and venture-capitalfinanced companies. This influx of money created 1 million new jobs in Europe between 2000 and 2004, according to the European Venture Capital Association. Seventy-three percent of venture-backed companies have increased staffing by an average of more than 25 percent since 2001.
To make the most of their strengths, whole industries are increasingly clustering in specific cities and countries. Much of Germany's solar-energy sector, for instance, is settled in the city of Thalheim. This mimics the way that Silicon Valley and Boston successfully established themselves as global hubs for computing and life sciences, respectively. Consider Lyon, France, where there are now 500 R&D laboratories for companies including Areva, Sanofi Pasteur and Renault—up 24 percent in two years. Or London, where business services like accountancy and advertising firms are booming; British recruitment companies have seen record-high turnover this year of £24.8 billion, and anticipate that at least 11,000 new posts will be created next year in London's financial district alone.
Some more traditional sectors, riding on the back of relatively strong eurozone economic growth in general, are also continuing to generate new jobs. Germany's manufacturing industry, packed with highly skilled engineers, is thriving in everything from cars to microchips. Unemployment there dipped below the psychologically significant 10 percent mark for the first time in four years last month. In Spain—where unemployment fell to its lowest level since 1979 in the third quarter of this year—construction companies building up the coasts are doing so well that they now account for 12 percent of the economy.
The European Commission expects the upward trend to continue. Last week, EU Economic and Monetary Affairs Commissioner Joaquin Almunia predicted that the EU would create 7 million new jobs by 2008.
Western Europe's general strength in job growth is also surprising in comparison with Eastern and Central Europe, where economies have been growing fast but job growth is lagging. In the eight new EU countries of Eastern and Central Europe the percentage of working-age population in employment is currently lower than it was before accession in most regions. The percentage of unemployed who've been out of a job for more than a year—a warning flag for a persistent problem—is above 50 percent. At the beginning of the transition, experts widely assumed that joblessness would be a temporary problem, solved as soon as the emerging private sector hit its stride. But the reality is that workers displaced from blue-collar construction sites and factory floors don't have the skills to land posts in hot new industries, or even in call centers.
Of course, not everything is looking up in Western Europe either. Some countries are still unable to supply enough jobs to keep pace with the even faster growth of the population, as a result of unprecedented levels of immigration from Eastern and Central Europe. In Britain, unemployment hit a seven-year high last month even as the total number of people with jobs—31 million—hit an all-time high. The apparent contradiction is due largely to the fact that Britain is coping with its biggest influx of foreign workers to date—1.5 million last year, equivalent to 5.4 percent of the employed population.
Beyond that, many experts argue that comparing America's job-growth rates with Europe's over the past five years isn't fair. John Martin, director of employment, labor and social affairs at the OECD, says the fact that America had to recover from its 1990s boom and ensuing recession means that its jobs numbers for the past few years are understandably grim, and shouldn't be used to draw sweeping conclusions. Indeed, signs of revival are already mounting. America's unemployment rate fell unexpectedly last month to a five-year low of 4.4 percent, with employers creating some 92,000 jobs in October. "Now that the U.S. jobs machine has finally managed to crank itself back into gear," says Martin, "I think it's possible that the U.S. will overtake Europe again in the next year to 18 months."
Still, for now Europe's jobs machine is giving America's a run for its money. And it's doing so by developing its high-value, high-cost strengths. Britain is building on its reputation as a global financial hub, the French on their flair for design, Germany on its engineers. Those are all fields in which the conventional wisdom about Europe is very much on the mark.