(FORTUNE Magazine) – WESTERN EUROPE'S sturdy recovery has been marred by one glaring weakness, the economy's failure to create jobs. But Europe finally is breaking the employment jinx. The latest figures show that employment is surging at the fastest pace since the late 1970s, and that the trend is gathering steam. ''We're on an employment roll,'' says Bernhard Molitor, an economist in West Germany's ministry of economics and an architect of Chancellor Helmut Kohl's conservative program. ''We don't intend to change policies one bit.'' Job creation is good news for conservative governments trying to stay in power, and they need some. Kohl faces reelection in six months, and British Prime Minister Margaret Thatcher must run again before the end of June 1988. Though their free-market policies have produced robust growth with low inflation, persistently high unemployment is still a juicy target for opponents. Europeans have grown so pessimistic about unemployment that they find good news hard to recognize. The press largely skipped over upbeat employment numbers released by the Organization for Economic Cooperation and Development in early June, while continuing to bemoan the still-high unemployment rates. Europeans tend to see the bottle as half empty instead of half full. The boom in jobs covers the depth and breadth of European business. The OECD predicts that its 19 European members will boost employment this year by 0.5%, or almost 800,000 workers, the best performance since 1979, and a huge improvement over the loss of 1.3 million jobs in 1981. For next year, the OECD projects an even bigger rise of some 1.2 million jobs. ''By European standards, the numbers are spectacular,'' says Paul Horne, an economist in the Paris office of Smith Barney, a New York investment firm. The surge is especially strong in high-tech industries and in services. Companies are ransacking universities for engineers and research scientists. Siemens, the German electronics giant, ran an ad in the Financial Times proclaiming that it has created 9,000 jobs since 1985. Demand is brisk for accountants, lab technicians, and just about anyone who can handle a computer or word processor. The deregulation of British financial markets this fall -- nicknamed ''the Big Bang'' -- has touched off a job explosion in the City of London. Banks and other financial firms that handle trades on the London Stock Exchange will hire nearly 2,000 employees ranging from secretaries to investment bankers. In the buoyant fast-food business, McDonald's of the U.S. plans to open 100 restaurants in Europe in 1986 -- and hire some 7,000 young people to squirt ketchup and ring up sales. Even manufacturing is staging a comeback. The number of industrial jobs is poised to rise for the first time since 1975. For the 12 months ended in February, manufacturing employment in Germany rose a staggering 2.1%, while Britain broke even after years of declines. Companies in such stricken industries as steel, coal, and shipbuilding have struggled through restructuring, and most of the big layoffs are over. The pace of hiring in healthy companies should begin to overtake the labor shedding in the sick ones. Till now the dribble of new jobs in Europe could not come close to offsetting the sharp rise in the work force. Since 1973 the U.S. has created 24 million jobs, while Europe has added just 1.5 million. Now for the first time in 13 years, the European Economic Community is forecasting a significant decline in unemployment, to 10.5% from 11%. ''Europe is turning the corner on unemployment,'' says Douglas Todd, an economist with the EEC. The rate is still rising in some countries, notably Britain, but in others it is dropping rapidly. In West Germany it went from 9% to 8.5% in May alone, and the government predicts a fall to 5.5% by 1990. Europe is also about to get a demographic dividend. The birthrate peaked in 1964, about eight years after the U.S. In the early 1980s the baby-boomers became teenagers and poured into the labor market. By the end of the decade the flood of teenage job seekers will slow sharply. According to United Nations projections, average annual increases in the Western European work force will drop from one million in 1980-85 to 692,000 in 1985-90. And the figure will dwindle to just 365,000 for the five years ending in 1995. The favorable economic trend is arriving just as Europe's economic recovery gathers force in its fourth year. Spurred by the collapse of oil prices, growth of gross national product in Europe should reach 2.8% in 1986, the highest rate since 1979. And growth isn't the only source of cheer. Europe is finally attacking the bloated labor costs that have made employers reluctant to hire. Rapidly rising oil prices and lavish government spending saddled Europe with high inflation in the Seventies. To keep up workers' purchasing power, governments prodded companies to grant big raises and pushed through generous indexation plans. Wages for government and industrial workers alike grew faster than increases in the cost of living. Manufacturing wages shot up on average 13.4% a year from 1971 to 1980, 3.3 percentage points more than inflation. Social security and other indirect labor costs borne by employers soared. In Britain, for instance, they jumped from 16.1% of the total labor bill in 1968 to more than 25%. All told, European labor costs have risen almost 50% since 1970 after adjusting for inflation -- vs. just 10% for the U.S. The labor cost explosion had two perverse effects on employment. First, companies could not raise prices as fast as wages. As profits were squeezed, little was left for the kind of investment that could have created jobs. Second, companies rushed to substitute machines for workers. Governments hastened the process: They cut the cost of capital relative to labor by granting lavish investment tax credits and depreciation allowances for machinery. The big crunch came after the 1979 oil price rise threw Europe into recession. Government hiring, which had cushioned employment in the 1970s, came to a standstill, while job seekers born in the baby boom of the early 1960s flooded the market. Companies used their meager profits to increase automation. ''It took five workers at $25,000 per year to man a work station 24 hours a day on a year-round basis,'' says Jose Bidegain, chief of personnel at French fiberglass and bottle manufacturer Saint-Gobain. ''We could replace them all with a machine that cost $125,000.'' The company cut its work force by 18,000 from 1982 to 1985. Hardest hit were the unskilled workers, many young, who were hungry for job training. Because of high minimum wages, such workers have become far more expensive for what they do than skilled and professional employees. In France, for example, minimum wages have doubled since 1980. To make matters worse, unions demand that companies raise wages for unskilled workers faster than for the skilled. All wages are now increasing roughly in line with prices. Manufacturing pay in Europe will rise 5.75% this year, a hair below the inflation rate of 6%. In France, Ford raised wages less than 4%, compared with over 10% a year in the early 1980s. A jump in worker productivity is also helping to hold labor costs in check. Adjusted for inflation, the wage costs of manufacturing a single unit of a product declined 0.3% from 1982 to 1985. EMPLOYERS ARE also gaining elbow room to use labor more efficiently. Europe is benefiting from more flexible working hours and looser regulations that allow companies to adjust their work forces with the rise and fall in orders. The German metal industry, which encompasses most of the nation's manufacturing sector, signed a labor agreement that went into effect last year granting companies a freer hand in scheduling work time. Previously unions had tried to keep companies from organizing night and weekend shifts. Expensive machinery sat idle. Now companies keep the equipment humming by arranging shifts round the clock, six days a week. Union leaders across Europe have fought both lower wage increases and increased flexibility, but their influence has been waning. After swelling by seven million workers from 1974 to 1979, union membership has been stuck at 50 million, despite a big increase in the labor force. Even when they stay in a union, workers are increasingly reluctant to strike lest they lose scarce jobs. When it comes to flexible hours, union leaders seem to be way out of step with their members. Leaders like a 9-to-5 workday. Everyone is there at the same time. It's easy to call a meeting or pass out pamphlets. With the work force broken into smaller groups working round the clock or on weekends, leaders have less control. But the workers seem to love the new arrangements. At a Siemens semiconductor plant in Bavaria, some workers beaver through the weekend and take days off during the week. Merlin Gerin, a manufacturer of electrical equipment in Grenoble in the French Alps, offers a similar plan. Some workers spend weekdays on the nearby slopes -- and Merlin Gerin is running its factory 102 hours a week, vs. 62 hours 18 months ago. At Daimler- Benz, secretaries and other employees at headquarters in Stuttgart can work from 7 A.M. to 3:30 P.M., from 9 A.M. to 6 P.M., or any schedule in between. ''I'm there when the kids get home from school,'' says a secretary who takes off at 3:30. ''And I have plenty of time to cook dinner.'' In West Germany, the metal industry got this flexibility in exchange for cutting the workweek from an average of 40 hours to 38.5 hours without reducing pay. France passed legislation in January that gives companies similar leeway -- provided they reduce the average workweek from 39 to 38 hours. For some companies the payoff can be big. Overtime is cut substantially. In West Germany, companies pay overtime only when a worker's hours over a two-month period exceed an average of 38.5 a week. Thus if a + worker puts in an extra-long week when orders are flowing, he can work shorter hours when business slows down, all at the same rate of pay. European companies have shied away from hiring in boom times for fear of being stuck with excess workers in a recession. German employers had to go through an expensive and complicated process to fire any employee on the payroll for six months. A new law allows them to hire workers on contracts of up to 18 months. When the contract ends, companies can lay off the workers without the usual hassles. France has had a particularly cumbersome system. To lay off workers, companies need the approval of the labor inspector, a bureaucrat who works for the ministry of labor. The labor inspector refuses permission in 13% of the cases. Even if the labor inspector eventually says yes, the negotiations can take up to six months. Newly elected conservative Prime Minister Jacques Chirac has introduced legislation to eliminate the labor inspector's power to block layoffs. According to the French Employers' Association, that change could create as many as 300,000 jobs, more than compensating for the layoffs that would follow an easing of the firing procedures. Says Bidegain of Saint-Gobain: ''We'd hire a lot more workers on a short-term basis if we were sure we wouldn't be stuck with them for years.'' More flexible labor markets, coupled with stable labor costs, should encourage companies to make investments that will create jobs. They have the money. Nourished by moderate wage increases, corporate profits have bounced back strongly since the early 1980s. In 1985 industrial investment in the Common Market jumped 11% in real terms over the previous year. The rub is that companies are still skittish about making investments that will create jobs rather than replace them. But the nervousness is fading. A recent EEC study found that spending for new capacity as opposed to automation rose from less than 20% of industrial investment prior to 1984 to about 30% in 1985. Another promising sign: The capital utilization rate for manufacturing in the Common Market stands at over 83%, the highest in six years. That means companies are pushing their manpower and equipment virtually to the maximum. If the recovery continues, the next step should be a surge in capacity that will create jobs. The big employers should range from those in high tech to those in machine tools, textiles, and other old industries that are staging a comeback. | MANY COMPANIES are adding workers and machines in an increasingly evenhanded mix. Following an 18-month hiring freeze, Volkswagen took on 19,000 employees in 1984 and 1985, most of them production workers, and will add 10,000 more this year. Electronics companies are building briskly. Bosch, the electronics and auto parts firm, is building two electronic components plants in its home market of Germany that will employ 1,100 when they open in 1987. Small factories are sprouting. Thomson of France recently completed a semiconductor factory near Nancy that will eventually provide about 200 jobs. European Silicon Structures, a newly founded chip producer based in Luxembourg, is scattering offices around Europe and building a facility in Aix-en-Provence that will employ 400 by 1989. Just as small businesses have been dynamos driving U.S. job creation, they are beginning to spark European employment. The city of Cambridge, one of Britain's Silicon Valleys, has spawned 250 new companies since 1979. France created 101,000 new companies last year, 20% more than the year before. Venture capitalists are suddenly appearing too. Five years ago there wasn't a single magazine about small business published in France; today there are five. The wave of entrepreneurship has inspired even the unemployed. Job Creation Ltd., a British company that operates across Europe, has carved out a lucrative niche helping the jobless turn into the self-employed. Companies planning to shut down a plant hire Job Creation to teach departing workers how to set up businesses. Job Creation's representatives help the workers draw up a business plan and arrange financing at local banks. The company also helps transform the old plant into offices or other kinds of spaces that the new businesses can rent. When synthetic-fiber producer ENKA shut its plant in Kassel, West Germany, Job Creation helped convert the old facility into a home for more than 50 businesses. The trick for Europe now will be to stay on course. In many ways the hard part is over; workers have been weaned from spiraling wages that outpace inflation. The payoff is just beginning.