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EUROPEAN UNEMPLOYMENT:
OUTCOMES AND OUTLOOK
Prakash Loungani Advisor, Research Department, IMF
Co-Chair, Jobs & Growth Working Group, IMF April 17, 2013
VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF .
I thank Ezgi Ozturk for excellent research assistance.
Outline
1. Unemployment: outcomes and outlook
2. Diagnosis: cyclical or structural?
3. IMF advice
1. European Unemployment
Outcomes: DireOutlook: Dire
Unemployment Rate:2012
Serb
iaSp
ain
Gre
ece
Port
ugal
Lat
via
Alb
ania
Irel
and
Cro
atia
Slov
ak R
epub
lic
Lit
huan
iaB
ulga
ria
Hun
gary
Ital
yFr
ance
Est
onia
Pola
ndT
urke
ySl
oven
iaU
nite
d K
ingd
omU
krai
neFi
nlan
dSw
eden
Bel
gium
Rom
ania
Cze
ch R
epub
lic
Mol
dova
Den
mar
kG
erm
any
Net
herl
ands
Aus
tria
Swit
zerl
and
Nor
way
0
5
10
15
20
25
30
Change in Unemployment Rate:2012-2007
Spai
nG
reec
eIr
elan
dL
atvi
aL
ithu
ania
Port
ugal
Serb
iaE
ston
iaC
roat
iaB
ulga
ria
Ital
ySl
oven
iaH
unga
ryU
nite
d K
ingd
omSl
ovak
Rep
ubli
cD
enm
ark
Alb
ania
Fran
ceC
zech
Rep
ubli
cN
ethe
rlan
dsU
krai
neSw
eden
Swit
zerl
and
Rom
ania
Finl
and
Mol
dova
Nor
way
Pola
ndA
ustr
iaT
urke
yB
elgi
umG
erm
any
-5
0
5
10
15
20
Euro Area GDP Growth Forecasts in 2007
2008 2009-5
-4
-3
-2
-1
0
1
2
3
OECD EO (December 2007) WEO (October 2007)Actual
Euro Area Unemployment Rate Forecasts in 2007
2008 20090
2
4
6
8
10
12
OECD EO (December 2007) WEO (October 2007)Actual
Unemployment Rate:2013 WEO Forecast
Serb
iaG
reec
eSp
ain
Port
ugal
Irel
and
Lat
via
Slov
ak R
epub
lic
Cro
atia
Alb
ania
Lit
huan
iaIt
aly
Bul
gari
aFr
ance
Hun
gary
Pola
ndT
urke
yE
ston
iaSl
oven
iaU
nite
d K
ingd
omC
zech
Rep
ubli
cB
elgi
umFi
nlan
dU
krai
neSw
eden
Rom
ania
Mol
dova
Net
herl
ands
Den
mar
kG
erm
any
Aus
tria
Swit
zerl
and
Nor
way
0
5
10
15
20
25
30
2. Diagnosis: Cyclical or Structural
Largely cyclicalRisk of turning structural (“hysteresis”)?
A Debate since the 1970s …
• “There is sometimes the naïve belief that unemployment must be due to a defect in the labor market, as if the hole in a flat tire must always be at the bottom, because that is where the tire is flat” (Solow, 2000).
• "It takes a heap of Harberger triangles to fill an Okun's gap.” (Tobin, 1977)
“We impute the higher [European] unemployment to welfare states' diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new information technologies, and a rapidly changing international economy. “(Ljungqvist and Sargent, 1998)
• Initial increase cyclical rather than structural
• Greater uncertainty about relative proportions now, but remains largely cyclical in our view
• Beveridge curve quite stable; moreover shifts may not be sign of increase in natural rate (Diamond 2013)
• Other measures of mismatch back to normal• Lack of deflation not a sign of small unemployment
gap
• Stability of Okun’s Law (even during the Great Recession) suggests jobs will return if the growth returns.
• Hence focus of IMF policy recommendations remains on getting growth back
Unemployment during the Great Recession
11
Stability in Beveridge Curve in Most Countries
(relative to past changes)
Graph shows average percent point deviation in the unemployment rate. Source: Hobijn and Sahin (2012)
12
Correlation between Change in Unemployment and Change in GDP
(2012, in percent)
-8 -6 -4 -2 0 2 4 6-3
-2
-1
0
1
2
3
4
5
6
7
All European Countries
Real GDP Growth
Cha
nge
in U
nem
ploy
men
t
Correlation between Change in Unemployment and Change in GDP
(2012, in percent)
-8 -6 -4 -2 0 2 4-3
-2
-1
0
1
2
3
4
5
6
7
Euro Area
Real GDP Growth
Cha
nge
in U
nem
ploy
men
t R
ate
3. IMF Advice
Framework
Large increase in unemployment in advanced economies during the crisis– Cyclical or structural unemployment?– How to achieve the relative price adjustment in
periphery Euro countries?– Can labor market reforms reduce the natural
unemployment rate and raise potential growth?
Recent Staff Discussion Note (Blanchard, Jaumotte, Loungani) looks at IMF advice in this light
16
Diagnosis that unemployment problem is largely cyclical has framed IMF advice on labor markets
• Fiscal stimulus and monetary easing early in the crisis
• Now, fiscal consolidation– should be gradual, with credible medium-term plans
• Effects of fiscal consolidation on growth should be offset by other measures to the extent possible– Continued ease in monetary policies– Financial sector repair & reform
Recommendations: Monetary & Fiscal Policy
17
IMF leadership on fiscal issues widely recognized …
How the IMF became the friend who wants us to work less and drink more
-- Washington Post April 16, 2013
“It is to the credit of the economists at the Fund that their recommendations to policymakers have adapted to this strange world we’re living in rather than sticking with their more normal, doctrinaire advocacy of monetary and fiscal restraint.”
IMF Renews Push Against Austerity
IMF leadership on fiscal issues widely recognized …
How the IMF became the friend who wants us to work less and drink more
-- Washington Post April 16, 2013
“It is to the credit of the economists at the Fund that their recommendations to policymakers have adapted to this strange world we’re living in rather than sticking with their more normal, doctrinaire advocacy of monetary and fiscal restraint.”
IMF Renews Push Against Austerity
-- Wall Street JournalApril 17, 2013
“IMF Renews Push Against Austerity”
“ … the International Monetary Fund called on countries that can afford it -- including the U.S. and Britain -- to slow the pace of their austerity measures.”
“The fund warned that "overly strong" belt-tightening in the U.S. will slow growth this year. Across-the-board government spending cuts, known as the sequester, were the "wrong way" to shrink the budget deficit, it said in its semiannual report on economic growth. Those cuts should be replaced by more targeted reductions that would take effect further down the road -- after the economy gains strength, the report said.”
“The U.K. government, which in 2010 embarked on a closely watched effort to escape its slump through tax increases and spending cuts, also should consider easing up on its austerity drive amid a weak recovery there, the IMF said. And it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn.
“IMF Renews Push Against Austerity”
“ … the International Monetary Fund called on countries that can afford it -- including the U.S. and Britain -- to slow the pace of their austerity measures.”
“The fund warned that "overly strong" belt-tightening in the U.S. will slow growth this year. Across-the-board government spending cuts, known as the sequester, were the "wrong way" to shrink the budget deficit, it said in its semiannual report on economic growth. Those cuts should be replaced by more targeted reductions that would take effect further down the road -- after the economy gains strength, the report said.”
“The U.K. government, which in 2010 embarked on a closely watched effort to escape its slump through tax increases and spending cuts, also should consider easing up on its austerity drive amid a weak recovery there, the IMF said. And it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn.”
“IMF Renews Push Against Austerity”
• And it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn.
• "Fiscal adjustment needs to proceed gradually, building on measures that limit damage to demand in the short term," the IMF said.
• The IMF also called on countries like Germany that have traditionally relied on exports for growth to lift spending to stimulate their economies and, the IMF hopes, imports from the country's struggling neighbors.
• "There is a need for higher demand" in countries with big trade surpluses, IMF Managing Director Christine Lagarde said in a speech last week. "For countries in Northern Europe, like Germany, it means doing more to boost investment."
• Extension of unemployment benefits• Iceland, Greece• But reduction in Portugal
• Targeted interventions to help some groups • Youth; Low-skilled; Long-term unemployed (see chart that
follows)
• Move away from duality• Too late to stop layoff of temporary workers• But reduction in employment protection on permanent
contracts could help hiring as recovery takes hold
Recommendations: Labor Market Policies
23
‘Recovery’ differs across groups
24
90.0
95.0
100.0
105.0
110.0
115.0
Youth (aged 15-24) Older workers (aged 55-64)
Low-skilled (aged 25-64) High-skilled (aged 25-64)
Ratio of each group's employ ment relativ e to ov erall employ ment, a OECD av erage, b 2008 Q1-2011 Q4, index = 100 at the start of the
crisis
• In some Euro area countries, need reduction in relative wages
• Best way to achieve would be through national tripartite agreement
• Experience of Latvia, Ireland, Greece
• Without such an agreement• More flexibility in wage-setting • Reduction in public sector wages• Reduction in minimum wage• Fiscal devaluations
• Higher inflation in North relative to South
Competitiveness
25
• Higher potential growth and lower natural rate of unemployment desirable
• Product market reforms– essential for medium-run but can hurt in the short-run
• Labor market reforms– move away from duality– more flexible wage-setting– Reduce tax distortions to raise participation, particularly for
females– Raising retirement age and adjusting benefits to raise participation
of older workers
Medium-run Growth
26