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Unemployment in the European Union
Barra RoantreeAugust 2011
The Institute of International and European Affairs Tel: (353) 1-874 6756. Fax: (353) 1- 878 6880. E-mail: [email protected]. Web: www.iiea.com 8 North Great Georges Street, Dublin 1, Ireland 'Unemployment in the European Union' by Barra Roantree. © Institute of International and European Affairs 2011 This briefing forms part of the IIEA’s E View project, which is part-funded by DG Communication of the European Parliament. The Institute of International and European Affairs does not express any opinions of its own. The words and opinions expressed in this document are the sole responsibility of the author.
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Table of Contents 1. INTRODUCTION 2 2. OVERVIEW OF TRENDS 3 UNEMPLOYMENT 3 REGIONAL VARIATION 5 YOUTH UNEMPLOYMENT 6 LONG‐TERM UNEMPLOYMENT 7 EMPLOYMENT & PARTICIPATION 8 3. EUROPEAN POLICY FRAMEWORK 9 EUROPE 2020 9 EURO PLUS PACT 10 ECONOMIC GOVERNANCE PACKAGE 11 4. NATIONAL RESPONSES TO THE CRISIS 11 SHORT‐TIME WORKING SCHEMES 12 TEMPORARY WAGE SUBSIDIES 13 PUBLIC SECTOR EMPLOYMENT 13 SKILLS TRAINING 13 BENEFITS 14 5. ACTIVE LABOUR MARKET POLICIES 14 ACADEMIC LITERATURE 15 CONCLUSIONS 16 REFERENCES 16
1. Introduction Following the financial crisis of 2008, the European Union has experienced the worst recession of the post‐war era, with a comparable cumulative decline in GDP. Its single currency, the euro, is currently facing what even optimistic commentators are calling an existential crisis.1 Against this background, several EU member states are also experiencing an unemployment crisis. While average European unemployment appears to have stabilised, there is considerable variation both between and within member states. This short briefing outlines the main unemployment trends since the onset of the financial crisis and the response of the EU so far. It also briefly discusses the menu of policy responses that are open to governments, and some academic literature on the likely success or otherwise of such interventions.
1 See for example: http://www.ft.com/intl/cms/s/0/500fddce‐b0a7‐11e0‐a5a7‐00144feab49a.html#axzz1SRovMoKQ
2. Overview of trends
Unemployment The latest statistics show that at the end of the first quarter in 2011, 23.4 million people were unemployed in the European Union, giving a seasonally adjusted unemployment rate of 9.7%.2 This is comparable to the current US rate of unemployment at 9.1%, though the variation between states falls within a lower range (3.2% to 12.4%) than that which exists between the member states of the EU.3 As can be seen from figure 1, the dispersion in member states’ unemployment rates has risen sharply during the crisis. There has been a particularly pronounced divergence between the maximum and average rate of unemployment, with the difference between the two rates rising from 3.4% in 2008q1 to 11.1% in 2011q1. This compares to the much smaller divergence between the minimum and average rate, from 3.6% in 2007q1 to 5.3% in 2011q1. As of at 2011q1, Spain is experiencing the highest rate of unemployment at 20.6%. At the far end of the spectrum, a rate of unemployment of 4.2% leaves the Netherlands with the lowest rate in the EU. In terms of proportionate changes, the unemployment rate in Lithuania has risen by more than a factor of four since 2008, compared to an EU27 average of around 0.4 (figure 2). Five other countries (Estonia, Ireland, Latvia, Denmark, Spain) have seen their national rate of unemployment more than double in the same timeframe. Only two countries, Luxembourg and Germany, are currently experiencing a lower rate of unemployment than at the start of 2008. Germany has seen a sustained decline in the rate of joblessness, from over 11% in 2005 to 6.3% in 2011.
2 ILO definition. Source: Eurostat. Unemployment rate, quarterly average, by sex and age groups (%) [une_rt_q] 3 http://www.bls.gov/web/laus/laumstrk.htm
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Figure 1: Unemployment Rates in the European Union (max/min national rates shown by shaded area)
Figure 2: Index of selected European Union unemployment rates (2008q1=100)
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Regional variation The substantial variation in the incidence of unemployment between member states has been replicated within member states, as can be seen in figure 3 which maps unemployment rates for 2009 (latest available date) by NUTS3 region.4 This is particularly noticeable in Spain, where the southern regions have seen unemployment rates of more than 25% compared to around 10% in the Basque and Navarre regions in the north‐east. The lowest regional rate of unemployment in 2009 was in Satu Mare County, Romania at 1.3%, while the highest rate was 29.2% in Fuerteventura, one of the Canary Islands of Spain. Figure 3: Regional unemployment rates by NUTS3 regions (2009)
Source: Eurostat lfst_r_lfu3rt series
4 NUTS3 regions are standardized European administrative boundaries. 2009 latest year for which data available.
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Youth Unemployment One of the most significant developments in EU labour markets in recent years has been the rapid increase in unemployment amongst those aged between 15–24 years of age. As figure 4 shows, in the years immediately prior to the financial crisis, youth unemployment for both males and females fell faster than average unemployment. The gap between youth unemployment and average unemployment narrowed to its lowest level of the decade by 2007. This convergence was quickly reversed following the financial crisis, with the youth unemployment rate now twice that of the EU average. As with the rate of unemployment itself, the differential between youth and average rates of unemployment shows considerable variation across the EU, with the gap smallest in Germany at 2.8pps, and highest in Spain at 21.5pps. A further noteworthy trend is the increasing proportion of young people engaged in part‐time employment. This has risen steadily from 21% of employment for those aged 15–24 in 2000, to almost 30% in 2010 (figure 4, bars on right hand scale). Figure 4: EU27 youth unemployment
Source: Eurostat une_rt_a and lfsa_eppga series
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Long‐Term Unemployment Perhaps the most worrying development in EU labour markets has been the resurgence in the level of long‐term unemployment – those unemployed for 12 months or more. As figure 5 shows, there was a sustained decline in the numbers of long‐term unemployed in the EU27 between 2005 and 2008, falling from around 9.6 million to just under 6 million over this period. The proportion of the jobless in long‐term unemployment also fell from 50 to 30% between 2005 and 2009. These positive trends were abruptly reversed following the economic crisis. The numbers in long‐term unemployment quickly rose above 2005 levels as individuals made redundant failed to regain access to the labour market. Likewise, the share of unemployed in long‐term unemployment has risen from around a third to 42% in 2011q1. Long‐term unemployment is particularly problematic given the declining likelihood of finding a job as the period of unemployment increases (Krueger and Mueller, 2011; Ball, 2009). Policymakers are therefore understandably concerned with ensuring a quick transition from unemployment to work. Figure 6 shows the composition of EU27 unemployment by duration of unemployment, and the sharp increase in the numbers unemployed for between 6‐11 months. Figure 5: Longterm unemployment in the EU
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Figure 6: Longterm unemployed by duration of unemployment (where given)
Employment & Participation In addition to the numbers of people in unemployment, a key indicator of the health of the labour market is the level of participation. Women have been historically underrepresented in the labour market, though as figure 7 shows, this has improved in recent years. The shaded area on each side of the EU27 average participation rate shows the degree of variation within the EU27, ranging in 2009 from 60% in Malta to 79.5% in Denmark. The labour participation rate has remained surprisingly steady in most countries during the crisis. This has meant that employment rather than participation has borne the burden of adjustment, as illustrated by the dramatic increase in unemployment rates. This contrasts with developments in the United States, where the 'Civilian Participation Rate' has fallen from 66.2% in January 2008 to 63.9& in July 2011 as individuals drop out of the labour force.5
5 Federal Reserve Bank of St. Louis. http://research.stlouisfed.org/fred2/data/CIVPART.txt
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3. European Policy Framework
Europe 2020 Tackling unemployment and increasing participation have been central aims of the European Union’s most recent growth strategies, the ‘Lisbon Strategy’ and ‘Europe 2020’. The Lisbon Strategy represented an attempt by the EU to tackle a variety of well‐acknowledged problems with European competitiveness, the stated aim being to make Europe "the most competitive and dynamic knowledge‐driven economy by 2010".6 Despite numerous pledges and reviews, most observers agreed that the strategy had failed to achieve its ambitious goals.7 The ‘Europe 2020’ strategy was launched following a review of the Lisbon Strategy, and contained more specific and measureable targets across a range of areas. The primary goal as regards employment was to “raise to 75% the employment rate for women and men aged 20‐64, including through the greater participation of young people, older workers and low‐skilled workers and the better integration of legal migrants". In addition to the EU‐level goals, specific targets for member states are set in national reform programmes with seven European Commission‐led ‘flagship initiatives’ designed to achieve the targets. The Commission’s major initiative aimed at achieving those targets was launched in 2010.8 The ‘Agenda for New Skills and Jobs’ outlined four key priorities, namely better functioning labour markets; a more skilled workforce; better job quality and working conditions; and stronger policies to promote job creation and demand for labour. In addition, the communication set out “13 key actions with accompanying and
6 http://www.euractiv.com/en/future‐eu/lisbon‐agenda/article‐117510 7 See for example the article by then Swedish Prime Minister Fredrik Reinfeldt http://www.euractiv.com/en/priorities/sweden‐
admits‐lisbon‐agenda‐failure/article‐182797 8 Available at http://ec.europa.eu/social/BlobServlet?docId=6328&langId=en
Figure 7: Participation rates in EU27 (max/min shown by shaded area)
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preparatory measures” to be undertaken by member states and the central European institutions, and incorporated in a revised form in the EU’s 2014 medium‐term budget. Europe 2020 also formally incorporated the European Employment Strategy, which had been in place since 2007. Following consultations with the European Parliament, agreement was reached by the European Council on a set of guidelines proposed by the Commission, which outlined a framework for the implementation of labour market reforms at member state level.9 These guidelines included:
• Guideline 7: Increasing labour market participation of women and men, reducing structural unemployment and promoting job quality.
• Guideline 8: Developing a skilled workforce responding to labour market needs and promoting lifelong learning.
These 'integrated guidelines' are used by the Commission to evaluate employment policies adopted by member states, resulting in an annual report containing country‐specific recommendations. In June 2011, the European Commission issued the first set of these recommendations as envisaged under the ‘European Semester’ system of closer economic coordination. Measures to tackle unemployment formed an important part of many of the national reform programmes submitted, and indeed of the Commission's recommendations.10
Euro Plus Pact The European Council at its meeting of 24/25 March 2011 agreed to the Euro Plus Pact,11 designed to “strengthen economic governance of the European Union and ensure the lasting stability of the euro area as a whole”. One of the four declared goals of the pact was to “foster employment” in the participating states, with progress to be assessed on the basis of “long term and youth unemployment rates, and labour participation rates”.12 Furthermore, while giving each country leeway to implement a preferred set of policy actions, the agreement specified three areas of priority, namely:
1. labour market reforms to promote 'flexicurity', reduce undeclared work and increase labour participation;
2. life‐long learning; 3. tax reforms, such as lowering taxes on labour to make work pay while
preserving overall tax revenues, and taking measures to facilitate the participation of second earners in the work force.
Implementation of the agreed goals is to be achieved through inclusion of the commitments in the national reform programmes referred to above. These reform plans are “subject to the regular surveillance framework, with a strong central role for the Commission in the monitoring of the implementation of the commitments, and the involvement of all the relevant formations of the Council and the Eurogroup”, with a minor role for the European Parliament.13
9 Europe 2020 Integrated Guidelines. Available at http://ec.europa.eu/eu2020/pdf/Brochure%20Integrated%20Guidelines.pdf 10 See http://ec.europa.eu/europe2020/tools/monitoring/recommendations_2011/index_en.htm for the recommendations. 11 EUCO 10/1/11 REV 1, available at http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf 12 ibid, Annex 1, p.17 13 ibid, p.14
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Economic Governance Package The European Commission has proposed a 'six‐pack' of legislative measures designed to bolster the economic governance of the Eurozone. It seeks to incentivise and enforce the recommendations made as part of the Europe 2020 strategy and the Euro Plus Pact, as well as reinforce existing mechanisms of economic coordination such as the Stability and Growth Pact. The package allows for much more intrusive surveillance of member states' economic policies than has previously been the practice. Among other things, national labour market policies will be subject to more stringent 'peer review' at European level. This legislative package has been approved by the European Council, though the European Parliament is withholding approval seeking changes to the automaticity of the sanctions which will apply to states which breach the new rules. It is anticipated that these issues will be resolved early in the autumn of 2011. The stand‐off is evidence of an increasingly powerful European Parliament, which since the Lisbon Treaty is enjoying the status of co‐legislator with the Council in the area of economic and monetary affairs. Many of its committees – such as its Special Committee on the Financial, Economic and Social Crisis and its Committee on Employment and Social Affairs – have long made labour market policies a central concern of their various reports and statements. Led by its Economic and Monetary Affairs Committee, the Parliament now has a real opportunity to insist on the integration of job activation measures into the revised system of EU economic governance
4. National Responses to the Crisis Throughout Europe, a wide variety of policies have been adopted by governments in attempts to combat adverse labour market developments. Some have been successful and others less so. This section briefly outlines some of the policy responses enacted in the European Union, and evidence to date on the effectiveness or otherwise of such policies. In doing so it draws the analysis of the European Commission (2010, chapter 2), OECD (2010) and the European Employment Observatory (EEO 2011; EEO 2010), which readers are advised to turn to if they are interested in exploring the issues in greater detail. One summary indicator of the European response to the crisis can be found in figure 8, which charts the change in spending on Labour Market Policies (LMP) between 2007‐9. The average increase across the EU27 amounts to 15%, but this masks huge variation between countries, with Estonia, Slovenia, Poland and Latvia LMP spending more than doubling between 2007‐9. More drastic still is the change in passive LMP spending, constituted predominantly by unemployment benefits, which has increased substantially nearly everywhere since the onset of the economic crisis. In Estonia, spending on welfare benefits has increased more than tenfold. The higher spending includes changes arising from the increased numbers availing from unemployment benefits, as well as any new policies. The figures are nonetheless useful in communicating the impact of the unemployment crisis on government deficits, with total LMP spending in Ireland and Spain rising above 3.5% of GDP (Eurostat lmp_expsumm series).
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Figure 8: Labour Market Policy spending 200709
Short‐Time Working Schemes The European Commission (2010, p.78) notes an increase in the number of employees participating in short‐time working (STW) schemes from 39,000 to over 1.5m in the year to May 2009. While there is much variety among such programmes, the shared basic principal is that they allow firms to reduce labour demand without the costs incurred by laying off a worker, with government providing a contribution to support the income of the workers whose hours are reduced. This can lead to an inefficient allocation of resources, as there is often little screening of participating firms, meaning some participants may never have intended to lay off workers. These STW schemes have become popular in Europe due to the perceived success of the German ‘Kuzarbeit’ (short‐work) programme, and the low levels of unemployment experienced by Germany in the recent recession, which many observers have attributed to the ‘Kuzarbeit’. The OECD (2010) examine the role of STW schemes in limiting job losses for the period 2008‐9. They find that the “reduction in permanent employment is likely to have been about 0.75 percentage points smaller than it would have been in the absence of short‐time work” in Finland, Italy and Germany and slightly higher in Belgium. However, they also find that having a STW scheme in place before the start of the economic downturn was important to the success of the scheme, with no effect found for newly introduced schemes. They also highlight the need for more research in the area given the small number of schemes examined in their own study, and for policy makers to consider – if the above finding is correct – whether it is preferable to operate STW schemes in good times as well as bad.
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Temporary Wage Subsidies A policy frequently adopted in the face of increasing unemployment has been to offer firms or employers direct subsidies or tax relief contingent on employing or training individuals from groups seen as ‘at risk’ e.g. young workers or the long‐term unemployed. Such subsidies, typically payroll tax deductions, reduce the cost to the employer of hiring a worker and can therefore enable ‘at risk’ groups to gain employment when they otherwise might not. Furthermore, by assisting ‘at risk’ individuals in regaining access to the labour market, such schemes can reduce long‐run structural unemployment and reduce the numbers reliant on welfare benefits. However, a major problem with such schemes is the difficulty in establishing whether the firm would have been willing to hire the worker without the subsidy. If so, there is scope for substantial ‘deadweight loss’ and ineffective allocation of scarce resources. Countries adopting these schemes include Spain, Latvia and Hungry, while France offers a “financial support incentive of €2,000 for every company that recruits unemployed people over the age of 45 in a part‐time training contract” (EEO, 2011, p.6). Schemes along these lines are usually time‐limited and have restrictions on the number of participants in order to minimise the overall budgetary impact.
Public Sector Employment An alternative to funding employment or training in the private sector is for the state to directly employ jobseekers in the public or civil service, or less frequently in the voluntary sector. Such schemes aim to provide participants with experience and skills which can assist in gaining subsequent private sector employment. The downsides of such schemes are ‘crowding out’ effects or increased wage pressures in the private sector, as the expected wage of these individuals is raised and their incentive to seek new jobs is reduced. Furthermore, they impose significant costs on the exchequer, both in terms of direct costs and the indirect costs of managing or training new workers. Nonetheless, many countries have adopted such direct employment schemes. The new coalition government in Ireland has recently announced 5,000 internships in the public sector (EEO, 2011). Counteracting moves to provide jobs in the public sector are the austerity measures being undertaken by governments around Europe in attempts to control public debt. Recruitment embargoes and early retirement programmes have formed a central part of such strategies due to a general unwillingness to reduce wages for existing workers, or to only do so as a last resort.
Skills training As European economies adapt to the competitive pressures of globalisation, increasing emphasis has been placed on upskilling and retraining workers to enable them find employment in new sectors. Some member states have seen disproportionate levels of unemployment in particular sectors (e.g. construction in Ireland and Spain). With such economies unlikely to attain previous levels of output in the affected sectors, policies to assist the unemployed in developing the requisite skills to re‐enter the job market have formed a significant part of the European policy response. These approaches can range
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from establishing apprenticeship positions in targeted sectors to providing funding to enable individuals to further their education. While the benefits of retraining unemployed workers are evident, it is far from clear that authorities can succeed in predicting the skills required for future labour demand. Furthermore, where a previously important sector has been particularly badly hit by unemployment, it can prove difficult to establish the required training capacity and variety (e.g. apprentices in the construction sector). In Sweden, the government has announced an increase in the number of places in vocational training, while it is planned that approximately “30,000 apprenticeship places will be established in upper secondary school and 5,900 in adult education” (EEO, 2011, p.22).
Benefits Ensuring an effective balance between incentives to work and the social safety net offered by the unemployment benefit system is one of the key issues facing policy makers in normal times, and whose importance is heightened by the increase in unemployment documented above. Unemployment benefits have direct consequences in setting an effective floor to wage rates for those individuals in lower paid sectors, while other facets of the system can result in perverse incentives discouraging the unemployed from finding work (e.g. low thresholds for rental subsidies). Lastly, as figure 8 showed, the costs of unemployment for countries across the EU has soared, with the consequence that higher taxes will be needed to maintain budget deficits, with the attendant disincentive effects on work. Perhaps the primary policy response of European governments to growing unemployment has been to adjust eligibility rules and support levels for a variety of benefits. The difficulties in striking a balance between the desired social net and incentives to work is highlighted by the German case, where the Federal Government recently reformed the “basic social income benefits‟ (UB‐II) scheme, increasing the level of benefits. This drew criticism from the state’s Expert Advisory Board who saw the move as excessively narrowing the benefit to wage differential. They citied figures showing that recipients drawing high levels of social welfare received between 60 and 87 % of a potential labour income, while a “potential job would cut their labour income by 90 % on average” (EEO, 2011, p.5).
5. Active Labour Market Policies The surging costs of unemployment benefits in the advanced economies combined with the negative consequences of long‐term unemployment on the future labour market outcomes for an individual lead to the increased popularity of active labour market policies (ALMP). The scope of policies captured under the heading is broad, including job placements and benefit administration, as well as training and job creation. An important complement to ALMP are activation strategies, characterized by “mutual obligation requirements”, whereby recipients of unemployment benefits are expected to actively seek employment in return for efficient employment assistance.14
14 For a brief overview and links to various resources on ALMP see: http://www.oecd.org/els/employment/almp
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ALMP formed the core of the OECD’s Jobs Strategy, launched in 1994, which sought to provide a blueprint for reform programmes in the group of advanced economies which it represents. Revised and published in the 2006 Employment Outlook, the strategy rekindled interest in ALMP by outlining a “comprehensive set of policy recommendations covering macroeconomic management, incentives to work and to create jobs, taxes and welfare benefits as well as skills development”. Emphasising that there was no single successful approach, the restated strategy laid out four pillars which if implemented as a package, offered ‘the best’ policy advice on tackling unemployment and job creation. These pillars, containing a wide variety of policy actions, focused on:
1. Setting appropriate macroeconomic policy 2. Removing impediments to labour market participation as well as job‐search 3. Tackling labour and product‐market obstacles to labour demand 4. Facilitating the development of labour force skills and competencies
While these guidelines and recommendations provide an important framework for policy makers facing the challenging task of reducing unemployment, key to successful intervention is confronting these policy actions with empirical evidence, and adopting them to suit national circumstances. It is to the former that this briefing now finally turns.
Academic Literature A considerable literature has built up examining the effectiveness of ALMP through microeconomic evaluation studies. Rather than attempt an inevitably partial review here, this briefing summarises the findings of two meta‐studies that examined the results from almost 200 separate programme evaluations. The appendices of these two studies provide a detailed bibliography to which those interested can turn to for greater detail on the strengths and flaws of different types of programmes. First, Card et al (2010) provide a meta‐analysis of recent studies, examining almost 200 'programme estimates' from 97 studies. They find that “subsidised public sector employment programmes are relatively ineffective, whereas job search assistance (JSA) and related programmes have generally favourable impacts, especially in the short run.” A further interesting finding of their study is that “classroom and on‐the‐job training programmes are not particularly effective in the short run, but have more positive relative impacts after two years.” The authors also find programmes targeting youths are less effective than untargeted programmes, while there is little difference in the effectiveness across gender. Lastly, the short‐term effectiveness of programmes is more pronounced in “evaluations based on the duration of time in registered unemployment”, rather than ”those based on direct labour market outcomes (i.e. employment or earnings)”.15 Second, Kluve (2010) provides a similar analysis for 137 programme evaluations in 19 European countries. He finds that traditional training programmes have a modest positive impact on employment prospects, and are significantly outperformed by private sector incentive programmes and “Services and Sanctions”16 type of
15 Card et al, 2010, p.F453 16 Defined as “all measures aimed at enhancing job search efficiency”
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programmes. The latter category of programmes have a 30–50 percentage points higher probability of estimating a significant positive impact. In contrast, studies of direct employment programmes as less likely to find a positive impact, while – similar to the findings in Card et al – those programmes targeting youths have a lower likelihood of being effective. Lastly, Kluve finds that active programmes are more likely to work when the unemployment rate is higher.
Conclusions This briefing has outlined the extent of the unemployment problem facing governments in the European Union as well as some of the policy responses that are available to them, utilised or not. Just as the economic crisis has been varied in intensity, so too has the unemployment crisis. Faced with a financial crisis, an economic crisis, a sovereign debt crisis, and now a currency crisis, responses to the unemployment crisis have taken a backseat. While the immediacy of the former crises is understandable, the potential consequences for social unrest and the immense human cost arising from sustained unemployment warrant that the issue is placed at the forefront of the policy agenda.
References Ball, L. M. (2009). Hysteresis in Unemployment: Old and New Evidence. National Bureau
of Economic Research Working Paper Series, No. 14818. Card, D. and Kluve, J. and Weber, A. (2010). Active Labour Market Policy Evaluations: A
Meta‐Analysis. The Economic Journal, 120 (November), F452–F477. Doi: 10.1111/j.1468‐0297.2010.02387.x
European Commission. (2010). Employment in Europe 2010. Kluve, J. (2010). The effectiveness of European active labor market programs. Labour
Economics, 17 (6) pp.904‐18 Krueger, Alan and Mueller, Andreas. (2011). Job Search, Emotional Well‐Being, and Job
Finding in a Period of Mass Unemployment: Evidence from High‐Frequency Longitudinal Data. Brookings Papers on Economic Activity Spring Conference
OECD. (2010). Moving Beyond the Jobs Crisis. In “OECD Employment Outlook 2010”. Pp.15‐102
OECD. (2006). Boosting Jobs and Incomes: policy lessons from reassessing the OECD jobs strategy.
