Youth Unemployment in Advanced Economies in Europe: Searching for

SolutionsAngana Banerji

International Monetary FundFebruary 2015

Based On

Scope of Research

• 22 countries: 18 euro area, Denmark, Norway, Sweden and the UK

• 1983 – 2012

• Youth: Workforce aged 15–24 years and

Adult: Workforce aged 25 and above

Road Map

Problem

Impact

Main drivers

Research Conclusions

ProblemDiverse Cross-Country Picture

Youth Unemployment Rate, 2014(Percent, 12-month average through October, 2014)

More than 25 percent

15 to 25 percent

Less than 15 percent

Source: Eurostat.

Youth Unemployment Rate, 2014(Percent, 12-month average through October, 2014)

More than 25 percent

15 to 25 percent

Less than 15 percent

Source: Eurostat.

ProblemDiverse Cross-Country Picture

Youth Unemployment Rate, 2014(Percent, 12-month average through October, 2014)

More than 25 percent

15 to 25 percent

Less than 15 percent

Source: Eurostat.

ProblemDiverse Cross-Country Picture

Youth Unemployment Rate, 2014(Percent, 12-month average through October, 2014)

More than 25 percent

15 to 25 percent

Less than 15 percent

Source: Eurostat.

ProblemDiverse Cross-Country Picture

The ProblemUnprecedented Highs. Long-Term.

Source: Eurostat and IMF staff calculations. Note: Long-term unemployment defined as unemployment lasting 12 months or more.1/ Euro area youth unemployment rates maximum and minimums across all Euro Area countries.

0

10

20

30

40

50

60

EA Youth range 1/ ESP youthESP adult

Euro Area: Unemployment Rate(Percent)

0

10

20

30

40

50

60

70

EA Youth range 1/ ESP youthESP adult

Euro Area: Long-term Unemployment Rate

(Percent)

ImpactLow Growth. Social Costs. Pressure on Social Safety Nets

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201315

20

25

30

35

40

45

50

55

60

35

40

45

50Spain: Labor Market Indicators

Dependency ratioYouth unemployment rateYouth labor participation rate (rhs)

Sources: Eurostat; and IMF staff calculations.

DriversBlame the Crisis?

Source: Eurostat and IMF staff calculations.

5 7 9 11 13 15 17 19 21 23 25-10

0

10

20

30

40

50

R² = 0.122742412007137

Youth unemployment in 2007 (percent)

Ch

an

ge b

etw

een

20

07

an

d 2

01

3 (

perc

en

tag

e

poin

ts)

Youth Unemployment Rate: 2007 Levels Not Correlated With Changes During the Crisis Pe-

riod

Drivers Important Role of Growth: Youth Are 3 Times More Sensitive

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% Euro Area: How Well Does Growth Ex-plain Increase in Youth Unemployment?

Source: IMF staff calculations.

Average

EA average EA crisis-hit 1/

EA other high unemploy-

ment 2/

EA low un-employment

3/

ESP0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Euro Area : Increase in Unemployment Rate For A Decline in Growth, (Per-

centage Points)

Youth Adult

Source: IMF staff estimates,.Note: 1/ EA Crisis-hit countries include: CYP, GRC, ESP, PRT, IRE. 2/ EA other high unemployment countries include: ITA, FRA. 3/ EA low unemployment countries include: AUS, GER, NED.

Drivers Fragile Employment Conditions

Sources: Eurostat; and IMF staff calculations.Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

Share of youth workers on temporary contracts

Share of adult on temporary contracts

0

10

20

30

40

50

60

70

46%

15%

Share of Workers on Temporary Con-tracts in Crisis-hit Countries (2013,

Percent)

Em-ploy-

ment in SMEs75%

Employ-ment in

non-SMEs25%

Employment in SMEs as a Share of Total Employment in Spain, 2008–13

(Percent)

Drivers Fragile Employment Conditions

Sources: Eurostat; and IMF staff calculations.Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

6

8

10

12

14

16

18

0

10

20

30

40

50

60

Impact of Housing Market on Unem-ployment in Spain

Construction (%GDP)

Unemployment rate (15–24, rhs)

0

10

20

30

40

50

60

70

80

90

100

Youth Employment By Sector in Crisis-hit Countries, 2000–07

(Percent)

ManufacturingConstruction, Real EstateWholesale, Retail Trade

Drivers Labor Market Rigidities

Source: Eurostat and IMF staff estimates. Abbreviations: GRR (gross replacement rates), MIN2MED (minimum to median wage ratio), TWEDGE (tax wedge), TSHARE (share of temporary workers), ALMPTOT (total ALMP expenditure per unemployed). Results of EPT (employment protection of temporary workers) not shown due to scale. Estimate range from -2.5 to -5.2.

GRR MIN2MED TWEDGE EPT /1 TSHARE TPROB ALMPTOT0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2 Marginal Effects of Labor Market Factors on Youth Unem-ployment Rates

(Percentage points)Median coefficient across regression specifications (all countries, several institutions together)

USA JPN

OECD EA

EA cris

is-hi

t cou

ntrie

sES

P0.0

0.1

0.2

0.3

0.4

0.5

0.62001 2013

Ratio of Minimum to Median Wage

Source: OECD.Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

1 2 3 4 5 60

10

20

30

40

50

60

70

Labor Tax Wedge (Percent)

2001 2013

Source: OECD.Note: Tax wedge is defined as the difference between labor costs to the employer and net take-home pay of the employee as a percentage of labor costs. Single person taxed on 100% of average earnings with no child. Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

Drivers Cost of Hiring

USA JPN

OECD EA

EA cris

is-hi

t cou

nt...

ESP

0

10

20

30

40

50

60

70

2001 2013

Share of Temporary Workers Ages 15–24

(Percent of total employment)

Source: OECD.Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

USA JPN

OECD EA

EA cris

is-hi

t cou

nt...

ESP

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2001 2013

Protection of Temporary Workers(Employment Protection Legislation Rat-

ing)

Source: OECD.Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

Drivers Labor Market Duality

1 2 3 4 5 60

1

2

3

2006

2011

Active Labor Market Policies Spending on Training

(Thousand euro per unemployed)

Source: OECD; Eurostat; and IMF staff calculations.Note: ALMP measures include training as one of the main components, while total spending combines measures, supports and services. Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

Best in euro area Crisis-hit countries0

10

20

30

40

50

60

70

80

90

100

Share of Temporary Workers Ages 15–24 in Vocational Training, 2012

(Percent)

Drivers Training and Skills

Research Conclusions

Boost Growth

Support Demand

● Monetary Easing● Use Fiscal Space

Supply Side Reforms

● Strengthen Banks● Product Market Reforms

Labor Market Reforms

● Lower Labor Tax Wedge● Align Minimum Wages

● Reduce Duality

● Vocational Training● Active Labor Market Policies

Research ConclusionsGrowth: Will History Repeat Itself?

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

201320

30

40

50

60

70

80

90

100

110

Youth Unemployment Rates (Peak = 100)

PRT ESP FRA

Spain France Italy Portugal Euro Area

0

1

2

3

4

5

6

7

Historical

WEO projection

Average Growth for Unemployment Reduc-tion

(Percent)

Source: Eurostat; World Economic Outlook; and IMF staff calculations.

Thank you

Background SlidesFramework: Key Assumptions

• Output gap: different effect across countries

• Labor market features: same effect across countries

• Explaining level not change.

• 22 countries, 18 euro area, Denmark, Norway, Sweden and the UK. 1983 – 2012.

• Substantial data gaps.

Background SlidesMore Details In…

Background SlidesFramework: Role of Economic Activity

yu 10

Panel and country-specific estimation

Growth/Output gap

Background Slides Labor Market Characteristics

• Hiring costs• Opportunity cost of work• Labor market protection, flexibility• Collective bargaining• Vocational training and education• Active labor market policies

Background Slides Framework: Do Labor Market Characteristics Matter?

• Levels and changes of unemployment rate• Fixed effects, business cycle, and labor market features

• Univariate analysis (larger sample)• U = f(Fixed Effect, Output Gap, Labor Market, Interact)

• Multivariate analysis (common sample)• U = f(Fixed Effect, Output Gap, Labor market features)

Background Slides Interaction of Labor Market Factors with Growth

GR

R

NR

R

ITR

AP

MIN

2M

ED

TW

ED

GE

UD

EN

SIT

Y

EPR

T

TS

HA

RE

TPR

OB

LO

WED

UC

ALM

PTO

T

ALM

PTR

AIN

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0 Spain. Interaction Coefficients

Significant Insignificant

Source: Eurostat and IMF staff estimates. Abbreviations: GRR, NRR (gross and net replacement rates), ITRAP (inactivity trap), MIN2MED (minimum to median wage ratio), TWEDGE (tax wedge), UDENSITY (union density), ABP (adjusted bargaining coverage), TSHARE (share of temporary workers), TPROB (share of temporary workers on probation), LOWEDUC (share of individuals with low education), ALMPTOT (total ALMP expenditure per unemployed), ALMPTRAIN (ALMP spending on training, per unemployed). Results of EPT (employment protection of temporary workers) excluded for presentational clarity.