Talking point
Youth unemployment not only affects “youths”

February 17, 2014

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Following two years of recession in the eurozone Greece, Italy, Portugal and Spain can expect a return to positive GDP growth – albeit probably of less than 1% – in 2014. At the same time, at least the labour market situation no longer appears to be deteriorating further. Nevertheless, what remains alarming is high youth unemployment and – even though it attracts less public attention – the often equally precarious employment situation of 25 to 35-year-olds in the crisis-stricken countries.

The average unemployment rate in the eurozone, which stood at just 7.6% in 2008 and climbed above the 12% mark in mid-2013, has stabilised at a high level since then. In Ireland, however, it already fell slightly last year, and Spain and Greece, which had experienced the biggest increases, also seem to have reached the turning-point in the meantime. Elsewhere, the situation is less clear. François Hollande was unable to keep his promise to halt the rise in unemployment by the end of 2013, and after the long phase of political instability and reform inactivity that followed the last election in Italy the jobless rate there also has continued to rise.

In general, however, the good news is that unemployment in the eurozone is unlikely to rise further. The bad news is that it will decline only very slowly. Since the threshold for an expansion in employment probably lies at around 1.5%, this means that even in 2015 eurozone GDP growth (Deutsche Bank Research and IMF forecast 1.4%; European Commission forecast 1.7%) will be a long way short of the level required to bring about significant easing of the labour market situation. For instance, the latest European Commission forecast for 2015 is also still based on an average jobless rate of 11.8%.

In response to the question of who is being hit hardest by the crisis in the peripheral countries, the unequivocal answer is predominantly younger workers, especially those with little labour market experience and below-average educational attainment. There is nothing new about youth unemployment rising faster than the average during recessions – conversely, when the economic situation improves it falls much faster – but youth unemployment rates of over 50% in Greece and Spain, and of around 40% in Portugal and Italy are of course disturbing and have developed into a symbolic political issue. There are, however, several reasons why the official unemployment rate for 15 to 24-year-olds can only be compared with that of other age groups to a limited degree. After all, the majority of under-25s are still at school or university, and it is mainly the less skilled who enter the labour market at an early age.

aA rate of 50% – as is the case in Spain and Greece – does not mean that half of all under-25s are looking for work. After all, the majority of those who are still undergoing job training or are attending university are not directly available to the labour market. Eurostat, therefore, uses an alternative yardstick, the “youth unemployment ratio”, that relates the number of unemployed youths to all persons between 15 and 24. By this measure only some 20% of young people in Spain and Greece are unemployed, but this much more positive image is also deceptive. The youth unemployment ratio does not, for example, take into account the fact that poor labour market prospects in the crisis-stricken countries prompt many youths to head for university or start additional vocational training so that they do not become unemployed. Those not officially registered as unemployed are also ignored.

So, since it is difficult to correctly calculate the youth unemployment rate, we should look at “the other side of the coin”, that is the development of the employment rate. True, the picture for the under-25s is similar in qualitative terms.  It is, however, striking that above all the younger cohorts in the core labour market population aged between 25 and 35 saw their participation rates drop very sharply. In Greece, the employment rate among 25 to 29-year-olds has fallen since 2008 from more than 71% to just 49%, and for 30 to 34-year-olds from nearly 79% to just 62%. In Spain too, the share of 25 to 29-year-olds in employment has fallen by more than 20 percentage points since the beginning of the crisis to less than 60% now. Before the crisis 30 to 34-year-olds in Spain had the highest employment rate of all age groups (over 80%), but since then it has fallen twice as fast as for older workers. And also in Italy, where the youth unemployment rate now stands at about 40%, the sharpest decline in employment has been experienced not by young people aged between 15 and 24 but by those aged 25-34.

aThe simplistic separation between youth unemployment and “normal” unemployment thus ignores the fact that in most crisis-stricken countries it is primarily young adults aged 30 or so who are hit harder by declines in employment than other age groups. In many instances, this is even more serious as most 30-year-olds cannot sensibly bridge longer periods of unemployment by enrolling for university courses or undergoing additional training. Moreover, unlike their younger counterparts, it is not uncommon for 30-year-olds to already have substantial financial obligations, for example from buying property or starting a family, which are virtually impossible to meet if they suffer a long period of unemployment. The dilemma of this generation is also reflected in the recent renewed decline in birth rates in Spain, Italy and Greece. Who would want to think about starting a family without the prospect of a steady job?

One phenomenon that is closely linked to this is the sharp rise in long-term unemployment among young people. True, even before the crisis many people starting their working lives at the eurozone periphery were often only able to enter the ranks of the employed by signing temporary contracts. However, the share of those who remained unemployed for longer than 12 months was mostly much lower among 20 to 35-year-olds than among older workers. Since the onset of the crisis, however, the share of long-term unemployed among the under-35s has risen steeply. When the economic situation is good, the medium to highly skilled members of this age group normally find a new job relatively quickly. Given the generally high level of unemployment in the crisis countries, however, this is currently difficult even for those with good qualifications. An interesting fact is that although education considerably reduces the risk of unemployment in Ireland and Spain, it has no major influence in Greece, Italy or Portugal.

In the early 1990s Spain already had to contend with an unemployment rate of over 20% due to a serious recession, and it took more than a decade to bring this back down below 10%. So we should not succumb to the illusion that this time the recovery will occur substantially faster in Spain, Greece or Portugal. Besides paying greater attention to the potential employment effects that accompany fiscal consolidation efforts more extensive structural reforms are therefore necessary. A key reason for the unequal opportunities of younger and older workers is the dichotomy between heavily protected permanent employment contracts and temporary contracts that provide barely any protection. The main consequence of the strong protection provided by permanent contracts was that during the crisis companies inevitably started by terminating temporary employment contracts, which primarily hit younger employees. Most of the crisis-stricken countries have started to reduce the huge discrepancy between these types of contracts so that companies will have a greater incentive to offer more permanent jobs. On the other hand, the incentive to work also needs to be boosted, for example by cutting the marginal tax burden on labour income in order to raise the employment rates of women and older workers. Given that by European standards there is a very high proportion of low-skilled school leavers in Spain, Portugal and Italy, however, there is also an urgent need for investment in human capital and an upgrading of training opportunities.

Ultimately, the current situation also requires crisis-specific activation and employment policies. This is also the intention of the “employment guarantee” for under-25s being sought by the European Commission. Although it will not really be possible to implement a “guarantee”, the crisis-stricken countries have received financial assistance for measures such as providing incentives for hiring younger unemployed people, for example by reducing the social security contributions made by companies. Confining assistance to the under-25s does not appear to be justified, though, given the large decline in employment among 25 to 35-year-olds. It is particularly important for this age group, most of whom already have several years of experience in the labour market, that they do not to slide into long-term unemployment. To stop this from happening, mobility aids for cross-border job searching are conceivable, for example, as is the temporary creation of additional fixed-term positions in key sectors such as education and healthcare.

See also:
Who is Europe's "lost generation"? An anatomy of (un)employment demographics in Europe




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