How can Europe reduce youth unemployment?

A slight twist on the title of the Coen brothers’ Oscar-winning film No Country for Old Men seems to match well the growing concern in Europe of having a lost generation. This is especially the case in those peripheral economies badly hit by the Great Recession and the subsequent sovereign debt crisis.

Yet, the problem is far from being new. It has been around for several decades, and has been subject to a wide range of policy interventions. The rise in youth joblessness has not happened across the board, and youths in some European countries have fared much better than in others. Therefore, identifying which of those policy actions have been more effective – as well as the obstacles to their implementation in some countries – is a key element in analysing how to straighten the current course of events and prevent any future recessions hitting youth as hard.

In a recent VoxEU.org eBook (Dolado 2015), several labour economists review the relevance of policy lessons from their specific country experiences in order to: (i) improve the transition from school to work, (ii) foster the creation of more jobs for young people, and (iii) increase the well-being of youths overall. Additionally, they look at the recent proposal of a new ‘Marshall Plan’ of the European Commission – the so-called Youth Guarantee – to find a coordinated solution to youth joblessness.

A good starting point to address these issues is to recall why youth unemployment rates tend to be higher than adult rates (Blanchflower and Bell 2011). From the demand side, it can be argued that

• Firms in distress tend to dismiss youths first, particularly where statutory redundancy payments depend heavily on seniority, since young people have less specific human capital; and
• Youths often find themselves in an experience trap, whereby employers require experienced workers, so that young people are placed at the back of the queue and cannot increase their own experience.

From the supply side, there are:

• A much higher worker turnover among youths because their initial job matches may not fit well with their preferences and skills; and
• The financial protection that youths receive from their families, which may improve their outside option of not working.

The different labour markets facing young people in Europe

The EU27 average youth (15–24) unemployment rate is around 23%, approximately twice the adult/prime-age (25–54) unemployment rate. When looking at country-level rates, we first find a group formed by central European and some Scandinavian countries, with youth unemployment rates below 20%. Then there are France, Sweden, the UK, and some eastern countries in a second group with rates between 20% and 30%. Finally, the group of the worst performers includes Ireland, some Balkan countries, and primarily the olive-belt countries badly hit by the Crisis, among which Greece and Spain stand out with youth unemployment close to or above 50%.

Figure 1 displays the ratios between youth and adult unemployment rates on the vertical axis, and the overall unemployment rate on the horizontal axis, both as of 2013. Somewhat surprisingly, it can be seen that the reported ratios do not fit neatly into the previous classification of countries, and that there is not a clear relationship between these two variables. For example, the youth–adult unemployment ratio is above 3.5 in Italy, Sweden, and the UK, while it lies between 2.0 and 2.5 in Greece and Spain, though admittedly there is no divergence as regards the third group, with countries such as Austria, Germany, Switzerland, and the Netherlands exhibiting the lowest ratios. Thus, a lesson to be drawn from this evidence is that in some countries youth labour market problems just reflect overall problems while in others there is a specific issue with youth unemployment.

Figure 1. Ratio between youth (15–24) and adult (25–54) unemployment rates

Source: European Labour Force Survey (annual samples, 2013).

Yet, it can be argued that youth unemployment rates are not the best indicators of young people’s fortunes in the labour market since many of them are still enrolled in the education system. For example, with an EU average labour force participation rate of about 40% (versus 61% in the US or around 55% in central European countries and the UK), a youth unemployment rate of 23% means that ‘only’ 10% of the (15–24) youth population are unemployed.

For this reason, a more relevant statistic is the so-called NEET rate, an acronym devoted to those in the 15–24 population who are not in education, employment, or training. This definition includes the unemployed, school dropouts, and all those discouraged college graduates who still have not found a job. Figure 2 shows NEET rates for EU27 countries in 2008 and 2013. As can be observed, although these rates move within a lower range of 5% to 25%, the breakdown by countries mimics the one on youth unemployment rates. Furthermore, when the NEET rates are computed also including individuals aged 25–29, the rates are between 2 (Italy) and 9 (Spain) percentage points higher that when only considering those aged 15–24, and in some countries (Ireland, Italy, Portugal, and Spain) more than 25% of young people who have completed higher education are classified as NEET.

Figure 2. NEET rates (15–24)

Lessons from this eBook

In view of the previous evidence, the chapters of this eBook are structured around detailed accounts of how specific countries in the above-mentioned three categories have dealt with their youth labour market problems. In particular, the contributors to this volume focus on the following country studies:

• Group I (top performers): Austria, Germany, and Switzerland.
• Group II (middle performers): France, Sweden, and the UK.
• Group III (laggards): Greece, Italy, Portugal, and Spain.
• Additionally, there is an early evaluation of the Youth Guarantee.

There are many lessons to be drawn from these reviews, which I summarise in the remainder of this column. Some are well known, but others are more novel.

Austria, Germany, the Netherlands, and Switzerland

The relative success of countries in Group I relies on the efficient use of the so-called ‘dual system’ (on-the-job training combined with formal vocational schooling) and the strengthening of ‘pre-apprenticeship’ or ‘third track’ transition systems, targeted at potential school dropouts with limited competencies.

In this latter programme, disengaged youths from school are prepared to access the more conventional apprenticeship tracks, without providing formal qualifications. Further, there has been an effort to establish ‘bridges’ from vocational training to formal qualifications, opening pathways to higher education. Yet, there have been other factors that have helped these countries to keep youth joblessness under control during the Crisis: (i) shrinking cohort sizes (in Germany), (ii) an abundance of (voluntary) part-time jobs (in Switzerland, but also in the Netherlands), and (iii) a strong consensus among policymakers and social partners on fighting youth joblessness (in Austria and also in the Netherlands).

France, Sweden, and the UK

Regarding the countries in Group II, the usual culprits for their mediocre performance are stringent employment protection and minimum wages (in France and Sweden), plus a partially dysfunctional education system (in France, Sweden, and the UK).

Further, it is argued that the high youth–adult unemployment ratio in the first two countries may be an artefact of the crude definition of unemployment in conventional Labour Force Surveys, according to which youths are counted as employed if they work in a store for one hour, and unemployed if they are looking for a part-time job while studying. Further, students frequently take ‘gap years’ before starting higher education. Since these are standard practices among many youths in Sweden and the UK, the high youth–adult unemployment ratio in both countries might not be a very good indication of social exclusion.

Yet, both France and Sweden have high shares of temporary contracts as a result of the extremely dual nature of their employment protection legislation. However, whereas temporary contracts play a screening role in Sweden, they often become dead ends in France. On top of that, minimum monthly wages are particularly high in France (€1,445 in 2014), even allowing for the lower minimums for youths (80% and 90% of the adult minimum for those aged 16–17 and 17–18, respectively). This, together with the lack of resources devoted to job-seeking support for the less qualified, aggravates the situation of French youth.

Likewise, the lack of a well-developed vocational training system in the UK, combined with the fall in early retirement as a result of pension fund deficits and the dismantling of the Future Jobs Fund in 2010, hit young people hard. However, the introduction of the Work Programme in 2011 – operated by approved providers who receive a payment for sustained employment – and ‘pre-apprenticeships’ for youths with low school grades at the age of 16 have helped to progressively reduce youth unemployment to pre-recession levels as the UK economy has recovered.

Greece, Italy, Portugal, and Spain

As is well known, the four countries in Group III are among those that have been hit hardest by the Crisis, Greece being the most prominent example of a collapsing economy subject to ‘internal devaluation’ and severe austerity measures.

Yet, the youth unemployment and NEET rates were higher than in most other EU countries before the Crisis, due to high youth sub-minimum wages, the perception that vocational training was of low quality, an excess supply of university degrees facilitating access to the public sector, and the difficulty of implementing an apprenticeship programme in an economy where very small firms make up a large share of employment. The last three features are also shared by Portugal and Spain.

Italy is another outlier with a very high youth–adult unemployment ratio. Several explanations have been provided for this feature. First, as with other southern Mediterranean economies, Italy has a dual labour market as a result of the deregulation of temporary contracts in the late 1990s. This was useful in reducing youth unemployment in an otherwise rigid labour market, given the flexibility of temporary contracts. Yet, like in Spain, the gap in employment protection between indefinite and temporary contracts implied a lot of churning, poor training of workers under fixed-term contracts, and a high destruction rate of temporary jobs when the recession hit.

Further, a specific institution of the Italian labour market – the Cassa Integrazione Guadagni, which provided income support to permanent workers who were laid-off – not only meant that they were not counted as unemployed in the official statistics but also reduced the hiring of youths in the short run. On top of that, a pension reform in 2012 increased the pensionable age, preventing the substitution of older workers with young ones in the short run. Finally, as in other countries in this group, there is a weak dual vocational training system leading to a high increase of NEETs, not only among those aged 15–24 but also among the slightly older 25–29 group.

As mentioned earlier, segmentation is also a trait of the Portuguese labour market, albeit in this case not due to large employment protection gaps, but because there is large judicial uncertainty (i.e. red-tape costs) in terminating open-ended contracts. As in other laggard countries, the Portuguese government’s reaction to growing youth unemployment was not been well designed. For instance, active labour market policies lacked a well-defined target population, being devoted to subsidising workers younger than 31 with completed secondary education or college and thus leaving aside the most disadvantaged groups. As in Greece and Spain, the immediate response to very high youth unemployment and NEET rates has been a large outflow of young emigrants, which is likely to contribute to lowering both rates when the Portuguese economy improves, but also to leave long-lasting scars behind.

Lastly, there is the case of Spain which, despite suffering a much lower fall in GDP than Greece, exhibits one the most dramatic performances in terms of the youth labour market indicators, as also happened during the recessions of the mid-1980s and the early 1990s. Spain has been the epitome of a dual labour market, with a large employment protection gap and high red-tape costs, wage rigidity, excess churning, and investment in low value-added sectors amenable to the use of flexible temporary contracts (such as real estate and tourism), coupled with poor training and very low ‘temp-to-perm’ conversion rates. All these factors have led these contracts to become dead ends – instead of stepping stones – for the careers not only of the low-skilled but also many graduates. A recent labour market reform in 2012 has reduced the employment protection gap, but not by much, though it has succeeded in decentralising collective bargaining, but perhaps by too much.

At any rate, the fact that the youth–adult unemployment ratio is not particularly high points to the Spanish labour market being dysfunctional at the overall level rather than in relation to youths. A poorly designed vocational training system, a large share of small firms in employment hindering the use of apprenticeships, a limited use of pre-apprenticeship tracks, and the widespread use of active labour market policies based on subsidising permanent contracts – with limited effects due to large substitution effects – suggest that the scarring effects of the Great Recession for youths are bound to be long-lasting. Further, as expected, the recent recovery in the Spanish economy has been mostly based on the creation of temporary and part-time jobs so that one cannot discard the possibility that, in a few years, we may observe a repetition of the housing bubble episode of the recent past.

The European Commission’s Youth Guarantee scheme

The concern that there may be a lost generation led the European Commission to launch the Youth Guarantee scheme in 2013 as a pledge by member states to ensure that youths under 25 (whether or not they are registered in the public employment services) receive either an offer of employment, continued education, an apprenticeship, or training within four months of becoming unemployed or leaving formal education.

Relying on the successful experiences of some Nordic countries, the Youth Guarantee aims to combine early intervention with activation policies, involving public authorities and all social partners, especially in the Crisis-ridden countries of Group III.

Its targets are the 7.5 million youth NEETs, of whom almost a third are long-term unemployed, and the costs of whom in terms of benefits and foregone income and taxes amount to €162 billion, i.e. almost 1.3% of Europe’s GDP. In comparison, the estimated cost by the European Commission of implementing the Youth Guarantee is in the range of €21 billion per year. The EU will top up national spending on Youth Guarantee schemes through the European Social Fund and other financial sources, having put on the table an initial amount of €6 billion earmarked to help NEETs in regions with youth unemployment of above 25%. In comparison with the annual needs, this is clearly an insufficient amount. Yet, as in the case of the Junker Plan for investment in infrastructure, the hope is that the leverage multipliers will be large.

Although it is still too early to evaluate the potential effects of the Youth Guarantee, past experience of similar schemes in Scandinavia and elsewhere indicates that the expected gains from its introduction are very small, at least in the short run and lacking an agenda to stimulate growth in Europe for the time being (Card et al. 2010). Further, there is a risk that the introduction of the Youth Guarantee may delay the adoption of more politically sensitive reforms, such as measures to reduce labour market dualism in the peripheral countries. Nonetheless, the Youth Guarantee contains some favourable elements. The most important of these is having a specific target in the form of NEET, rather than a blurred target. The lessons drawn from successful experiences in Group I countries should be applicable to the rest of Europe. Some should be easier to implement, like the introduction of well-budgeted pre-apprenticeship tracks in the education system or a fruitful collaboration between the underfinanced Public Employment Services and private agencies, which so far have played a very small role as labour market brokers. In exchange for reasonable fees for each difficult NEET that receives one of the above-mentioned offers, the latter could help Public Employment Services (dealing with the easier cases) in achieving training and job sustainability, initially for disadvantaged young people but later also for older starters.

What the Youth Guarantee should definitely avoid is providing unlimited subsidies to firms that rarely translate into stable jobs and lead to a lot of churning due to their deadweight and substitution effects. It should also avoid handing control of training funds over to trade unions and employer associations without strict surveillance by public authorities. As proven in Spain, where there have been several big scandals relating to the mishandling of these funds, this is not a good strategy. Further, the difficulty in implementing apprenticeships and traineeships in small firms could be circumvented by encouraging large (and profitable) firms to support this type of action targeted at small firms in exchange for some tax reduction.

Finally, a drastic reform of employment protection legislation in dual labour markets is paramount (Bentolila et al. 2010). Marginal reforms do not work in the long run, and the introduction of a single open-ended contract with severance pay smoothly increasing with job tenure (up to a cap), or the combination of this and a so-called ‘Austrian capitalisation fund’ (i.e. workers’ notional accounts involving a few percentage points of payroll taxes, which can be used along the lifecycle and not necessarily when a dismissal takes place) should be prioritised before the Youth Guarantee funds reach the countries concerned. The recent approval in Italy in December 2014 of a draft law involving a single open-ended contract shows that the usual excuses from other governments for blocking its introduction – under the claim that it is against their constitutions – are not justified. A few fixed-term contracts (e.g. replacement contracts) should be allowed to persist, since they may play a role in rapid job creation when the economy picks up speed. Even in those countries that signed Convention C158 of the International Labour Organization – requiring a cause for termination of employment at the initiative of employers – there could be two different profiles of single open-ended contract, one related to economic dismissals and another to unfair dismissals with minimal intervention by judges.

Without solving these structural problems, the available funds of the Youth Guarantee will do little to support the provision of training and high-quality jobs for youths, making our slight twist on the Coen brothers’ movie title a sad reality.

References

Bentolila, S, T Boeri, and P Cahuc (2010), “Ending the scourge of dual labour markets in Europe”, VoxEU.org, 12 July.

Blanchflower, D and D Bell (2011), “Young people and the Great Recession”, Oxford Review of Economic Policy, 11: 241–267.

Card, D, J Kluve, and A Weber (2010), “Active labour market policy evaluations: A Meta-Analysis”,Economic Journal 120: F452–F477.

Dolado, J (ed.) (2015), No Country for Young People? Youth Labour Market Problems in Europe, VoxEU.org eBook, London: CEPR Press.

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Juan J. Dolado is Professor of Economics at the European University Institute and Universidad Carlos III de Madrid