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News : EU Economy Last Updated: Jan 6, 2015 - 7:08 AM

Youth unemployment problem in Eurozone pre-dated crisis
By Finfacts Team
Dec 10, 2014 - 12:37 AM

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The financial crisis has exacted a severe toll on society in the Eurozone. Nowhere is this more apparent than in the headline-generating figures for youth unemployment, which peaked at over 50% in some countries in September 2014. Even today only 4 out of 10 workers (excluding numbers in education) between the ages of 15 and 24 in the most vulnerable Eurozone countries are employed. And if the Eurozone’s recovery slows, these numbers could start to climb again. However, in several countries, the problem has predated the current crisis.

The decline in economic growth in the Eurozone due to the financial crisis accounts for half the increase in youth unemployment in the region, according to IMF staff research released Tuesday.

And in the most vulnerable Eurozone economies—Cyprus, Greece, Ireland, Portugal, and Spain—the lack of growth accounts for about 70% of the rise in youth unemployment, the report finds.

While youth unemployment rates of over 50%, are shocking, the reality is not as bad as that figure suggests - according to Eurostat, when for example youth in Greece who are in third level education are excluded from the denominator, the rate of 55.3% in 2012 became an unemployment ratio of 16.1%; Spain's falls from 53.2% to 20.6%.

Youth unemployment explained 2013

The Eurozone (EA18) includes Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.

Young workers are critical

While high unemployment is always undesirable, youth joblessness can be especially problematic in the Eurozone, which has an aging population and suffers from large amounts of unused labour and capital. And the longer unemployment lasts, the greater the erosion of skills and employability, and the more corrosive the effects on social cohesion and institutions.

The IMF economists say that without a vibrant young workforce, economies cannot afford to fund their social safety nets. They become vulnerable to slowing innovation and competitiveness and reduced growth potential, especially if their most talented youth choose to study and work abroad. This makes it especially alarming that a growing share of youth—reaching some 40% at end-June 2014—has been unemployed for longer than a year, joining the ranks of what are defined as the long-term unemployed.

The IMF economists also say that it is easy to blame the financial crisis in the Eurozone for the perilous state of affairs. But that doesn’t tell the whole story. Youth unemployment varies across the region. Some countries—Ireland, Greece, Spain, and Portugal—experienced a surge in unemployment during the crisis. But, with the exception of Ireland, these countries’ youth unemployment rates were already persistently above average before the crisis. In Italy and France, too, the high youth unemployment rates are, for the most part, a precrisis legacy.

Growth is good

The report finds that young workers are about three times more sensitive to changes in economic activity than adult workers, owing to their more fragile employment conditions. For example, they are three times more likely than adult workers to be hired on temporary work contracts. In vulnerable economies, youth employment is concentrated in sectors—such as the construction sector—that are more susceptible to the business cycle and in small and medium-sized enterprises, which have been hit particularly hard by the financial crisis.

The remedy lies in robust output growth. But without strong policies, such robust growth is not in the cards for the Eurozone.

But growth is not enough

Growth alone will not solve the problem, especially where high youth unemployment predates the crisis. Fortunately, the report finds, a number of labour market reforms can help reduce youth unemployment. For example, making it less costly for firms to hire workers can increase the demand for labour, thus reducing unemployment. In particular, it might be helpful to ensure that minimum wages are set taking into account other wages in a country. Because of their relatively low skills and experience, young workers are likely to be hired at minimum wages, and would be priced out of the labour market if the wages they are paid are high relative to those applicable to the rest of the work force.

The report says employment structures where some workers are on temporary contracts with low job protection while others are on highly protected permanent contracts add to youth unemployment because young workers tend to fall in the former category. Given the large-scale job destruction that has already taken place during the crisis, policymakers should aim to reduce this labour market duality by easing protection on permanent jobs. Finally, vocational training to enhance job readiness and skills and well designed cost-effective active labour market policies to support the unemployed and help them transition to jobs can also moderate high youth unemployment.

Multifaceted solutions

A complex problem requires a complex solution. The answer to high youth unemployment lies in jumpstarting economic growth and implementing labour market reforms.

A revival of growth requires strong support for output demand across the Eurozone. This includes support for private investment through accommodative monetary policy, a concerted effort to clean up bank balance sheets to revive credit, an increase in public investment in countries that can afford it, and a broad range of reforms in product and labour markets.

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