Labour market reform is a tricky job for Europe

Rigid labour markets, skills shortages and anti-competitive hiring practices have made it difficult for the eurozone to recover from the crisis. Urgent reform is needed.

Europe’s companies need to get the region’s 27 million unemployed people back to work  for the sake of its economic recovery, not to mention political stability.

The European Commission, though, is gloomy. It reckons that unemployment will remain near its current rate of 12 per cent even into 2015. The reason? Although the recessions across the eurozone in the wake of the financial crisis put many people out of work, companies face structural challenges to increasing employment, which have nothing to do with the recent years of upheaval.

Some are well known, in the form of taxes and rigid labour legislation. The 34-member OECD calculates that the 10 countries with the highest burden of taxes on workers’ income are all in Europe. Belgium tops the list with a ‘tax wedge’ of 56 per cent, while Germany, France and Italy all hover around 50 per cent.

Inflexible labour contracts, or rules that impose high penalties on companies for dismissing workers, provide additional disincentives.

Progress has been made in some countries. Labour market reform in Spain in 2012 gave firms more flexibility in hiring and firing, but developments in other parts of Europe have been mixed. Portugal, says the OECD, still gives permanent workers the highest level of protection against dismissal among all the organisation’s members.

Developments in some countries suggest structural impediments to job creation could actually grow. Controversy over the impact of a minimum wage on inequality and the labour market has been heated in the wake of the financial crisis. But despite many employers’ concerns, Germany plans to phase in a nationwide minimum wage of €8.50 an hour by January 2017. One analysis by Deutsche Bank estimates that this could result in the loss of between 450,000 and 1 million jobs.

Other, perhaps more deep-seated, practices undermine companies’ competitive choice in hiring. In Italy, the government is about to fill 500 top positions at 76 public sector companies – including energy giant Eni, utility Enel and defence conglomerate Finmeccanica – which account, by some estimates, for 15 per cent of Italy’s output. The process is widely derided in Italy as the toto nomine – ‘nominations sweepstakes’ – a spoils system where the main political parties carve up posts in murky backroom deals.

Rigid labour markets and anti-competitive hiring practices aside, Europe’s companies are not taking on staff because they cannot find workers with the skills they need. This has a particularly chilling effect on the hiring of young people. It’s a huge concern given the fact that youth unemployment in the eurozone is so high – 24 per cent at the end of 2013.

A recent survey of 2,600 employers in France, Germany, Greece, Italy, Portugal, Spain, Sweden and the United Kingdom by McKinsey found that more than a quarter had left a vacancy open over the past year because they could not find anyone with the right skills. Employers from countries where youth unemployment was highest reported the greatest problems.

This seems to stem partly from a failure by education providers to understand employers’ needs. Nearly three-quarters of the 700 colleges and universities surveyed by McKinsey believed that graduates were adequately prepared for work, whereas only a third of employers agreed. McKinsey found that only in Germany and the UK did most employers report that they communicated with education providers at least several times a year. In Portugal, only a third did. And only in Spain did most employers report that their dialogue with providers was actually effective.

Small businesses in Europe struggle most to find people with the right skills. Yet according to McKinsey, they either do not (or cannot) invest in training. This is a particularly acute problem in countries such as Greece, which has a high reliance on small businesses as a source of employment, as well as a very high rate of youth unemployment.

McKinsey suggests a range of solutions. Companies could meet all or part of the costs of training prospective employees in the relevant skills. Employers should work more closely with education providers to design curricula that fit business needs, and should participate as teachers. And the European Union should work to make vocational qualifications transferable across borders.

One problem it identified, though, was a particular shortage of ‘soft skills’ such as a facility in spoken communication and a good work ethic. This suggests that part of the solution lies with workers themselves, rather than their bosses.

Copyright The Financial Times Limited 2014.

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