The eurozone periphery has its work cut out

Youth unemployment has been decreasing slowly in Greece, Ireland, Portugal and Spain, but the data is less encouraging in Italy.


One rather obvious corollary of the European economic weakness is high unemployment. the unemployment rate for the eurozone has grown from 7.5 percent in 2007 to 12 percent in 2013, and it does not show signs of significant decrease. But if total unemployment has increased, youth unemployment has literally skyrocketed.

The unemployment rate among workers aged 25 years or less has increased from 15 percent to about 25 percent between 2007 and 2013. Figure 1 shows the eurozone overall youth unemployment rate figure (black line) compared with the same indicator aggregated across three sub-groups. The impressive internal divergence within the eurozone stands out clearly.

After having increased slightly in 2009, the youth unemployment rate in Northern countries stands today at the same level it was in 2000. In the hypothetical Centre made of France and Belgium, youth unemployment has increased compared to pre-crisis levels, but it has not exploded, passing from slightly less than 20 percent, in 2007, to 25 per cent in 2013.

In the south, instead, the increase has been dramatic. The youth unemployment rate -- which before the crisis was decreasing, although slowly -- has jumped to 45 per cent in 2013. And things are worse if, within the group, we look at the cases of single countries, where youth unemployment peaked in 2013 at rates of even 58 per cent in Greece and 55 per cent in Spain. 

Seasonally adjusted data for the first three quarters of 2014 show some reductions or stabilisation (depending on the country) but still not a meaningful decline in aggregate.

In the south of the eurozone, youth unemployment has not only increased, but it has also become more persistent. The percentage of those who have been unemployed for longer than one year has increased considerably during the crisis, and the entire distribution has shifted towards longer unemployment periods.

In 2007 those who had been unemployed for longer than one year constituted 25 per cent of the total unemployed, whereas in 2013 they accounted for 45 per cent of the total. The percentage of young workers unemployed for shorter periods (in particular for less than a month or between one and three months) has decreased.

This is especially worrying because workers who lose their job during a recession can remain unemployed for a period long enough for their skills to become obsolete. Studies recently conducted on the US labour market suggest that staying out of the labour market for too long can act as a negative signalling effect and reduce the probability to be re-employed because for the same level of experience, employers tend to prefer systematically those who have been unemployed for a shorter period.

This factor could be even more relevant for young workers with little experience. Therefore the risk that a significant part of present youth unemployment becomes structural is not to be underestimated.

Moreover, part of the unemployed in the southern countries could be not easily re-employable because of the change in the productive structure induced by the crisis. Unemployment has increased a lot in the South, across all educational levels, although more among those workers with basic education. But the interesting fact to notice is that, before the crisis, the unemployment rate among workers with low educational levels was significantly lower in the South than in the North or Centre.

This could reflect the pre-crisis boom of traditionally unskilled sectors, such as construction, which took place in some of these countries. The Spanish economist Luis Garicano, for example, has shown the existence of a distortion in human capital investment decisions of Spanish young people before the crisis, linked to the real estate sector boom.

Due to the ease of finding a job in the overheating sector, Spain has seen an increase in the dropout rate from secondary education (a very unusual thing, for a developed country). And it is exactly in Spain, Greece and Ireland, where the pre-crisis construction bubble has been the most pronounced, that the unemployment rate has increased the most among workers with low levels of education. Being linked to the burst of the construction bubble, part of this unemployment could be difficult to re-absorb, even assuming that  the economic cycle improves.

The latest seasonally adjusted quarterly data released by Eurostat show that youth unemployment has been decreasing in Greece, Ireland, Portugal and Spain during 2014. This is a positive development, but the drop is small compared to the very high level reached by youth unemployment in these countries, and the decrease is slow. More worryingly, Italy is the only Southern country where youth unemployment rate does not show encouraging signs.

Recently, there have been discussions about the possibility to create a European unemployment insurance scheme, as a response to the bleak situation. If such a mechanism had been in place before the crisis, maybe it would have helped mitigating its effects on the labour market of southern countries. But now the differences induced by the crisis make it politically difficult to enact such system, because in the actual context it would be characterised as a big transfer between countries with low unemployment and countries with high unemployment.

A reinforcing of active labour market policies could help re-absorbing those workers that are less re-employable, but the eligible pool of beneficiaries is so large that in countries with high unemployment the costs would hardly unsustainable in the immediate future. Moreover, an increase of investment into  this kind of instruments (which is already very limited in eurozone countries) would certainly not be facilitated by existing fiscal constraints. All hopes to address this prioritarian problem may have to rest on growth (which is sluggish) and perhaps on effective labour market reforms (which are politically challenging and traditionally not speedy). But in the short term, many might be driven to the conclusion that the south is not a place for young workers.

This article was first published in Bruegel. Reproduced with permission. 

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