The Youth (Un)Employment Challenge in Europe

1. The Youth (Un)Employment Challenge in Europe Johannes Koettl with Indhira Santos andGallinaVincelette JVI – Vienna, Austria September 25, 2014

2. Youth unemployment rates are high Youth unemployment rate in European economies, 2012

3. But: given the high overall unemployment rate, is it surprising? Youth unemployment rate versus overall unemployment rate (2012)

4. Youth unemployment rate is mostly around twice as high as regular unemployment rate • Maybe, in transition countries, the ratio is even in favor of young people? • After all, young generation is better educated than older (pre-)transition generation • The danger is that of another “lost generation” because of the scarring effect of current difficult school-to-work transition • What is clear is that there are not enough (private sector) jobs in ECA—for young and old

5. In Europe and Central Asia… Only HALF of the working age population has a job

6. Every person forgoes, on average, 14 YEARS of productive life

7. Between 40-60 PERCENT of all unemployed have been looking for a job for more than a year

8. ONE IN FIVE youth is not working, not searching for work nor studying

9. For each person contributing to social security, on average, almost THREE ARE NOT

10. The jobs challenge is broad: Reducing unemployment and increasing participation among all workers Employment Rate (population aged 15+, first quarter 2013) How to create more jobs and ensure that all workers are ready to take on those jobs? Notes: *denotes data for 2012. Data is not seasonally adjusted. Source: ILO and ECA Regional Jobs Report (2013).

11. Thinking about the youth employment challenge in ECA:Three policy areas 1 • Resuming Sustained Growth: • Ensure macro fundamentals for economic recovery and regain pre-crisis reform momentum 2 • Enabling Private Sector-led Job Creation: • Eliminate impediments to business expansion and entrepreneurship 3 • Preparing Workers for New Jobs: • Making (formal) work pay by removing disincentives and barriers to work as well as binding regulations • Helping workers acquire skills for the modern workplace

12. Outline • (The Macro-economy) and private sector job creation • Including an analysis of crisis impact • A Comprehensive Approach to Youth Employment • Tax and benefit design • Labor regulations • Barriers to employability • Skills

13. The Youth Employment Challenge (The Macro-economy) and private sector job creation

14. Strong growth performance in early 2000s Real GDP growth and labor productivity (2000-2007) Notes: ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; EAP = East Asia and Pacific; OECD = Organization for Economic Co-operation and Development. Source: World Development Indicators (WDI)

15. Performance less impressive on employment Employment growth, 2000=100 (2000-2012) Source: Authors’ calculations based on ILO and WDI.

16. Enterprise restructuring drives employment dynamics Poland (advanced modernizer) achieved net employment creation in mid-2000s… … while job destruction is still higher in Serbia (intermediate modernizer) Source: Authors’ calculations using data from Amadeus database.

17. Over the long haul, reforms generate a virtuous circle of productivity and employment growth % of years in each decade when both labor productivity and employment increased Source: World Bank’s calculations, based on ILO and WDI.

18. Many countries today are still highly dependent on the public sector as a source of employment Share of employment in the public sector (including public administration) (%) Source: World Bank’s calculations, based on LiTs 2010.

19. Young firms that grow rapidly are the engine of job creation Gazelle firms (2006-2008) Source: Authors’ calculations using data from Amadeus database.

20. Significant untapped entrepreneurial potential Share of respondents with entrepreneurial ambitions or experience (2010) Source: Authors’ calculations using LiTS (2010).

21. There is still need for improvements in overall business environment Doing Business Indicators, Best performer=100 Notes: The “Distance to Frontier” measure shows how far on average an economy is from the best performance achieved by any economy on each Doing Business indicator since 2005. The measure is normalized to range between 0 and 100, with 100 representing the best performance (the frontier). Source: World Bank calculations using data from Doing Business database.

22. What explains the dynamics of youth unemployment?

23. Youth unemployment is more sensitive to the economic cycle than adult unemployment Yearly change in youth and adult unemployment rate versus GDP growth (EU 28 and SEE countries)

24. This “supercylicality” of youth unemployment is particularly pronounced in the Western Balkans… Estimated Okun coefficients for youth and adult unemployment

25. Most recently, the youth were harder hit by the crisis than adults…

26. High youth unemployment countries also struggle to keep youth in education and in the labor force High youth unemployment ends to be associated with: • Higher rates of youth not in employment, training or education (NEET) • Higher youth emigration

27. Unemployment is not the only problem among youth Notes: NEET= Not in employment, education or training. *Estimates MENA= Middle East and North Africa; SEE = Southeast Europe; SAR = South Asia Region; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; EAP = East Asia and Pacific; AFR = Africa Source: World Bank’s calculations.

28. They also tend to be on temporary contracts and have a more fragile employment status Youth tend to be on temporary contracts and have a more fragile employment status… Temporary youth and adult employment in the EU (2012)

29. …and a large informal economy Young workers in Europe tend to constitute a larger share of the informal employment than they do of formal employment

30. Its persistence also poses long-term economic social risks • Scarring effects: prolonged unemployment early on in one’s career can permanently reduce future earnings and job prospects and delay or prevent the accumulation of valuable on-the-job skills (ILO, 2012). • Reduced economic growth: the extent that these “scarring effects” translate into lower productivity and human capital for these youth workers later in life, they can substantially impair the economy’s future potential growth. • Income inequality and social malaise: High youth unemployment has also been shown to be associated with increased income inequality (Morsy 2012) as well as higher incidence of unhappiness, mental health problems, and burglary and drug offences (Bell and Blanchflower, 2009).

31. Macro-economy and private-sector job creation • Economic growth did not always translate into employment growth • Reforms take time to pay off • In many countries, transition to modern market economy is still incomplete • Early reforms saw the payoff in terms of employment growth before the crisis • Youth employment is “super-cyclical” • Just like informal employment, they represent the more flexible segment of the labor market • Concerns about scarring effects on current youth cohort because of crisis • Reforms pay off, but require persistence • Young “gazelles” are the driver of job creation, need to be nurtured

32. The Youth Employment Challenge A Comprehensive approach to Youth Employment

33. Macro-economy and private sector job creation A Comprehensive Approach to Youth Employment Labor market institutions Taxation and Social Safety Nets Youth Employment Skills Barriers

34. The Youth Employment Challenge Taxation and social benefit design

35. Labor taxation is high in many countries (although lower than in OECD Europe) Tax wedge, percent of wages (2011) Source: OECD and IZA.

36. There is still room to improve work incentives: … but it remains less progressive than elsewhere, penalizing low wage earners Source: World Bank based on OECD Tax and Benefit Models.

37. Youth are more heavily taxed when working formally (often part-time and as low-wage earners) Note: % of the gross income that is taxed away through personal income tax, social security contributions and lost social benefits when moving from inactivity to a formal job. Source: World Bank’s calculations.

38. Work incentives: Policies • For improving incentives for formal work, policies can focus on: • Reducing labor taxation, especially among low-wage, part-time and second earners • Including tax regime that applies to first jobs and/or apprenticeships • Including tax credits for low-wage earners (EITC in the US; similar in the UK) • Improve targeting and design of social protection • Including the gradual withdrawal of benefits (income disregards) • Strengthening active labor market programs and link to benefit receipts

39. The Youth Employment Challenge Labor market institutions

40. The link between labor regulations and youth employment • Labor regulations partly determine the costs for firms of hiring and firing new workers • But also partly determine other margins: the type of employment (formal/informal; part-time, full-time; temporary/open-ended, length of day, etc.) • The aggregate effects on total employment or unemployment are highly debatable, but unlikely to matter much below a certain threshold (WDR 2013) • But less debatable is that they create an insider/outsider problem (WDR 2013, World Bank 2013) which is likely to affect youth – among other groups – disproportionately (CRISIS)

41. Regulations remain tight in a number of countries (often related to severance pay) but significant progress Employment Protection Legislation Index, 2008 (the higher the index, the stricter the legislation) Difficult to think that they are a binding constraint since regulations have become more flexible but youth employment has not improved. There is also a big problem with ENFORCEMENT – what matters is the uncertainty in the application of the law? (Pritchett, et. al) Source: World Bank, based on IZA-OECD database.

42. Youth are particularly affected, for example, by restrictions on flexible work arrangements Source: World Bank based on Labor Force and Households surveys

43. The minimum wage • Most countries have a minimum wage; if not, effectively there is one secured through collective bargaining • They are an issue if they are “binding”, meaning that they are above a worker’s labor productivity • General effects on employment are also controversial and unclear (World Bank, 2012) • But, if binding, this is most likely to be case among youth – especially the unskilled youth (Montenegro and Pages, 2005)

44. Again, significant variation in relative levels of minimum wages among ECA countries, but rapid increases overall Minimum wage (% of the average wage) Source: World Bank, based on ILO.

45. Labor regulations: Policies • Avoiding the “cliff” when labor regulations become binding, especially for youth: • Reducing costs of hiring youth through other mechanisms – although temporarily and well-targeted • Do reform particular pockets of rigidity that could be particularly damaging for youth • Including apprenticeships, part-time work, other forms of flexible employment • Work on regularity and fairness of enforcement • Risk-based approach • Transparency • Labor inspections as service providers

46. The Youth Employment Challenge barriers to employability

47. Beyond lack of experience, three key barriers… • Early exposure to private sector and entrepreneurial learning (tours, internships, mentors) • Academic and career counseling early on • Serbia: Job preferences (Number individuals, 2013) Motivation/Attitudes

48. Beyond lack of experience, three key barriers… • Serbia: Presence of Risks among Young (Number FG, 2013) • Holistic approach youth considered to be at risk • Implications for PES? 2. Risky behaviors

49. Beyond lack of experience, three key barriers… 3. Availability and affordability of child care • A double-dividend? • A supply constraint: role for private providers with subsidies for the most in need? Improve incentives for firms to provide it?

50. Women participate less in labor markets in childbearing years • Source:ECA Jobs report. With data from household and labor force surveys, circa 2010.