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What Happened to European Mass Unemployment? Tito Boeri Bocconi University 26/06/2008

What Happened to European Mass Unemployment? Tito Boeri Bocconi University 26/06/2008. 1994 OECD Jobs Study.

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What Happened to European Mass Unemployment? Tito Boeri Bocconi University 26/06/2008

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  1. What Happened to European Mass Unemployment?Tito BoeriBocconi University26/06/2008

  2. 1994 OECD Jobs Study • “The labour market has become particularly worrying in Europe… (…) in comparatively inflexible Europe, on the other hand, both relative employmentand unemployment rates deteriorated”. • “The high incidence of long-term unemployment in most EC countries is associated with low inflow rates into unemployment. The opposite relationship – low incidence of long-term unemployment and high inflows into unemployment – holds for North America”.

  3. 6 4,5 3 1,5 Since then 12 10 as a % of the labour force 8 6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Unemployment EU 15 Long term Unemployment EU 15

  4. Outline • A European dream… turning into a European nightmare • Why? A closer look at transitions across labour market states • Can we “cheat” the employment labour productivity tradeoff?

  5. A European dream “The Community shall have as its task (…) to promote throughout the Community (…) a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States”. Rome Treaty, March 25, 1957

  6. 1 .5 0 -.5 1 1.5 2 2.5 3 Convergence: Did the countries with high unemployment experience the strongest decline in unemployment?1985 - 1995 FI SE FR GR DE Log (Unemployment rate 1995 / Unemployment rate 1985) IT ES LU DK PT BE UK IE NL Log (Unemployment rate 1985)

  7. .5 0 -.5 -1 1 1.5 2 2.5 3 Convergence 1996 - 2006 AT DE PT GR BE FR SE Log (Unemployment rate 2006 / Unemployment rate 1996) NL UK IT DK FI ES IE Log (Unemployment rate 1996)

  8. FI SE 1 .5 IT GR DE Log (Unemployment rate 1995 / Unemployment rate 1985) FR ES 0 LU DK PT BE UK IE -.5 NL 1 1.5 2 2.5 3 Log (Unemployment rate 1985) .5 AT DE PT 0 GR BE FR SE Log (Unemployment rate 2006 / Unemployment rate 1996) NL UK -.5 IT DK FI ES IE -1 1 1.5 2 2.5 3 Log (Unemployment rate 1996) No convergence1985 - 1995 Convergence1996 - 2006

  9. Convergence in unemployment rates also within EU countries since the mid 1990s (Nuts II regions) 2,5 2,0 1,5 Squared root of Sum of Squares 1,0 0,5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2003 2004 2005 2006 1986 1987 1988 1989 1990 1991 2001 2002 Within Total Between

  10. 0,3 0,25 0,2 0,15 0,1 0,05 0 -0,3 -0,2 -0,1 0 0,1 0,2 0,3 -0,05 -0,1 -0,15 It is not inactivity. It is employment - Δ U < Δ E IRE ES Δ Empl 2006-96 NL FI PT SE FR GR IT BE UK AT DK ΔUnempl 2006-96 DE - Δ U > Δ E Δ Empl = - Δ Unempl Unemployment and Employment expressed as a fraction of the working age population

  11. Whatever measure of labour slack we use 16 14 12 10 8 Measure of labour slack (in millions) 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 Unemployed workers Discouraged workers EU Countries: DK, BE, FR, IRE, IT, GR, ES, PT.

  12. Lisbon is no longer a mirageEmployment to population rates and the distance from the Lisbon Employment Target 2006 1995 80% 70% 60% 50% 40% 30% 20% 10% 0% DK NL SE UK AUT FI IE PT DE EU15 ES FR LU GR BE IT Source: Eurostat

  13. The dream came true? • Since 1995, the UE15 has4 millions less people unemployed. • Decline seen in 11 countries out of 15. • Associated with 21 millions more jobs. • Reducing cross-country and within country unemployment differentials. • Supposedly more “social cohesion”, but…

  14. …Europeans are unhappy Satisfaction with work or main activity in EU10 18 17 16 Fully satisfied as a % of respondents 15 14 13 12 1994 1995 1996 1997 1998 1999 2000 2001 years Source: ECHP

  15. Declining job satisfaction notably in the countries with the strongest unemployment decline Source: www.eurofund.europa.eu

  16. Reducing unemployment is not a popular business • Under Berlusconi II (June 2001- May 2006) 1,354,320 jobs were created. Yet support for the Govt fell by 43%. • Under Prodi II (May 2006 - December 2007) 432,512 jobs were created. Yet consensus fell by 51%. • Aznar had to go in spite of 4,982,050 jobs created and halving the Spanish unemployment rate.

  17. Italy 60% 12,5% 58% 11% 56% 9,5% Unemployment as a % of labour force Employment as a % of population in working age 54% 8% 52% 6,5% 50% 5% 2005 2006 2007 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1985 1986 1987 1988 1989 1990 1991 2003 2004 Employment Unemployment

  18. Spain 75% 25% 65% 20% Unemployment as a % of labour force Employment as a % of population in working age 55% 15% 45% 10% 35% 5% 2004 2005 2006 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2003 1985 1986 1987 1988 1989 1990 2001 2002 Employment Unemployment

  19. Outline • A European dream….. turning into a European nightmare • Why? • a simple explanation • looking at flows • Can we cheat the employment labour productivity tradeoff?

  20. The simple explanation • Lower unemployment could simply be related to demographics. • Insofar as unemployment rates are higher for the young people than for the other age groups, the ageing of Europeans may involve a reduction of unemployment. • Is this the reason why we no longer see mass unemployment in Europe?

  21. No. It isn’t 1995-2004 Variation of Unemployment as a % of the Working Age Population SE ES PT NL LU IT IRE GR FR FI DK BE AT -7 -6 -5 -4 -3 -2 -1 0 1 Within group variation in U rate Pure demographic effect

  22. Also more migrants, but they have higher unemployment rates than natives 1995-2004 Variation of Unemployment as a % of the Working Age Population SE ES PT NL LU IE GR FR FI DK BE AT -7 -6 -5 -4 -3 -2 -1 0 1 Migration composition effect Variation in U rate of natives and migrants

  23. Unemployment declined with larger unemployment inflows 15 0,8 0,6 0,4 11 0,2 Inflows/Outflows as a % of the working age population Unemployment as a % of the labour force 0 -0,2 8 -0,4 1986 1987 1989 1991 2003 -0,6 1997 1993 1999 2001 2006 1995 -0,8 5 Inflows EU15 Outflows EU15 U rate EU15

  24. Out of 100 hundred unemployed, 30 find a job within a year …. …and 23 leave the labour market altogether another 47 remain unemployed…. Let us look at transition matrices Employment t Unemployment t Inactivity t Employment t-1 93,5 3,0 3,5 Unemployment t-1 30,0 47,3 22,6 94,6 Inactivity t-1 3,7 1,8 Yearly Average 2001 – 2004

  25. What do these transitions imply in terms of the long-run unemployment rate? 12% 10% 8% 6% 4% 2% 0% 1991-1995 2001-2004 1991-1995 2001-2004 Current Unemployment rate Unemployment rate in the long run

  26. Employment t Unemployment t Inactivity t Employment t-1 93,1 3,2 3,7 Unemployment t-1 29,0 56,5 14,1 Inactivity t-1 2,8 1,7 95,5 Mobility Index = (S- tr(M))/(S-1) where S denotes the number of labour market states and tr(M) the trace of the transition matrix 28% 1985 – 1988 In Europe more mobility across labour market states than 15-20 years ago 2001 – 2004 Mobility Index 32% Employment t Unemployment t Inactivity t 93,5 3,0 3,5 Employment t-1 30,0 47,3 22,6 Unemployment t-1 3,7 1,8 94,6 Inactivity t-1

  27. Increase in mobility in the countries with the strongest unemployment declines .5 AT PT 0 GR BE FR log(U rate 2006 / U rate 1996) NL -.5 IT FI ES -1 IE -.1 0 .1 .2 .3 .4 log(Average Mobility Index 1996-2004/Average Mobility Index 1985-1995)

  28. Why did mobility increase? • Multivariate analysis (across countries and over time) of the determinants of mobility indexes. • Reduction in the strictness of Employment Protection Legislation (EPL) for temporary contracts increases mobility by 5%. • Reduction of EPL strictness for regular contracts increases mobility by 2%. • Controlling for GDP growth and the share of immigrants in the population.

  29. 1996-2000 2001-2005 1986-1990 1991-1995 Acceleration of reforms of EPL Regular contracts Temporary contracts Employment Protection Legislation 18 16 14 12 10 N° of Reforms 8 6 4 2 0 1996-2000 1996-2000 2001-2005 2001-2005 1991-1995 1986-1990 1991-1995 Countries: EU 14

  30. The growth of temporary employment in Europe 15 67 66 14 65 13 64 Employment rate EU15 (%) % of employees with temporary contracts 63 12 62 11 61 10 60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 % of employees with temp. contracts Employment rate EU 15

  31. A port of entry?… 1 0.9 0.8 0.7 France 0.6 Denmark Netherlands 0.5 Italy % of employees with temporary contracts Spain 0.4 Portugal 0.3 0.2 0.1 0 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Age

  32. … or a dead end? Spain 2004 Permanent Fixed Term Inactivity Unemployment 2003 Contracts Contracts Permanent Contracts 97,2 1,1 1,0 0,7 Fixed Term Contracts 4,8 82,6 9,0 3,5 Unemployment 2,5 20,1 67,0 10,4 Inactivity 0,4 2,4 3,9 93,3

  33. Temporary contracts:a longlasting phenomenon 35% 30% 25% Self-employment SPAIN ITALY 20% 15% 10% 5% 0% Current share of FTC Long-run share of FTC Long-run Share of FTC Current share of FTC

  34. Social cohesion? Dualism temporary-permanent contracts creates longstanding asymmetries (this is not properly social cohesion)….

  35. Moreover • Also workers with permanent contracts may suffer a capital loss with EPL reforms as their welfare includes expectations of future job losses. “Insiders” cannot be fully insulated from reforms! • Decline in their welfare associated with an increase in the probability of job loss (λ) is -(w-wr)/(r+λ) where w is the market wage, wris the reservation wage and r is the interest rate

  36. Easier to (re)enter the labour market but often at lower wages Entry wage in a new job as a % of the average wage for different groups 140% 120% 100% 80% 60% 40% 20% 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: ECHP (BE, DE, DK, ES, FR, GR, IE, IT, LU, NL, PT, UK), EUSILC (AUT, BE, ES, GR, IE, IT, PT, UK ).

  37. As wage increases are mostly related to tenure(unconditional wage-tenure profiles,source ECHP) 600 500 400 mean wage 300 200 100 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 tenure Germany UK France Italy Spain Sweden

  38. Outline • A European dream….. turning into a European nightmare • Why? A look at transitions across labour market states • Can we “cheat” the employment/productivity tradeoff?

  39. How to make Europeans happier about lower unemployment? • Providing more employment security is not an option. • More labour market risk makes risk-averse individuals unhappy unless it is accompanied by higher wages. • We need higher wages to provide popular support to reforms in Europe. • But higher wages require higher labour productivity.

  40. Can Europe increase both employment and productivity? 100% 180 Hourly labour productivity (US=100) (left scale) 90% 80% 160 70% Employment (in millions) 60% 140 50% 40% 120 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2007 Source: Groningen Growth & Development Centre, Total Economy Database

  41. What do employment protection reforms do to labour productivity? • On the job destruction margin: they reduce the number of low productivity jobs. This increases productivity. • On the job creation margin: they may discourage investment in human capital as shorter tenures reduce incentives to training on-the-job. This reduces productivity.

  42. How to “cheat” the tradeoff then? Increase wages-productivity at entry. More investment in human capital. • Before the job: better education systems via compulsory evaluation of all schools • On the job: • tenure track to permanent contracts (no segregation into temporary contracts) • decentralised wage bargaining that rewards productivity rather than simply tenure

  43. Reallocation increases average productivity and wages wage productivity wage productivity Ls Ls1 Ls1 Ls w w1 Reallocation surplus Ld w1 w Ld Employment Employment

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