What Happened to European Mass Unemployment? Willem F. Duisenberg Lecture. Tito Boeri Bocconi University 28/02/2008

Transcription

1 What Happened to European Mass Unemployment? Willem F. Duisenberg Lecture Tito Boeri Bocconi University 28/02/2008

2 1994 OECD Jobs Study The labour market has become particularly worrying in Europe ( ) in comparatively inflexible Europe, on the other hand, both relative employment and 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 Since then 126 as a % of the labour force 10 4,5 83 1, 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 Convergence: Did the countries with high unemployment experience the strongest decline in unemployment? Log (Unemployment rate 1995 / Unemployment rate 1985) LU SE FI DE Log (Unemployment rate 1985) GR DK PT FR IT BE UK NL IE ES

7 Convergence AT DE PT GR BE FR NL UK SE DK IT FI ES IE Log (Unemployment rate 1996) Log (Unemployment rate 2006 / Unemployment rate 1996)

8 SE FI No convergence IT DE GR FR ES LU DK PT BE UK IE NL Log (Unemployment rate 1985) Convergence AT PT NL UK DK DE GR BE FR SE IT FI IE ES Log (Unemployment rate 1996) Log (Unemployment rate 1995 / Unemployment rate 1985) Log (Unemployment rate 2006 / Unemployment rate 1996)

9 Convergence in unemployment rates also within EU countries since the mid 1990s (Nuts II regions) 2,5 2,0 1,5 1,0 0, Total Between Within Squared root of Sum of Squares

10 It is not inactivity. It is employment Δ Empl ES IRE 0,3 0,25 0,2 0,15 - Δ U < Δ E FI NL SE FR IT UK DK 0 0,1 PT GR BE 0,05 AT DE Δ Unempl ,3-0,2-0,1 0 0,1 0,2 0,3-0,05 - Δ U > Δ E -0,1-0,15 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 Measure of labour slack (in millions) Unemployed workers Discouraged workers EU Countries: DK, BE, FR, IRE, IT, GR, ES, PT.

12 Lisbon is no longer a mirage Employment to population rates and the distance from the Lisbon Employment Target 80% % 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 has 4 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 Fully satisfied as a % of respondents years Source: ECHP

15 Declining job satisfaction notably in the countries with the strongest unemployment decline Job satisfaction in EU15 (% of employees expressing satisfaction with their working conditions) Denmark Finland Ireland UK Austria Belgium Luxembourg Germany Netherlands Sweden EU15 France Portugal Italy Spain Greece 50% 60% 70% 80% 90% 100% Source:

16 Reducing unemployment is not a popular business Under Berlusconi II (June May 2006) 1,354,320 jobs were created. Yet support for the Govt fell by 43%. Under Prodi II (May 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% 58% 56% 54% 52% 50% 12,5% 11% 9,5% 8% 6,5% 5% Employment as a % of population in working age Unemployment as a % of labour force Employment Unemployment

18 Spain 25% 20% 15% 10% 5% % 65% 55% 45% 35% Employment Unemployment Employment as a % of population in working age Unemployment as a % of labour force

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 Variation of Unemployment as a % of the Working Age Population SE ES PT NL IT IRE FR FI DK BE AT LU GR Within group variation in U rate Pure demographic effect

22 Also more migrants, but they have higher unemployment rates than natives Variation of Unemployment as a % of the Working Age Population SE ES PT NL LU IE GR FR FI DK BE AT Migration composition effect Variation in U rate of natives and migrants

23 Unemployment declined with larger unemployment inflows 0, ,6 0,4 0,2 0-0,2-0,4-0,6-0, Inflows/Outflows as a % of the working age population Unemployment as a % of the labour force Inflows EU15 Outflows EU15 U rate EU15

24 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 Inactivity t-1 3,7 1,8 94,6 Yearly Average Out of 100 hundred unemployed, 30 find a job and 23 leave within the labour a year market. altogether another 47 remain unemployed.

25 What do these transitions imply in terms of the long-run unemployment rate? 12% 10% 8% 6% 4% 2% 0% 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% In Europe more mobility across labour market states than years ago Mobility Index 32% Employment t-1 Unemployment t-1 Inactivity t-1 Employment t Unemployment t Inactivity t 93,5 3,0 3,5 30,0 47,3 22,6 3,7 1,8 94,6

27 Increase in mobility in the countries with the strongest unemployment declines log(u rate 2006 / U rate 1996) AT PT GR BE FR NL IT FI ES IE log(average Mobility Index /Average Mobility Index )

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 Acceleration of reforms of EPL N of Reforms Countries: EU 14 Employment Protection Legislation Regular contracts Temporary contracts

30 The growth of temporary employment in Europe % of employees with temporary contracts Employment rate EU15 (%) % of employees with temp. contracts Employment rate EU 15

31 A port of entry? 1 % of employees with temporary contracts Age France Denmark Netherlands Italy Spain Portugal

32 or a dead end? Spain Permanent Fixed Term Contracts Contracts Unemployment Inactivity 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% 20% SPAIN ITALY Selfemployment 15% 10% 5% 0% Current share of FTC Long-run share of FTC Current share of FTC Long-run 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-w r )/(r+λ) where w is the market wage, w r is 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% 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 600 (unconditional wage-tenure profiles,source ECHP) 500 mean wage 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% 90% 80% 70% 60% 50% 40% 1960 Hourly labour productivity (US=100) (left scale) Employment (in millions) 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 L s 1 L s L s L s 1 w w 1 w w 1 Reallocation surplus L d L d Employment Employment

44 In Duisenberg s words The euro is not and cannot be a cure for all European problems. The introduction of the euro will not in itself solve the unemployment problem. Monetary policy is neither the cause nor the solution of the unemployment problem. Structural reforms are needed to attack it. Fortunately, this insight is gaining broader support. The challenge now is to translate it into sustained action. Carrying out structural reforms is politically difficult, since they may be painful in the short term and only bear fruit over a longer time scale. However, it is encouraging to note that those countries which have implemented structural reforms have indeed been more effective in coping with the unemployment problem. Lecture at the Per Jacobbson Foundation in Washington, 26/9/99