A Long Shadow over Growth

Author:Helge Berger and Martin Schindler
Position::an Advisor, and is a Senior Economist, both in the IMF's European Department.
SUMMARY

Conquering unemployment and boosting growth is the number one priority in Europe today

 
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Even if the European economy were sailing along at full capacity—and it clearly is not—some people would be looking for jobs. As new and innovative firms make their way into the marketplace and less productive firms retreat, employees are on the move as well, and finding a new job will always take some time. Some unemployment is therefore part and parcel of a healthy and growing economy.

But these are not normal times: since the beginning of the European debt crisis, euro area unemployment has risen to nearly 20 million people. At the end of 2013, this meant about 12 percent of those looking for work remained without a job, about one and a half times the level before the crisis (see Chart 1). What is worse, an increasing share of those seeking employment have been out of work for more than one year. The latest available numbers suggest that nearly half of Europe’s unemployment is long term.

Unemployment on this scale is worrisome. The sacrifice and hardship that come with being out of work for a long time have affected many European families. To make matters worse, the unemployment crisis also threatens to cast a long shadow over Europe’s ability to grow in the future. Much of the rise in unemployment has been concentrated among vulnerable groups, including the less educated and the young: at the end of 2013, more than half of those below age 25 looking for work in Spain and Greece were without a job (see Chart 2). The comparable figure is over one-third in Italy and Portugal, about a quarter in Ireland, and nearly one-quarter on average in Europe. Numbers like these raise the specter of a lost generation.

The repercussions of being unemployed at a young age are severe. It means that those who are well trained cannot put their skills to work and, in an application of the “use it or lose it” principle, may lose those skills, while those with less education are missing out on crucial on-the-job training. All of these could have lasting consequences and set young people off on a permanently lower earnings path, risking entrenchment of already rising income inequality.

But the scarring effects of unemployment at a young age extend well beyond the economic sphere: many unemployed people adjust their life decisions accordingly, deferring marriage and child rearing or leaving home to seek employment abroad. While migration supports macroeconomic adjustment when other mechanisms fail, it can come at a cost for those who have to move: cultural change, the need to learn a new language, and a lack of recognition of degrees and training can mean that highly skilled workers are employed in low-skill jobs. The tale of highly trained foreign scientists driving cabs in Berlin or Stockholm is not far from reality.

A two-way street...

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