by Ármand Jámbor-Balog
There were more than 5 million unemployed young people at the end of 2014 in the European Union while the Euro area languished under a youth unemployment rate of about 22 percent, according to official data sources. Even Angela Merkel, Germany’s long-serving Chancellor, spoke of the danger of a “lost generation.” The issue is indeed one of Europe’s “most pressing” problems, as she put it, resulting in enormous social and economic costs.
As the 2008 global crisis unfolded, it was young people who were laid off first, as they were the ones with temporary contracts or other, less secure, forms of employment. Based on previous studies, the International Monetary Fund (IMF) reports that those who suffer unemployment at the beginning of their careers are more likely to be unemployed later. This is known as the scarring effect. It can lead to a 20 percent reduction in real wages of the long-term unemployed young person, compared to their employed counterpart and the effect can last for decades.
According to Eurostat, youth unemployment (which refers to the young between 15 and 24 years of age) is roughly twice as high as the post-1990 average in the Mediterranean countries, and also about twice as high as the unemployment rate of other age brackets. Approximately one in two young people in Greece and Spain, two in five in Italy and one in four in France are looking for employment but finding none. It gets worse. A 2012 European Commission report says that about one-third of unemployed youth have been out of a job for more than 12 months. With average youth unemployment rate in the euro zone having declined by only about 2 percent since its peak in 2012, there is indeed danger of a lost generation.
The EU reacted to the plight of the youth with a significant delay in 2012, when the former European Commission President José Manuel Barroso launched the Youth Guarantee program. According to this initiative, Member States (MS) are to adopt a two-pronged approach. In the shorter term, they are to offer good-quality jobs or continued education, apprenticeship or traineeship to people aged below 24, within four months of having finished their education or having become unemployed. In the longer term, country-specific structural causes of high youth unemployment are to be tackled.
The associated costs of the Youth Guarantee program are estimated to be €20 billion. The EU provides some support through the European Social Fund to the tune of €10 billion. Countries particularly hit hard by the crisis, with youth unemployment rates above 25 percent in their regions, are also eligible for funds through the Youth Employment Initiative. This fund totals approximately €6 billion. Despite these action steps, euro area youth unemployment decreased only about two percent from the 2012 record high of 24 percent.
The above initiatives are a good start, but in true EU fashion, also represent a compromise among net contributor and net beneficiary MS. Given the size of available funds, they are likely insufficient to tackle the problem of youth unemployment effectively, given the fact that these funds add up to less than 0.1 percent of the GDP of eligible countries. At the same time, Eurofound, an EU agency, estimated the cost of young people not in employment, in education or training, also referred to as NEETs, is around €150 billion.
What are some the causes of structural youth unemployment? Paradoxically, in a 2012 survey, McKinsey and Company found that 27 percent of interviewed employers left a vacancy open because they could not locate the right person with the necessary skill set. Moreover, employers had the greatest trouble recruiting in the countries with the highest youth unemployment rates. The mismatch between skills taught and skills required thus appears to be a very serious problem that needs solving in the long run.
Demographics are another cause of structural youth unemployment, creating a catch 22 scenario. In traditional pension systems, the current workforce pays for the pension of the retired and disabled. Given the demographic specifics, in most of Europe people are working longer and retiring later. In a low-growth environment, where the number of available jobs is, on average, constant and where people retire later, young people are hard-pressed to find jobs. As highlighted by the IMF report, with longer bouts of unemployment, their expected lifetime earnings decrease significantly, as well as their pension contributions.
What is to be done? First and foremost, job creation mostly hinges on growth. While austerity is meant to improve competitiveness and growth in the long run, at present it suppresses growth in the countries that need it most, prolonging the labor market issues. A softening of austerity conditions could have a beneficial effect on labor, which in turn would help improve government finances, possibly kicking off a virtuous cycle. Reform of the education system is also necessary to bring skills taught and those that are needed more in line with one another. Making labor markets less rigid could be another avenue for reform. While this might reduce job security for some, it could allow for a greater number of jobs by reducing the cost per employee faced by those hiring.
In a 2014 Pew Research Center poll, 65 percent of parents in developed nations expected their children to be worse off financially than themselves. The statistics suggest that this generation will indeed be worse off than the previous unless the problem of youth unemployment is treated with the seriousness it requires.