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

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Presentation on theme: "What Happened to European Mass Unemployment? Tito Boeri Bocconi University 26/06/2008."— Presentation transcript:

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

2 1994 OECD Jobs Study “The labour market has become particularly worrying in Europe… (…) in comparatively inflexible Europe, on the other hand, both relative 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 as a % of the labour force 1,5 3 4,5 6 Unemployment EU 15Long term Unemployment EU 15 Since then

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 LU SE FI DE DK GR PT FR IT UK BE NL IE ES Log (Unemployment rate 1995 / Unemployment rate 1985) Log (Unemployment rate 1985) Convergence: Did the countries with high unemployment experience the strongest decline in unemployment?

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

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

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

10 -0,15 -0,1 -0,05 0 0,05 0,1 0,15 0,2 0,25 0,3 -0,3-0,2-0,100,10,20,3 It is not inactivity. It is employment Δ Unempl Δ Empl Δ Empl = - Δ Unempl Unemployment and Employment expressed as a fraction of the working age population IRE ES DE AT PT GR BE NL FI FR SE IT UK DK - Δ U < Δ E - Δ U > Δ E

11 Whatever measure of labour slack we use Unemployed workersDiscouraged workers Measure of labour slack (in millions) EU Countries: DK, BE, FR, IRE, IT, GR, ES, PT.

12 0% 10% 20% 30% 40% 50% 60% 70% 80% DKNLSEUKAUTFIIEPTDE EU15 ESFRLUGRBEIT Lisbon is no longer a mirage Employment to population rates and the distance from the Lisbon Employment Target 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 EU years Fully satisfied as a % of respondents Source: ECHP

15 Declining job satisfaction notably in the countries with the strongest unemployment decline 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 50% 52% 54% 56% 58% 60% Employment as a % of population in working age 5% 6,5% 8% 9,5% 11% 12,5% Unemployment as a % of labour force EmploymentUnemployment

18 Spain 5% 10% 15% 20% 25% % 45% 55% 65% 75% Unemployment Employment 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 AT BE DK FI FR GR IRE IT LU NL PT ES SE Within group variation in U ratePure demographic effect Variation of Unemployment as a % of the Working Age Population

22 Also more migrants, but they have higher unemployment rates than natives Variation of Unemployment as a % of the Working Age Population AT BE DK FI FR GR IE LU NL PT ES SE Migration composition effectVariation in U rate of natives and migrants -7

23 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0, Inflows/Outflows as a % of the working age population 5 15 Unemployment as a % of the labour force Inflows EU15Outflows EU15U rate EU15 Unemployment declined with larger unemployment inflows 8 11

24 Employment t Unemployment t Inactivity t Employment t-1 94,6 Unemployment t-1 Inactivity t-1 Yearly Average 2001 – ,53,03,5 30,047,322,6 3,71,8 Let us look at transition matrices Out of 100 hundred unemployed, 30 find a job within a year …. …and 23 leave the labour market altogether another 47 remain unemployed….

25 What do these transitions imply in terms of the long-run unemployment rate? 0% 2% 4% 6% 8% 10% 12% Unemployment rate in the long runCurrent Unemployment rate

26 1985 – – 2004 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% Employment t Unemployment t Inactivity t Employment t-1 93,13,23,7 Unemployment t-1 29,056,514,1 Inactivity t-1 2,81,795,5 93,53,03,5 30,047,322,6 3,71,894,6 In Europe more mobility across labour market states than years ago Mobility Index 32% Employment t Unemployment t Inactivity t Employment t-1 Unemployment t-1 Inactivity t-1

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

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 N° of Reforms Countries: EU Acceleration of reforms of EPL Employment Protection Legislation Temporary contractsRegular contracts

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

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

32 … or a dead end? Spain Permanent Contracts Fixed Term Contracts Inactivity Unemployment Permanent Contracts97,21,1 0,7 1,0 Fixed Term Contracts4,882,6 3,5 9,0 Inactivity0,42,4 93,3 3,9 Unemployment2,520,1 10,4 67,

33 Temporary contracts: a longlasting phenomenon 0% 5% 10% 15% 20% 25% 30% 35% SPAINITALY Current share of FTC Self- employment 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 0% 20% 40% 60% 80% 100% 120% 140% 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 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) tenure mean wage GermanyUKFranceItalySpainSweden

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? Source: Groningen Growth & Development Centre, Total Economy Database 40% 50% 60% 70% 80% 90% 100% Hourly labour productivity (US=100) (left scale) Employment (in millions)

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 LdLd Ls1Ls1 LsLs LdLd Ls1Ls1 LsLs wage productivity wage productivity w1w1 w Employment Reallocation surplus w w1w1


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