Youth Unemployment in Advanced Economies in Europe: Searching for Solutions Angana Banerji International Monetary Fund February 2015

Based On

Scope of Research 22 countries: 18 euro area, Denmark, Norway, Sweden and the UK 1983 – 2012 Youth: Workforce aged 15–24 years and Adult: Workforce aged 25 and above

Road Map

Problem Diverse Cross-Country Picture Youth Unemployment Rate, 2014 (Percent, 12-month average through October, 2014) More than 25 percent 15 to 25 percent Less than 15 percent Source: Eurostat.

Youth Unemployment Rate, 2014 (Percent, 12-month average through October, 2014) More than 25 percent 15 to 25 percent Less than 15 percent Source: Eurostat. Problem Diverse Cross-Country Picture

Youth Unemployment Rate, 2014 (Percent, 12-month average through October, 2014) More than 25 percent 15 to 25 percent Less than 15 percent Source: Eurostat. Problem Diverse Cross-Country Picture

Youth Unemployment Rate, 2014 (Percent, 12-month average through October, 2014) More than 25 percent 15 to 25 percent Less than 15 percent Source: Eurostat. Problem Diverse Cross-Country Picture

The Problem Unprecedented Highs. Long-Term. Source: Eurostat and IMF staff calculations. Note: Long-term unemployment defined as unemployment lasting 12 months or more. 1/ Euro area youth unemployment rates maximum and minimums across all Euro Area countries.

Impact Low Growth. Social Costs. Pressure on Social Safety Nets

Drivers Blame the Crisis? Source: Eurostat and IMF staff calculations.

Drivers Important Role of Growth: Youth Are 3 Times More Sensitive

Drivers Fragile Employment Conditions Sources: Eurostat; and IMF staff calculations. Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

Drivers Fragile Employment Conditions Sources: Eurostat; and IMF staff calculations. Note: Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus.

Drivers Labor Market Rigidities Source: Eurostat and IMF staff estimates. Abbreviations: GRR (gross replacement rates), MIN2MED (minimum to median wage ratio), TWEDGE (tax wedge), TSHARE (share of temporary workers), ALMPTOT (total ALMP expenditure per unemployed). Results of EPT (employment protection of temporary workers) not shown due to scale. Estimate range from -2.5 to -5.2.

Drivers Cost of Hiring

Drivers Labor Market Duality

Source: OECD; Eurostat; and IMF staff calculations. Note: ALMP measures include training as one of the main components, while total spending combines measures, supports and services. Crisis-hit countries include Greece, Italy, Portugal, Spain, and Cyprus. Drivers Training and Skills

Research Conclusions Boost Growth Support Demand ● Monetary Easing ● Use Fiscal Space Supply Side Reforms ● Strengthen Banks ● Product Market Reforms Labor Market Reforms ● Lower Labor Tax Wedge ● Align Minimum Wages ● Reduce Duality ● Vocational Training ● Active Labor Market Policies

Research Conclusions Growth: Will History Repeat Itself? Source: Eurostat; World Economic Outlook; and IMF staff calculations.

Thank you

Background Slides Framework: Key Assumptions Output gap: different effect across countries Labor market features: same effect across countries Explaining level not change. 22 countries, 18 euro area, Denmark, Norway, Sweden and the UK – Substantial data gaps.

Background Slides More Details In…

Background Slides Framework: Role of Economic Activity Panel and country-specific estimation Growth/Output gap

Background Slides Labor Market Characteristics Hiring costs Opportunity cost of work Labor market protection, flexibility Collective bargaining Vocational training and education Active labor market policies

Background Slides Framework: Do Labor Market Characteristics Matter? Levels and changes of unemployment rate Fixed effects, business cycle, and labor market features Univariate analysis (larger sample) U = f(Fixed Effect, Output Gap, Labor Market, Interact) Multivariate analysis (common sample) U = f(Fixed Effect, Output Gap, Labor market features)

Background Slides Interaction of Labor Market Factors with Growth Source: Eurostat and IMF staff estimates. Abbreviations: GRR, NRR (gross and net replacement rates), ITRAP (inactivity trap), MIN2MED (minimum to median wage ratio), TWEDGE (tax wedge), UDENSITY (union density), ABP (adjusted bargaining coverage), TSHARE (share of temporary workers), TPROB (share of temporary workers on probation), LOWEDUC (share of individuals with low education), ALMPTOT (total ALMP expenditure per unemployed), ALMPTRAIN (ALMP spending on training, per unemployed). Results of EPT (employment protection of temporary workers) excluded for presentational clarity.