Arbeitslosigkeit; Arbeitsmarktpolitik; Langzeitarbeitslosigkeit; Ungelernte Arbeitskräfte; EU-Politik; EU-Staaten

Stephen Nickell

English

Research Papers in Economics

CESifo Forum 1/2010 3
Focus
THE UNEMPLOYMENT
CHALLENGE IN EUROPE
STEPHEN NICKELL*
Where are we now?
Europe, like much of the World economy, is in the
middle of a serious recession with GDP in many
countries having fallen significantly. Interestingly
enough, looking across the OECD countries, there
has not been a very strong correlation between the
rise in unemployment and the fall in GDP.For exam-
ple, in the last year (up to 2009 Q1), GDP in the
United States has fallen by 2.5 percent and unem-
ployment has risen by four percentage points. By
contrast, German GDP has fallen by 6 percent but
unemployment has risen by less than one percentage
point.On the other hand,Spanish GDP has fallen by
3.1 percent whereas unemployment has risen by
eight percentage points.
To some extent, these differences reflect the pro-
ductivity levels in the hardest hit industries. For
example, in Spain, there has been a huge contrac-
tion in the relatively low productivity construction
sector generating large falls in employment relative
to GDP. In Germany, on the other hand, the high
productivity capital goods sector has been badly hit
leading to much smaller falls in employment rela-
tive to GDP. The other major factors are labour
market institutions and specific employee retention
policies. For example, countries with a combination
of very flexible short-term contracts and very
inflexible permanent contracts will see large falls in
employment. Indeed these falls may be exacerbat-
ed by the fact that those on permanent contracts
will be less inclined to moderate their wage de-
mands because their security of employment is
much enhanced by the existence of a large cushion
of short-term contract workers. Use of short-time
working subsidies, by contrast, will tend to attenu-
ate employment losses.This has been a key factor in
Germany.
Overall, however, prospects for unemployment look
bad across the board.While GDP growth in Europe
will probably be positive in 2010, it could well be
below trend and this will not bring down unemploy-
ment. So what is to be done?
How can we mitigate the rise in unemployment?
Macroeconomic policy
It goes without saying that we need,and by and large
we have got, expansionary monetary and fiscal poli-
cy as befits a situation in which aggregate demand
has fallen and there was little in the way of core
inflationary pressure even before this fall. This was
not a recession generated to squeeze inflation out of
the system.
Labour market policies
The issue here is the extent to which the rise in
unemployment can be attenuated relative to any
given fall in GDP. Firms which are confident in
their long-term prospects and employ a high pro-
portion of workers with firm-specific skills may
employ a variety of policies to retain employees at
reduced costs such as hour reductions, compulsory
vacations, pay cuts and so on. Subsidy policies can
be used to encourage this, the justification being
that this will sustain labour market attachment.
Maintaining attachment to the labour market is one
of the key ways of maintaining the health of the
labour market in the long run and this is one
method which has been employed effectively in
some EU countries. The cost of this method is that
it may impede the movement of workers towards
more productive activities and prevent the contrac-
tion of less productive industries or industries
where there is general overcapacity. For example,
competitive protection of automobile manufactur-
ing across the world may ensure that overcapacity
is sustained even as the world emerges from the
UNEMPLOYMENT CRISIS
* Nuffield College, University of Oxford.recession. Of course, there is a collective action
problem here since no one country wishes to con-
tract its domestic automobile industry to the long-
run benefit of the rest of the world.
As we have already noted, the structure of
employment protection rules will impact on the
rate at which unemployment rises. Strict rules will,
of course,slow the rate of job loss in a downturn at
the expense of slowing the rate of job gain in the
upturn. Making the rules stricter in response to a
recession is probably not to be recommended at 
a time when firms are under severe financial 
pressure.
Bringing unemployment down in the recovery and
preventing persistence
Can labour market policy make a difference in the
short run?
The speed of the recovery will, of course, depend
crucially on how macroeconomic policy develops,
how credit markets recover and how the manifest
problems facing the world economy are resolved.
Generally speaking, those economies which have
seen faster falls in employment relative to GDP in
the downturn will probably see faster rises in
employment relative to GDP in the recovery.
Indeed,the existence of flexible short-term contracts
and, particularly, widespread temporary employ-
ment agencies may allow faster expansion of GDP
without excessive inflationary pressure.
What measures are to be avoided?
In order to prevent unemployment persistence
and,indeed,to sustain labour supply more general-
ly, it is crucial to continue the labour market
attachment of those who lose their jobs. His-
torically, we have not been good at this. Under the
pressure of rising unemployment, the force of the
‘something must be done’ argument tended to
grow and it was easy to succumb by removing peo-
ple from the labour force via early retirement, dis-
ability and so on.While this reduced the number of
the non-employed who were actually looking for
work (the unemployed) in the short run, in the
long run the inactive population became larger
while the unemployment rate was unaffected. The
growth potential of the economy was reduced and
the fiscal position was worsened.
There is a long and unfortunate history of this policy
response so, by the early 2000s, in the vast majority
of OECD countries there were more inactive men
aged 25–54 than unemployed men in the same age
group, mostly long-term sick or disabled. Further-
more, in many countries, inactivity rates among men
aged 55–64 had risen to very high levels in the three
decades up to the mid-1990s, despite male life
expectancy having risen steadily throughout. The
consequences for pension systems were plainly
adverse. So one thing to avoid above all others, is to
be tempted into providing individuals with incen-
tives to retire early or to enter long-term sickness or
disability. Sustaining and enhancing long-run labour
supply is the direction in which to move.
How do we maintain labour force attachment?
As we have already noted, the key to maintaining
the long-term growth potential of the economy is to
prevent those who lose their jobs from getting into a
situation where it is very hard to get back into work.
So they must avoid going into long-term unemploy-
ment, early retirement or the disability benefit sys-
tem. In normal times, it is sensible to devote signifi-
cant resources to assisting those who are already in
one or other of these states back into the labour
market. In a recession, given limited resources, the
main focus has to be on those entering unemploy-
ment.There will, of course, be much larger numbers
of these than in normal times.
The standard policy shortly after entry into unem-
ployment is mandatory participation in an activation
programme, monitoring of job search, counselling
and job search assistance in return for receipt of ben-
efits. For those lacking skills, policies to enhance
employability may be in order although such evi-
dence as we have suggests that training for the
unemployed is not a very successful policy.Targeted
recruitment subsidies can be more effective. EU
countries vary greatly in the rigour and effectiveness
of their activation policies.
When unemployment duration reaches a given
point, six months or twelve months say, then to sus-
tain labour market attachment it is worth introduc-
ing a job/training guarantee in return for continuing
receipt of benefits. The work would be temporary
(6–12 months) and part-time with the individual con-
tinuing to search for a regular job at the same time.
The work would be socially useful, requiring mini-
CESifo Forum 1/2010 4
FocusCESifo Forum 1/2010 5
Focus
mal training, organised at public expense by local
authorities or voluntary groups. Only a small minor-
ity of EU countries have mandatory schemes for all
the unemployed who reach a certain duration
although in most EU countries unemployed individ-
uals can be referred to such schemes by the employ-
ment service.
There are two problems with all these kinds of poli-
cies. First, they are expensive. However, in a serious
recession, fiscal policy is going to be expansive and
some of the extra expenditure should be diverted in
this direction. Second, a highly professional and well
organised employment service is required. Further-
more, its capacity must be increased rapidly as the
inflow into unemployment rises,otherwise activation
and related policies may be overwhelmed.
Tackling vulnerable groups in the short 
and long run
The short run
The vulnerable groups are the young, the unskilled
and those potentially suffering from long-term sick-
ness or disability. As we have already noted, for the
first two groups, the focus has to be on assistance in
obtaining work and enhancing employability which
should start immediately upon entry into unemploy-
ment. For the third group, if individuals lose their
jobs because of sickness or ill-health, it is vital to
mobilise support before they enter long-term dis-
ability.This plainly involves medical support, a focus
on the sort of work which the individual can manage
and immediate access to effective psychological
therapies for those affected by depression and anxi-
ety disorders which may indeed be worsened by
unemployment.The worst strategy is simply to allow
general practitioners to sign people off work with no
further intervention.
The long run
For the young, the evidence suggests that countries
which have so-called dual systems have lower levels
of relative youth unemployment and smoother and
more rapid transitions from education into work.A
dual system is simply one where a national appren-
ticeship is the way into skilled work for those out-
side university.The essence of these schemes is that
they are national,there is a contractual relationship
between employers and workers, the training is of
high quality and there are standards which are
imposed at a national level, like a driving test.
These schemes have been around for a very long
time in Austria, Denmark, Germany and Switzer-
land, and are hard to start up from scratch. How-
ever,some countries feel that it is worthwhile trying
to move in that direction,notably Norway,Australia
and Britain, because the benefits for the young are
so great.
For the unskilled and those without qualifications, it
is plain that the quality of schooling at the lower end
of the ability range is a key factor.Evidence from the
International Adult Literacy Survey indicates that
there are huge cross-country variations in the pro-
portion of the population of working age who have
minimal skills. It is clear that the labour market will
work much better and poverty will tend to be much
lower if there is only a small group of individuals
with very low literacy and numeracy skills. Those at
the bottom of the ability range require additional
resources for them to receive effective education. If
they can develop marketable skills when young,their
entry into the labour market is much easier to organ-
ise effectively.
In many, if not most, countries of the developed
world, there are more prime age men (aged 25–54)
on disability benefit than there are on unemploy-
ment benefit.This was not the case in the 1970s.The
key factors are the structure of the disability benefit
system and the way in which individuals are moved
into this system from employment or unemploy-
ment. In order to reduce the numbers on disability
benefit, two things are required. The first is to con-
trol the inflow using policies described above. The
second is to apply the standard activation mecha-
nisms allied to medical support to individuals who
are already on disability benefit.A good example is
the Pathways to Work scheme introduced recently in
Britain which has already had some success.
Overall, policies should be work friendly and
always aim at enhancing labour supply over the
longer term.
European Economic Recovery Plan
It is worth briefly commenting on the European
Economic Recovery Plan in this context. This Plan
covers a number of the points considered here. In
particular, it focuses on using flexible working timeto avoid ‘wasteful’ labour shedding due to tempo-
rary demand disturbances. The problem is, of
course, knowing what demand disturbances are
going to be temporary.We can be fairly certain that
the demand for sophisticated capital goods will
recover with the world economy and that the
demand for new housing will not recover rapidly in
countries which have seen huge house-building
booms. But, in many industries, the longer term
prospects are less certain.
The Plan rightly concentrates on activation mea-
sures for the unemployed and the necessity of avoid-
ing long-term unemployment, recommending the
use of temporary hiring subsidies. It also recom-
mends reducing social charges on lower incomes to
support the low skilled. As a temporary measure as
part of a recovery plan this is,perhaps,not a well-tar-
geted policy. It is expensive, it has little impact on
poverty since most low paid individuals are not in
poor households,and will probably have little impact
on employment.
Summary and conclusions
The key in a recession is to sustain the attachment of
workers to the labour force and to protect those who
lose their jobs.Therefore
– It is worth subsidising worker retention in those
sectors where demand is likely to return to pre-
recession levels.This can be a very effective policy
for sustaining attachment to the labour force.
– At all costs countries should avoid providing indi-
viduals with incentives to retire early or to enter
long-term sickness or disability.
– Those entering unemployment should participate
in an activation programme including monitoring
of job search, counselling, job search assistance
and medical/psychological support for those suf-
fering from ill-health.Policies to enhance employ-
ability and targeted recruitment subsidies may be
worthwhile. It is important to expand the capaci-
ty of the system to cope with the increased inflow
into unemployment.
– Beyond a certain level of unemployment dura-
tion,it is worth introducing a job/training guaran-
tee in return for continuing receipt of benefits.
– National apprenticeship systems generate smooth-
er and more rapid transitions from education to
work and lower youth unemployment than aver-
age. Things are even better if those towards the
lower end of the ability range have achieved high
levels of literacy and numeracy by the end of com-
pulsory school.
– Strict controls over entry into long-term disability
and activation mechanisms plus medical support
for those already in long-term disability help to
control the number of inactive individuals in the
working age population.
CESifo Forum 1/2010 6
Focus

The Unemployment Challenge in Europe

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The Unemployment Challenge in Europe

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