European Commission - Directorate-General for Empl : Employment and Social Developments in Europe 2012 – frequently asked questions (see also IP/13/5)

European Commission

MEMO

Brussels, 8 January 2013

Employment and Social Developments in Europe 2012 - frequently asked questions (see also IP/13/5)

How can the growing divergence between Southern and peripheral European countries, and most Northern and Central Europe countries be explained?

Southern and peripheral countries entered the global downturn in a more vulnerable fiscal position (high levels of debt or high implicit liabilities for ailing banks) and were consequently hardest hit when the initial financial and economic crisis turned into a sovereign debt crisis. Their governments and companies have had to pay much higher interest rates or lost market access altogether. Moreover, the pre-crisis years were also marked in these countries by an over-allocation of capital and labour to activities that could not be maintained for a long time, such as booming construction. Creation of new, more sustainable activities has proven to be a major challenge. The divergence in employment and social outcomes across Europe is also partly explained by how labour markets and social systems in individual countries have reacted and adapted to the economic crisis.

For instance, following a period of convergence in unemployment rates after 2000, when the initial gap of approximately 3.5 percentage points between the North and the South (+ periphery) of the euro zone had largely disappeared by 2004, divergence started to accelerate again since 2008, reaching 7.5 percentage points in 2011.

This worrying trend points to an urgent need for finding more effective mechanisms of macroeconomic adjustment, reflected also by the ongoing debate on a deep and genuine economic and monetary union.

Diverging unemployment rates by groups of Eurozone / non-Eurozone Member States, 2000 - 2011 period                  Source: Eurostat, EU LFS and DG EMPL calculations.

Which countries have the worst long-term unemployment problems?

The unemployment rate increased in the EU from 7.1% in 2008 to 10.6% in the third quarter of 2012. As a result, the long-term unemployment (LTU) rate also increased, with a time lag, from 3.0% in 2009 to 4.1% in 2011 and 4.6% in the second quarter of 2012.

The highest LTU rates (above 7% of the active population) were found in 2011 in Slovakia, Spain, Greece, Ireland, Latvia, Lithuania and Estonia.

Although LTU has increased in almost all Member States, eight countries (France, Greece, Ireland, Italy, Portugal, Poland, Spain and the UK) account for 90% of the net increase in LTU between 2008 and 2011 (and Spain alone for 43%).

Unemployment and long-term unemployment rates in % of active population, 2011

Source: Eurostat, EU LFS.

Which policies can mitigate the impact of the crisis on long-term unemployment?

The main factor driving the rise in long-term unemployment has been the inability of the labour market to accommodate the inflows of workers made redundant as a result of restructuring, either due to insufficient labour demand or labour market mismatches. It is therefore essential to stimulate the creation of jobs, particularly in sectors with the largest growth potential such as the green economy, information and communications technologies and the health sector, and to retrain workers to adapt their skills to the new needs of the labour market. Despite the increase in the number of short-term (i.e. less than one year) unemployed, some Member States have managed to limit the increase in long-term unemployment. For example, Netherlands, Finland and Sweden have consistently better transitions rates compared to Greece, Bulgaria and Slovakia. This is a result of better functioning labour market institutions (unemployment benefit systems, active labour market policies, employment protection legislation, in-work benefits).

Overall, the evidence shows that those participating to life-long learning (education or training) and those registered with the Public Employment Service and receiving benefits have higher probability of finding a job more quickly.

Transition rate from short-term unemployment (STU) to LTU and other statuses (E = employment, I = inactivity), 2010-11, aged 25-49

Source:Eurostat, EU-LFS, ad-hoc transitions calculations.EU-13 is the EU aggregate made of the 15 countries represented in the graph except NL and LT. For Estonia and Slovakia, those in STU the second year (2011) are included in the LTU category

Which countries have to face high levels of long-term social exclusion?

The protracted economic crisis has dramatically increased the risks of long-term exclusion. To successfully address this problem and prevent rising poverty and long-term exclusion from becoming entrenched, policies need to be tailored to specific country situations and population groups most at risk. The ESDE 2012 review's analysis shows that the risks of entering into and exiting out of poverty vary greatly across Member States, with three main groups identified.

In the first group, which includes France and the UK, rates of entry into and exit from poverty are high, although in some of the countries, a significant share of those at risk of poverty form a 'core group' that does not take part in the churning.

In the second group, consisting mainly of the Baltic and southern Member States, there is a high risk of entering into poverty, and low chances of getting out of it, creating a massive poverty trap.

The last group of countries, which includes the Nordic countries, displays low rates of entry into and exit from poverty. In these, the share of people at risk of persistent poverty is however high, which is a sign of a preoccupying social polarisation.

The churning of poverty - rates of entry to and exit from the risk of poverty situation among the 18-64 population

Source: EU-SILC longitudinal UDB 2009 - DG EMPL calculations

How effective and efficient is social spending in the EU?

EU Member States spend different shares of GDP on social protection, and also achieve different results in terms or reducing poverty. Although higher social spending is generally associated with stronger poverty reduction, important differences exist, suggesting scope for efficiency gains.

For instance, while Hungary and Portugal spent a similar share of GDP (around 13%) on social protection in 2009 (without pensions), social transfers reduced the risk of poverty by 36% in Portugal but by 57% in Hungary. By the same token, approximately halving the risk of poverty required social protection spending of 11% of GDP in the Czech Republic compared with 18% in the Netherlands.

Relation between expenditure on social protection (excluding pensions) and relative reduction in the share of population (aged 0-64) at risk of poverty (in percentage) - reference year 2009

Source: ESSPROS and EU-SILC

Social protection spending has other functions than solely poverty reduction, one of them being improvement in labour market participation. The positive relationship between childcare provision and female employment in the EU illustrated by the chart below is a case in point. Countries with good childcare provision make it much easier for women to take up jobs and create economic value.

Relation between share of children in formal childcare and the employment rates of women aged 20-49 with youngest child below 6 years old (2010)

Source: EU-SILC and LFS

Can tax shifts contribute to more jobs without increasing inequality and poverty?

Lower labour taxation can bring more jobs. This effect is most pronounced for vulnerable groups (such as low-income workers, single parents, second-income earners). As a result, the outcome of tax shifts away from labour may differ significantly between Member States, depending on the characteristics and composition of their workforce. The budgetary situation requires other taxes to be increased when lowering labour taxation. Which taxes to increase has to be carefully assessed, as increases can have negative distributional effects. Value added tax, green taxes and property taxation are the most obvious candidates to shift taxes to, in view of their less detrimental growth impact. However, increasing them, if not properly designed, can have unfavourable distributional effects and hamper the goal of decreasing poverty. Nevertheless, appropriate designs of reforms and accompanying measures might increase the case for such shifts. Attention should also be paid to alternative tax reforms, such as combating tax evasion and the simplification of the tax system (such as the revision of tax expenditures).

Effects of specific tax reforms

	Shift from labour taxes to  …			Other tax reforms
	VAT	Green taxes	Property tax	Mortgage relief	Fight tax evasion
Employment effects	J	J	J	J	J
	(if targeted)	(small)	(if well-designed*)
Distributional effects	L	L	J	L	J
			(if well-designed*)

* Taxation of imputed rent (non-monetary housing advantage derived from homeownership)

What have been the effects of minimum wages?

Evidence from the current economic downturn suggests that minimum wages have had positive rather than negative effects on the employment opportunities of the workers at the margin of the labour market. For instance, there has been a positive correlation between minimum wages (as a percentage of average wages) and the employment rate in the EU Member States in 2010. Some of the specific positive effects of minimum wages are particularly relevant in times of a severe economic downturn, including their support of aggregate demand, their underpinning of prices (reducing the risk of deflation during an economic downturn), and their boosting of wage equality by maintaining an adequate standard of living for low-skilled workers.

Minimum wage (as % of average wage) and employment rate of low-skilled workers - 2010

Source: DG EMPL calculations on the basis of Eurostat

Minimum wages do not only affect employment outcomes, they also affect social cohesion. For example, it is generally known that women are more likely than men to be employed in sectors with low wages, such as cleaning. In such sectors, minimum wages can set a floor to ensure that the pay gap with other wage earners (especially men) can be tempered in a way that strengthens social cohesion. The negative correlation between the minimum wage and the gender pay gap in the EU Member States in 2010 seems to indicate that minimum wages help reduce the gender pay gap.

Minimum wage and gender pay gap - 2010

Source: DG EMPL calculations based on Eurostat

How can policies help match skill needs and supply?

EU enterprises in several regions and sectors claim that they cannot meet their needs for labour and skills despite high unemployment. Skills mismatches in the EU, i.e. the discrepancy between the qualifications and skills that individuals possess and those needed by the labour market, has increased markedly during the crisis. Research reveals that one out of three European employees is either over- or under-qualified, with over-qualification increasing by about 5% over the past decade. This means that about 6.4 million employees in Europe have taken up jobs that typically demand lower qualifications and skills than they have.

Countries with higher qualification mismatches, especially in the Southern part of the EU, share some common features. They tend to have lower levels of public investment in education and training, which can reduce the quality and ability of education and training systems to respond to changing labour market needs. The demand for graduates is low and less high-skilled jobs are available. They also have lower expenditure on labour market programmes and more rigid and segmented labour markets.

Average incidence of qualification mismatch (2001-2011) in the Member States, % of employees (aged 25-64)

Source: Cedefop, based on EU-LFS data.

Even a good match in terms of educational qualifications, however, does not mean that individuals necessarily possess the skills required for their jobs. In addition to ineffective education and training systems, inadequate company training, geographical barriers and adverse working conditions may also be of the source of skill mismatches. Reducing skills mismatches thus requires both supply and demand side policy measures. Reforms to increase the responsiveness of education and training systems ultimately need to be combined with the creation of innovative and high-skilled jobs in sufficient numbers.