Rising unemployment, “ill-conceived” austerity measures

Painting a grim picture of the employment situation in Europe, the International Labour Organization is advocating a job-friendly strategy that encompasses macroeconomic and structural policy measures to arrest the crisis in the region.

by Kanaga Raja

GENEVA: The unemployment rate in the European Union stood at 10.9% as of February 2013, remaining 4.1 percentage points above the pre-crisis rate in the same month in 2008, the International Labour Organization (ILO) has said.

In a snapshot of the EU labour market released in advance of its ninth European Regional Meeting in Oslo on 8-11 April, the ILO further found that the unemployment rate in the eurozone increased even faster, reaching a historical high of 12% in February 2013.

According to the ILO, the EU employment rate (ages 15-74) stood at 57.6% in the third quarter of 2012, remaining 1.6 percentage points below the rate before the third quarter of 2008 when the global crisis erupted.

“This means that there is still a deficit of 5.9 million jobs to restore employment rates to their pre-crisis levels,” it noted.

From these trends, the ILO suggests that it is necessary to move to a job-friendly strategy.

“Much of the emphasis so far has been on reducing budget deficits and restoring external competitiveness through ‘internal devaluations’. While fiscal and competitiveness goals are important, it is crucial not to tackle them through ill-conceived austerity measures and structural reforms that do not address the root causes of the crisis,” it said.

Indeed, added the ILO, the above trends show that such an approach has failed so far. “Instead, moving to a job-friendly strategy could serve both macroeconomic and employment goals.”

Deterioration of employment

According to the ILO snapshot of the EU labour market, despite some encouraging signs of recovery that started to materialize in 2010, only five EU countries out of 27 (Austria, Germany, Hungary, Luxembourg and Malta) have witnessed employment rates above pre-crisis levels. In some instances, employment rates have decreased by more than 3 percentage points in the last two years alone, notably in Cyprus, Greece, Portugal and Spain.

Over 26.3 million Europeans were unemployed in February 2013, or 10.2 million more than in 2008.

Importantly, said the ILO, while the deterioration of employment paused during 2010-11, it has gained momentum over the past year.

Given the limited number of jobs created in the present context, job-seekers find it increasingly difficult to obtain employment. As a result, long-term unemployment (job-seekers without work for more than one year) is on the rise, it noted.

As of the third quarter of 2012, there were 11 million long-term unemployed in the EU. This is 1.3 million more than the year before and 5.2 million more than in 2008.

“In most EU countries, more than 40% of the unemployed are without work for more than one year. Since 2008, Estonia, Ireland, Lithuania and Spain recorded the largest increases in long-term unemployment.”

As a result, many job-seekers have become discouraged and have stopped looking for work. In EU countries with available information, the number of discouraged workers – those who are “inactive” but would like to work – rose by 29%, on average, between 2008 and 2011.

The ILO also found that youth unemployment has reached alarming levels. As of February 2013, the youth unemployment rate in the EU stood at 23.5% – with rates as high as 58.4% and 55.7% in Greece and Spain, respectively. Only in Germany has youth unemployment declined since 2008. “Worryingly, almost 30% of youth in the EU were at risk of poverty or social exclusion in 2011.”

The ILO further noted that low-skilled workers too are disproportionately affected by unemployment. The unemployment rate among workers with primary or low-secondary education is three times as high as in the case of workers with tertiary education. Employment among workers with tertiary education grew by 12.6% between 2008 and 2012, while employment among workers with primary and low-secondary education fell by close to 17% during the same period.

Since 2008, the incidence of temporary and part-time employment has increased in 19 and 22 EU countries, respectively. This is despite the fact that, when the crisis erupted, job losses tended to concentrate on those forms of employment, said the ILO.

“The increase in the incidence of involuntary temporary employment may reflect uncertainty among enterprises regarding future growth prospects –  so employers may be reluctant to provide stable employment contracts given the prevailing uncertainty regarding future sales and production. The increase in the incidence of part-time work may be the result of flexible working time arrangements concluded between employers and workers in order to prevent layoffs.”

The worsening employment situation has intensified the risk of social unrest, the ILO underlined. According to the latest estimates prepared for the purposes of the European Regional Meeting, the risk of social unrest in the EU was 12 percentage points higher than before the start of the global crisis. Compared with other major regions, the EU has registered the most significant aggravation in the risk of social unrest.

Between 2010 and 2012, the countries that experienced the sharpest increases in the risk of social unrest were Cyprus, Czech Republic, Greece, Italy, Portugal, Slovenia and Spain. The risk of social unrest declined in Belgium, Finland, Germany, Slovak Republic and Sweden.

Job-friendly strategy

Calling for a job-friendly strategy, the ILO said that this requires, first, addressing the structural vulnerabilities that really lie behind the crisis. One of these stems from the systemic issues in the financial sector, which were at the epicentre of the financial crisis but have not been resolved yet.

The percentage of small firms which face constraints to obtain credit from banks is growing alarmingly, according to a survey conducted by the European Central Bank. In January 2013, the volume of credit to all non-financial corporations (large and small) dropped by 1.5% compared to a year earlier.

Second, the renewed employment weaknesses in the EU mirror depressed aggregate demand conditions. More and more countries face downward pressures on wages and employment, thereby affecting domestic consumption and investment and eroding intra-EU trade.

“So it is increasingly difficult to count on faster exports in order to compensate for the loss of domestic demand. This highlights failure of strategies based solely on the combination of fiscal austerity and internal devaluations (i.e. improving competitiveness through decreasing real wages).”

The ILO said that evidence presented in earlier issues of its World of Work Report, also supported by recent International Monetary Fund (IMF) research, shows that there is scope for a smoother fiscal path, which would help achieve both employment and fiscal goals. This includes: (i) a more realistic path for reducing fiscal deficits; and (ii) a different mix of fiscal measures.

This includes a stronger emphasis on pro-employment programmes like well-designed active labour market programmes, a commitment to effective welfare entitlements, combined with an effort to reduce wasteful spending, to fight tax evasion and avoidance, and to raise new sources of government revenue that do not overly weigh on activity, work and business investment.

Third, said the ILO, the above structural and macroeconomic shifts may take some time to operate. Meanwhile, the situation continues to deteriorate, thereby justifying the adoption of emergency measures.

According to the ILO, the following are especially relevant:

l     Basic employment guarantees for young people would be a major plus. This includes education placement, training opportunities targeted specifically to people in inactivity, participation in work programmes or intensified job-search support. In the case of individuals with low educational attainment (either employed or unemployed), initiatives that provide them with adequate life-long learning are essential.

However, preventive measures should be at the centre of efforts, e.g., tackling dropout from secondary education.

A recent ILO study shows that these youth employment measures would cost around €21 billion for eurozone countries as a whole – which compares favourably with the costs of other interventions, especially given the likely longer-term benefits.

l     Further articulation of passive and active labour market policies across the eurozone countries would improve employability and provide income support and social protection to the unemployed. To achieve this, existing European funds could be mobilized.

l     Increased coordination among public employment services of eurozone countries would contribute to improving mobility and reducing labour market mismatches as well as labour shortages in low-unemployment countries.

The ILO further emphasized that social dialogue is instrumental for: (i) improving the design of the different policy instruments; (ii) gathering a constituency for pro-employment reforms; and (iii) ensuring that the strategy focuses on what is really important for people.

“The ILO can play a key role in accelerating the shift towards a job-friendly approach, including through the identification and exchange of good practices. It can provide technical support but also a new policymaking perspective that places the promotion of employment and decent work at the centre of the political agenda.” (SUNS7561)      

 Third World Economics, Issue No. 543, 16-30 Apr 2013, pp 13-14