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Unemployed in Europe |
Only a healthy recovery accompanied by job
creation will improve income distribution and strengthen social cohesion
and political sustainability of growth.
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The most fragile groups in the European labor market-young, low-skilled, and
temporary workers-suffered the most during the global and regional economic
crises. And if they remain unemployed for too long, they are likely to lose
their skills, become discouraged, and withdraw from the workforce.
Unemployment among these groups has aggravated income inequality and runs
the risk of shredding Europe's social fabric, threatening its public
finances, and inhibiting growth.
To find out how labor market developments after the crisis affected
inequality in Europe and what can be done to help, we looked at what caused
income inequality in the Organization for Economic Cooperation and
Development countries-for which a strong set of inequality data are
available-in the quarter-century (1980-2005) before the recent global
economic crisis. Extrapolating from the precrisis experience, we found that
despite the social safety nets Europe is famous for, the crisis exacerbated
inequality in the region, mainly by increasing unemployment and inhibiting
job creation. Moreover, as the recovery takes hold, how it plays out
globally and in Europe itself-which income groups benefit the most-will
determine what happens to inequality on the continent. A jobless recovery
could further worsen economic disparity and undermine both economic
performance and social cohesion.
No surprises
Overall, the rise in unemployment during the
crisis increased inequality by an estimated 2 percentage points in the euro
area as a whole, and by as much as 10 percentage points in the periphery
countries-Greece, Ireland, Portugal, and Spain-where the labor market
situation deteriorated much more sharply. The crisis also led discouraged
workers to drop out of the labor force, a factor that is likely to have
further exacerbated income disparity. On the other hand, social safety nets
are likely to have cushioned the impact of unemployment on inequality.
Inequality went up in most euro area countries as the rise in unemployment
rates further widened the gap between rich and poor. Spain and Ireland, in
particular, are estimated to have suffered the largest deterioration in
income distribution, with income inequality rising by 20 percentage points
and 11 percentage points, respectively. This reflects surging job losses as
construction sector activity contracted sharply after housing bubbles burst,
leaving many low-skilled workers without jobs. Close to half of the
unemployment contribution to inequality in these countries can be attributed
to long-term unemployment. By contrast, inequality barely moved in Germany
and the Netherlands: the unemployment response to declining output was
unusually muted because of part-time work programs that supported job
retention in anticipation of a rebound.
Within Europe, cross-country differences in income inequality reflect the
interplay of labor-market developments, education levels, and social
expenditures. In general, the evidence confirmed expectations. Higher
unemployment, long-term unemployment, and a two-tier employment system of
temporary and permanent workers all worsen inequality. And social safety
nets, including unemployment benefits and welfare payments; more education;
and better job opportunities for vulnerable groups who do not easily find
jobs-especially women and youths-all reduce inequality.
What to do
European countries can take a number of steps to protect vulnerable groups
from unemployment and help reduce income inequality:
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Rebalance employment protection-with a view to supporting job
creation-by relaxing protection for regular workers while enhancing it
for temporary workers, who are generally the last hired and first fired;
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Avert long-term unemployment, through job search assistance, training,
and incentives for private sector employment;
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Improve youth access to the labor market, by integrating employment
services and the education system through outreach programs, training,
apprenticeships, and access to job-search assistance measures;
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Attract second-income earners to the labor force, by enhancing child
care support and allowing women to file their labor income separately
from their husbands in countries with joint family taxation;
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Allow wages to be more aligned with productivity to provide firms with
better incentives to invest and create jobs; and
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Foster competition and a more business-friendly environment by removing
entry barriers and reducing operating restrictions in sectors such as
services and retail and network industries.
Only a healthy recovery accompanied by job creation will improve income
distribution and strengthen social cohesion and political sustainability of
growth. Accelerating jobs recovery through far-reaching labor and product
market reforms is essential to prevent the buildup of long-term
unemployment, especially for those groups that were hit the hardest.
Source: IMF / Finance & Development |
