employment and social developments in europe 2012

ISSN: 1977-270X

Employment and Social Developmentsin Europe 2012Social Europe

Employment and Social Developments in Europe 2012

European Commission Directorate-General for Employment, Social Affairs and Inclusion Directorate A Manuscript completed in November 2012

This publication is a Commission staff working document aimed to inform the public at large. It does not constitute an official position of the Commission on this subject nor in any way prejudges one. Neither the European Commission nor any person acting on behalf of the Commission may be held responsible for the use that may be made of the information contained in this publication. ACKNOWLEDGEMENTS The Directorate-General for Employment, Social Affairs and Inclusion would like to thank Eurostat and CEDEFOP (European Centre for the Development of Vocational Training) for their close collaboration and support in preparing the review. Comments from other services of the European Commission are gratefully acknowledged. Comments on the review would be gratefully received and should be sent to: Directorate A Directorate-General for Employment, Social Affairs and Inclusion Office J-27 05/80 B-1049 Brussels E-mail: [email protected] Cover photo: iStockphoto For any use or reproduction of photos which are not under European Union copyright, permission must be sought directly from the copyright holder(s).

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More information on the European Union is available on the Internet (http://europa.eu). Cataloguing data as well as an abstract can be found at the end of this publication. Luxembourg: Publications Office of the European Union, 2012 ISBN 978-92-79-27159-5 ISSN 1977-270X doi:10.2767/86080 European Union, 2012 Reproduction is authorised provided the source is acknowledged. Printed in Belgium

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Foreword2012 has been another very bad year for Europe. After five years of economic crisis, recession has returned, unemployment has reached levels not experienced in nearly two decades and the social situation is also deteriorating. The effect of national automatic stabilisers, intended to keep up household expenditure and protect the most vulnerable, has weakened compared to early years of the crisis. With increasing long-term unemployment, marginalisation risks also increase. Groups already at a heightened risk of poverty, such as young adults, children and to some extent migrants, are now experiencing an even worse situation. The ESDE (Employment and Social Developments in Europe) 2012 review analyses both the risks of entering into poverty and the prospects of escaping it, with striking differences between Member States. Wage developments have been subject of increasing attention throughout the crisis because of their importance for competitiveness, domestic demand, employment as well as social inequalities. Any fair analysis of this complex subject needs to take these multiple dimensions into account, and this review seeks to make a substantial contribution. ESDE 2012 also analyses the functioning of Europes social protection systems over recent years. At the same time, recognising the importance of the revenue side of the welfare state, the review presents evidence on recent developments in taxation systems, shifts in the tax base and their employment and distributional implications. The analysis crystallizing in this publication has underpinned the Commissions Annual Growth Survey 2013 as well as a number of new Commission initiatives. Within 12 months, the Commission is likely to have adopted three policy packages supporting Member States efforts to make progress towards the Europe 2020 targets despite a worsening economic environment. First, in April 2012 the Commission adopted the Employment Package, setting out a reinforced agenda for job creation and dynamic labour markets. Second, the Commission responded to the fact that young people are particularly hard-hit by the crisis in many different ways, as can be seen throughout this report, and in December 2012 adopted a Youth Employment Package, including a proposal for development of Youth Guarantee schemes across the Union. Third, the Commission is preparing a Social Investment Package, intended to help reconcile the need for effective and activating social policies in the context of a fiscal crisis in many Member States. I am convinced that the analysis in this review gives a clear picture of the need and points towards the means for the EU, its Member States and all other players to take action, to address divergences both between countries and between citizens, and to create a viable path for a job-rich and inclusive recovery.

Lszl Andor Commissioner for Employment, Social Affairs and Inclusion

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ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Key features of the current European employment and social situation. . . . . . . . . . . . . . . . . .171. KeyemploymentandsocialtrendsinthecontextofEurope2020: polarisationanddivergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171.1. 1.2. 1.3. 1.4. Divergence among Member States and social polarisation on the rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Latest labour market developments: deepening crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Mixed developments in income and poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 The Europe 2020 targets are becoming increasingly difficult to achieve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

2. Challengesandareasforpolicyresponses: increasingemploymentandreducingpoverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .492.1. 2.2. 2.3. 2.4. Sustaining growth and jobs without increasing deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 Improving the functioning of the labour market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 Addressing the social consequences of the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 EMU level stabilisers for better convergence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

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Chapter 1: The dynamics of long-term unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .651. Trendsinlong-termunemploymentintheEU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .661.1. 1.2. 1.3. Current and past level of long-term unemployment at EU level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66 How do the EU Member States fare in terms of long-term unemployment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 To what extent does short-term unemployment translate into long-term unemployment across EU Member States? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76

2. Whoisaffectedbylong-termunemployment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .802.1. 2.2. 2.3. 2.4. 2.5. Individual characteristics strongly influence levels of long-term unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . .80 The context in which the last job was lost matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 The strong influence of the previous occupation on long-term unemployment reflects the importance of the skill level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87 The previous sector of activity also matters: the influence of restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88 One fifth of the long-term unemployed have never had a job . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

3. Whatdriveslong-termunemployment?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .893.1. 3.2. 3.3. 3.4. 3.5. Aggregate demand is the first factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90 Unemployment benefit system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91 Active labour market policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 How do the Member States stack up in relation to their UB and ALMP schemes? . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Other institutional factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

4. Whatcanbelearnedfromlongitudinaldataonlabourmarkettransitions toandfromlong-termunemployment?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.1. 4.2. 4.3. 4.4. 4.5. 4.6.

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What is the added value of using longitudinal data? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 How have transitions between labour force statuses changed in the EU during the crisis? . . . . . . . . . . . . . . . . . . 106 How do rates of entry and exit from unemployment vary across EU Member States? . . . . . . . . . . . . . . . . . . . . . . 108 How do transitions differ for the short and long-term unemployed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Impact of policy-related variables on the transition out of unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Supplementary econometric analysis: A regression analysis on the LFS transition data . . . . . . . . . . . . . . . . . . . . 121 123 140

5. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 2: Social trends and dynamics of poverty and exclusion . . . . . . . . . . . . . . . . . . . . . . . . . 1431. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Developmentsinpovertyandsocialexclusionsincethecrisis . . . . . . . . . . . . . . . . . . . . . . . . . .2.1. 2.2. 2.3. 2.4. 143 143

Poverty and social exclusion on the rise in many Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Diverging trends across Member States in poverty, severe material deprivation and jobless households . . . . . 147 Varied impact of labour market developments on poverty and exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Developments in poverty or exclusion for different population groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 152

3. Trendsintheseverityofpovertyandsocialexclusionandinmultipledisadvantage . . .3.1. 3.2. 3.3.

The crisis has led to increased household financial stress in many Member States . . . . . . . . . . . . . . . . . . . . . . . . 152 Poverty gap figures indicate that poverty has generally become more severe . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Rising population facing multiple disadvantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 163

4. Dynamicsofpovertyanddeprivation:fromshortspellsofpovertytopersistence . . .4.1. 4.2. 4.3.

Poverty and social exclusion as dynamic events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 The incidence of the risk of poverty over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Ins and outs of poverty: divergent turnover across Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 169

5. Individualprofilesandthedynamicsofpoverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.1. 5.2.

Individual characteristics and the process of exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Profiling of the population having experienced poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 174

6. Estimatingthecostofpovertyandsocialexclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.1. 6.2. 6.3.

The challenge of measuring the cost of not fighting poverty and social exclusion . . . . . . . . . . . . . . . . . . . . . . . . . 174 Some indications based on estimates of the cost of unemployment or of NEET. . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Providing partial estimates of the cost of poverty and exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 176

7. Anincreasingemphasisonsocialinvestment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.1. 7.2. 7.3. 7.4.

Social protection and inclusion as a productive factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Social protection and inclusion as an investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Key areas for social investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Social investment in practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 178 191


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Chapter 3: Social protection systems confronting the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1931. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. SocialprotectionsystemsinEUMemberStates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.1. 2.2. 2.3. 2.4. 193 193

Size of social protection spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 Composition of social protection spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Evolution of social protection expenditure in time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Sources of finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 203

3. Themacroeconomicstabilizationroleofsocialprotectionexpenditure . . . . . . . . . . . . . .3.1. 3.2.

Social protection spending in the business cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Role of social protection spending in the recent crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 219

4. Efficiencyofspendingonsocialprotection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.1. 4.2.

Social protection expenditure and poverty reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Labour-market friendliness of social protection spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 233 243

5. Mainfindings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 4: Taxation in the context of the Europe 2020 strategy on employment and poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2451. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.1. 1.2. 245 Europe 2020 employment and poverty targets: the role of taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Overview of the chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

2. Keyfactsondevelopmentsinoverallandlabourtaxation2.1. 2.2. 2.3.

Trends in labour taxes and other tax revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 Trends within labour taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 Recent policy recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 256

3. Theeffectsoftaxation:keyelementsofthedistributionalaspects . . . . . . . . . . . . . . . . . . .3.1. 3.2.

The social effects of consumption taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 The social effects of property taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 269

4. Theeffectsoftaxation:employmentaspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.1. 4.2. 4.3. 4.4. 4.5.

Impact of direct taxation on employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Impact of direct taxation on employment: empirical evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Impact of reforms reducing labour taxation: empirical evidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Revenue-neutral tax shifts away from labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Simulation results for tax shifts from labour to consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 279

5. Trade-offsbetweentheemploymentandsocialeffectsoftaxshifts . . . . . . . . . . . . . . . . .5.1. 5.2. 5.3. 5.4.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 Tax shifts toward property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 Tax shifts to consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Tax evasion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 284 294


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Chapter 5: Wage developments in the European Union during a severe economic downturn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2971. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Internationalcostcompetitiveness:Nominalwages,productivity andderivedindicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.1. 2.2. 2.3. 2.4. 2.5. 297

300

Nominal compensation per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Productivity per person employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 Nominal unit labour cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 Inflationary cost-push pressures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 Real effective exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 309

3. Labourincomeshareaffectingdemandandsupply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1. 3.2. 3.3.

Real unit labour cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 Household earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 Impact of wages on both demand and supply side of employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 314

4. Personalwage/incomedistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.1. 4.2. 4.3. 4.4. 4.5. 4.6.

Wage distribution and income inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 Gender pay gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 Wage polarization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Regional wage dispersion and labour cost trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Minimum wages: a demand stabilizer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 Who earns minimum wages in Europe? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 325

5. Sectoralwagedistributionaffectsmacro-economicoutcomes . . . . . . . . . . . . . . . . . . . . . . . . .5.1. 5.2. 5.3. 5.4. 5.5.

Sectoral compensation per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Sectoral productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 Sectoral nominal unit labour cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 Sectoral prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 Sectoral real unit labour cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 333 349

6. Mainfindingsandconclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

Chapter 6: The skill mismatch challenge in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3511. Skillmismatch,awasteofhumancapitalandproductivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. AggregateskillimbalancesintheEuropeanlabourmarket . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.1. 2.2. 2.3. 351 352

Aggregate imbalances reflect the dynamic interplay of skill supply and demand . . . . . . . . . . . . . . . . . . . . . . . . . . 352 Skill shortages are prevalent among European firms and sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 Aggregate skill mismatch is increasing in Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 358

3. QualitativeskillmismatchinEurope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1. 3.2. 3.3. 3.4.

Qualitative skill mismatch takes many forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 Qualification mismatch is widespread in EU Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Horizontal mismatch reflects heterogeneity of skills within education levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 Qualification and skill mismatch are weakly related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 363

4. Theeconomicandwelfarecostofskillmismatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.1. 4.2. 4.3. 4.4. 4.5.

Skill mismatch is costly for economies and societies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 Skill mismatch can lower enterprise productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Qualification mismatches entail economic and welfare costs for individuals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Skill mismatch can be more costly than qualification mismatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 Skill mismatch can have lasting effects on welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 367

5. DriversanddeterminantsofskillmismatchinEurope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.1. 5.2. 5.3. 5.4. 5.5.

Sectoral restructuring and job quality affect skill shortages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 Different demographic and socioeconomic factors explain vertical mismatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 Over-qualification is a reflection of segmented labour markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371 Lowering over-qualification depends on high-skilled job creation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 Challenging jobs are needed to mitigate skill mismatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374 376

6. Skillmismatchamongspecificpopulationgroups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.1. 6.2. 6.3.

Young individuals: difficult integration into the job market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 Ageing workers face the risk of skills obsolescence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Third-country nationals are susceptible to skill mismatch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 380

7. FuturetrendsinskillmismatchintheEuropeanlabourmarket . . . . . . . . . . . . . . . . . . . . . . . 8. Policiestocombatskillmismatch8.1. 8.2. 8.3. 8.4. 8.5.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382

Enhancing the responsiveness of education and training to labour market needs . . . . . . . . . . . . . . . . . . . . . . . . . 382 Promoting high performance workplaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 Anticipation and identification of skill needs and supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 Targeting labour market institutions and regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 Reaping the benefits of innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 385 391

9. ConclusionEuropehasnoroomforcomplacency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statistical annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3951. Macroeconomicindicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Labourmarketindicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Socialindicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .395 402 438

11

Executive summaryThis second edition of the Employment and Social Developments in Europe (ESDE) Review builds on the integrated approach to employment and social analysis embarked on in the first ESDE Review last year. Our concentration on cross-cutting themes covering the employment and social domains, such as in-work poverty, wage polarisation and income inequalities in the 2011 Review, has met with a positive reception. The discussions which followed with stakeholders have helped shape our further analytical focus. The recent economic and social developments have also driven the choice of analytical subjects for this 2012 Review. Since 2011, the economic slowdown has gradually turned into recession in the EU, as the escalation of debt crises in several Member States led to significant policy shifts toward sharp fiscal consolidation by and large across the EU with adverse effects on aggregate demand. As a result, the previous timid employment growth has come to a standstill in the recent quarters and unemployment has reached levels not seen in more than a decade. Simultaneously, the social situation is deteriorating, especially in Member States in southern and eastern Europe, as the effect of national automatic stabilisers, which played an important role in keeping up household expenditure and protecting the most vulnerable in the first phase of the crisis, has weakened more recently. Very importantly, the social and employment trends are diverging significantly in different parts of the EU. A new divide is emerging between countries that seem trapped in a downward spiral of falling output, massively rising unemployment and eroding disposable incomes and those that have at least so far shown some resilience partly thanks to better functioning labour markets and more robust welfare systems, although there is also uncertainty about their capacity to resist continuing economic pressures. The crisis has, additionally, not impacted uniformly across the whole population and has often led to an even worse situation for groups already at heightened risk, notably young adults, children and to some extent migrants, thus contributing to social polarisation. Indications from recent consumer surveys are that the social situation has further deteriorated since 2010 in most Member States, with the poorest quartile being affected more than the average. The gradual expansion of womens employment has stopped and gender differences still remain. While the gap in unemployment rates between men and women has largely disappeared since the beginning of the crisis, many Member States show no signs of closing the gender pay gap and women still face higher risks of poverty or exclusion than men. Specific labour market trends help explain this apparent paradox part-time jobs, a traditional domain of female employment, have been the only The analytical focus of this review

reflects a deepening economic and social crisis in Europe.

Divergence between different parts of the EU is growing

social polarisation is on the rise

and gender differences still remain.

13


labour market segment continuously expanding even during the crisis, thus optically improving the labour market situation of women, but with only a limited impact in terms of income gains. What, in such a complex situation, are the most relevant subjects for social and employment analysis? The crisis has strongly increased the risks of long-term exclusion. The absence of tangible recovery has strongly increased the risks of long-term exclusion for the most heavily affected people. Understanding the risks and mechanisms of long-term exclusion is crucial for successful policy intervention. Long-term exclusion needs to be looked at bearing in mind its nature as a dynamic phenomenon, whereby individual transitions between different labour market statuses, to and from poverty provide the key to the analysis. Two chapters of this years ESDE Review take a closer look first at the specific labour market dimension of long-term exclusion in the form of long-term unemployment, and, second, at the broader social dimension. Long-term unemployment has increased in most Member States While long-term unemployment has increased in most Member States in recent years, the problem appears most concentrated in Spain and a few other Member States, affecting more severely specific groups, such as men, young people or low-skilled workers, predominantly those employed in declining occupations and sectors. Looking at the most recent available data on transitions, inflows into unemployment have returned close to pre-crisis level, but return rates to employment remain diminished for both short and long-term unemployed. The economic cycle remains a powerful factor explaining changes in levels and flows to and from long-term unemployment, but there are also strong country effects whereby some countries (such as the Netherlands, Sweden and Finland) ensure high transition rates back to employment thanks to good policy mix, in contrast with others which are less successful in this respect (for instance Slovakia, Greece and Bulgaria). Particularly in countries where temporary contracts play an important role, repeated multiple spells of short-term unemployment are also a widespread phenomenon. In general, one in five long-term unemployed in the EU has never worked, three quarters of these being young people below 35 years of age. This points to strong risks of marginalisation for the affected group and underlines the urgency of defining effective policy combinations including active and passive measures both to protect from poverty and to provide incentives and support to finding a job. Policies to address and prevent poverty and long-term exclusion need to be tailored to the specific country situations and population groups most at risk. Our results show that the risks of entering into and exiting out of poverty vary greatly across Member States, with three main groups of countries identified. In the first group, consisting of Austria, France and the UK, rates of entry into and exit from poverty are high, although in some of these 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 of the Baltic States, Bulgaria, Greece, Italy, Malta and Spain, there is a high risk of entering into poverty, and low chances of getting out of it, creating a massive poverty trap. As the evidence relates to pre-crisis data, the situation is worsening as the current perspectives are gloomy for this subgroup. The last group of countries, including the Nordic and Benelux 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, with a group of people at risk of poverty for which there are few chances of getting out of it. and some population groups are affected more. Evidence-based profiling of the different population subgroups facing poverty or social exclusion suggests that individuals trapped in poverty for a longer period have a specific profile compared to those experiencing shorter (even though possibly repeated) poverty spells. Individual profiles indicate that young adults, inactive or unemployed women, lone mothers, or older working age adults out of the labour market are among those facing higher risks of persistent poverty. Typical profiles vary across countries, suggesting that these people face specific structural and institutional barriers in different countries, which points to the need for further country-specific research in this field.

creating significant marginalisation risks.

Risks of entering and escaping poverty vary greatly across Member States

14

Executive summary

The unfolding debt crisis and the subsequent wave of austerity policies raise important questions about the viability of European welfare states. At the same time there appear to be major differences in the way various social models have reacted and performed under the recent stress. In order to explore policy implications and identify ways for welfare states to adapt, two chapters of this volume assess the functioning of social protection systems and some tax implications of their financing with regard to both efficiency and equity goals of employment and social policies. Social protection benefits have generally significantly helped cushion the effects of the income shocks on households from the economic crisis, especially in the period 2007-09, as available data clearly illustrate. However, a more detailed analysis reveals significant differences between Member States social protection systems with respect to their anti-cyclicality, poverty reduction effects and employment friendliness. For example, while pensions are generally considered as a less anti-cyclical type of social spending, especially in comparison with unemployment benefits, they have strongly anti-cyclical effects in Italy and Poland. Importantly, in terms of poverty reduction, Member States with similar levels of social spending achieve significantly different outcomes and, conversely, similar poverty reduction requires very different levels of spending in different Member States. Larger welfare states tend to have higher employment rates, and the design of the tax-benefit systems as well as incentives for job search and take-up play an important role in terms of the employment friendliness of social spending. One aspect that is shown to facilitate the take-up of jobs, in particular among women, is the provision of childcare services. There has, however, been little progress in this field. The design of the revenue side of the European welfare systems is equally important, and the chapter on taxation assesses its impacts on the goals of the Europe 2020 strategy with regard to employment and poverty. While there is a long-standing proposition to shift taxation away from labour to other sources to increase the employment rate, it is important to consider that such a measure may be most effective when targeted at the most vulnerable groups in the labour market. In turn, the outcome of the tax shifts away from labour may differ significantly in different Member States depending on the characteristics and composition of their workforce. At the same time, distributional aspects of tax redesign call for a cautious approach when looking for alternative sources to replace the lost revenues from lower labour taxation. While the value added tax, various green taxes and property taxation are the most obvious candidates in this respect, their increase, if not properly designed, can have unfavourable distributional effects and hamper the goal of decreasing poverty. Our analysis demonstrates that while there are no optimal solutions for tax shifts from an integrated employment and social policy point of view, an appropriate design might increase the desirability of some tax shifts. For example, the regressive effects of VAT can be mitigated by providing compensation to targeted groups (unemployed, retirees), and by focusing on standard rather than reduced rates and exemptions. Similarly, proper taxation of imputed rent has socially favourable effects. Finally, measures aimed at tax simplification, such as reform of tax expenditures, and at reduction of tax evasion can positively contribute to both employment and social policy goals. In normal times, but especially in the current severe economic downturn, wage developments are of major concern for policy makers, social partners and the public in general. Much of the current policy debate is focussed on the impact of wages on international competitiveness, aggregate demand, and their potential to contribute to the efforts to reverse rising poverty within the Member States as well as at the level of the EU as a whole. A chapter on wages contributes to this debate by assessing wage developments before and during the crisis from a socio-economic perspective, and by highlighting the transmission mechanisms through which they impact on the realisation of the Europe 2020 employment and poverty reduction targets. The analysis illustrates that both labour costs (adjusted for labour productivity and producer prices) as well as earnings (adjusted for consumer prices and taxes) have to be considered when assessing the impact of wage developments on achieving the

The welfare state faces major challenges.

Social protection benefits have cushioned the crisis effects, but have weakened over time

while similar levels of social spending often achieved different outcomes.

Revenue side design of welfare systems is equally important

and distributional aspects need to be considered.

No silver bullet taxation solutions, but some elements better than others.

Wage developments matter at both national and EU levels...

influencing labour costs and real disposable income alike.

15


Europe 2020 targets related to employment and social cohesion. It finds, for instance, that although the purchasing power of minimum wages in the EU generally remained fairly stable during the period of 2001-2012 the evidence that minimum wages would impact negatively on jobs even in a severe economic downturn is limited, while other effects - such as inducement for low-skilled workers to increase labor supply - may help lowering pressure for public spending. Skills mismatch is an increasing economic problem The last chapter of the ESDE 2012 Review analyses the structural problem of skill mismatch, or, in other words, the discrepancy between the qualifications and skills that individuals possess and those needed by the labour market. Available macroeconomic evidence points to increasing levels of skills mismatch in the EU, further aggravating the labour market difficulties resulting from the unfavourable economic cycle. A mismatch in skills affects economic competitiveness and growth, increases unemployment, undermines social inclusion, and generates significant economic and social costs. One out of three European employees is either over- or under-qualified, with the mismatch especially high in Mediterranean countries. Countries with higher vertical skill mismatches share some common characteristics. They tend to have lower levels of public investment in education and training, which might reduce the quality and ability of education and training systems to respond to changing labour market needs. They also have lower expenditure on labour market programmes and more rigid and segmented labour markets, as the qualification mismatch predominantly affects younger male workers on non-standard contracts. Even a good match in terms of educational qualifications, however, does not mean that individuals necessarily possess the skills relevant for their jobs. For instance, young people tend to be more often than other age groups over-qualified with respect to the educational requirements of their jobs, but also under-skilled and in need of further training to cope well with their duties. An effective reduction of the skills mismatch requires both supply and demand side policy measures. Reforms increasing flexibility and responsiveness of the education and training systems, including the improved recognition of skills acquired outside formal education or abroad, need to be combined with pursuing the creation of innovative and high-skilled jobs in sufficient numbers. Europe has been struggling to find appropriate policy responses to mitigate the various adverse effects of the crisis and restore a credible path to sustained recovery. In terms of economic and fiscal policies, this path involves stronger macroeconomic governance in the framework of the Europe 2020 strategy. Until recently, the governance aspects in terms of stronger employment and social policy coordination and a joint reform agenda have received comparatively little attention, largely as a consequence of political focus on emergencies in the financial markets and government finances. However, this situation is changing. As President Barroso stressed in his State of the Union 2012 Address, the structural adjustment agenda can only succeed if it is fair and equitable. Describing the situation in some parts of Europe as a real social emergency with rising poverty and massive levels of unemployment, especially among young people, he called for modernisation of European social protection systems and creation of better and fairer taxation systems, underlining that an effective social protection system that helps those in need is not an obstacle to prosperity. It is indeed an indispensable element of it. and new Commission initiatives indicate possible solutions. Several new Commission initiatives, including the Employment Package of April 2012, the Youth Employment Package of December 2012 and the Social Investment Package currently under preparation, have sought to develop policy responses capable to lift Europe from the present crisis back on a path of progress towards the Europe 2020 targets. The Employment and Social Developments in Europe Review 2012 attempts to underpin this process with solid analysis that will feed into the European semester 2013.

requiring both supply and demand side solutions.

Conclusion: stronger employment and social policies are needed to tackle the crisis

16

Key features of the current European employment and social situation(1)This Chapter identifies some of the core aspects of the labour markets and social situation in the EU. It is designed to analyse the main challenges facing policy makers today and in the near future as they strive for inclusive as well as smart and sustainable growth within the Europe 2020 strategy. It does not, however, attempt to look at the quarterly developments in EU labour markets as this is regularly done in the EU Employment and Social Situation Quarterly Review (2). The analysis starts with a look at key employment and social trends seen over recent years, stressing polarisation and divergence issues, then continues with a reminder on the main employment and social targets enshrined in the Europe 2020 strategy. The second part addresses challenges to overcome and action needed to counteract the sustained polarisation between different categories of citizens and the divergence seen across the EU in this respect. mark earlier this year. Young people are particularly hard hit, with more than one in five active Europeans aged 15-24 being unemployed. However, inactivity rates have fallen, except for among the young, where worryingly the number not in employment, education or training (NEETs) continued to rise in 2011. In addition to young people, non-nationals, the low-skilled and men are still the groups most affected by deteriorating labour market conditions. Increased part-time and temporary work, which were the main sources of job growth in 2011, point to a widespread uncertainty and an increasing segmentation of the labour market, considering the high percentages of involuntary short-term and part-time contracts, the latter affecting young people the most. Divergence in the EU-27 and especially between the North and South of the euro area has never been so significant. For the EU as a whole mismatches with higher unemployment rates but vacancies still available are increasing overall, though, again, the picture for individual Member States is varied. This context has inevitably had a negative impact on income and poverty levels, further aggravated by the weakening the stabilizing and protective role of welfare systems over time in a context of prolonged recession. Risks of long-term exclusion are confirmed with children, youth and migrants being most affected. All these aspects contribute to the trend of increasing social polarisation in many Member States.

1.1. Divergence among Member States and social polarisation on the riseAll employment and social indicators point to a growing divergence between the Southern and peripheral European countries, that seem to be trapped in a vicious circle of recession, while most of the countries of Northern and Central Europe have so far shown greater resilience. Part of this is driven by how the economy has performed overall but much of the overall performance is the result of how labour markets and social systems reacted to the severe global downturn. The shockwaves from the crisis appear to be asymmetric but the different institutional setups saw very different resistance to the generally experienced major shock from the initial financial crisis: very often countries with relatively un-segmented labour markets and strong welfare systems have fared better than those with highly segmented labour markets and weak welfare provisions. The (in)ability to cope with the shock was frequently compounded by the initial public debt and deficit levels, as well as the property market situation, and subsequent developments followed by the reaction of financial market. Looking at GDP growth since 2007 alone, some Member States are richer than before the crisis, many are back to pre-crisis levels and some are

1. Key employment and social trends in the context of Europe 2020: polarisation and divergenceLabour markets have continued to be marred by increasing divergence among Member States, whilst the average EU unemployment rate exceeded the 10 %(1) By Frdric Lagneaux, Isabelle MaquetEngsted, Virginia Maestri and Monika Velikonja. See the Employment and Social Analysis website under http://ec.europa.eu/social/ main.jsp?catId=113&langId=en

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Chart1:ChangeinGDPsecondquarter2012, comparedtosecondquarter2007,inpercentages25 20 15 10 5 % 0 -5 -10 -15 -20

average unemployment rate for the North of the EA was 7.0 %, against 14.5 % in the South and periphery of the EA. This gap was only 3.5 percentage points in 2000, while in 2006 the situation was the opposite (-1.2 percentage points in favour of the south and periphery). There is also growing divergence between the countries that were cushioned from the worse social impacts of the crisis, and those countries where living conditions have deteriorated markedly. The decrease in household disposable income was most significant (above 4 %) in the Southern countries, Ireland, Hungary and the Baltic States. It was the result of the further deterioration of the labour market conditions, as well as of the weakening of the cushioning impact of social expenditure over time (see section 1.3.2). In these countries, declining incomes affect the living conditions of a large part of the population, and in 2012 the decline of private consumption is expected to weaken already bleak growth prospects. In the Baltic States the rebound of the economic and labour market situation has contributed to stabilising income levels overall after 2010, but long-term unemployment and poverty remain at high levels in this region. This significant decline is in stark contrast to the situation observed in Northern and Continental countries. In these Member States, the combined effect of robust automatic stabilizers (reinforced by initial discretionary measures) and more resilient labour markets in general helped mitigate the impact of the recession on overall household incomes and private demand. In these countries, while household incomes continued to increase during the crisis, some population groups were more affected than others by rising unemployment. The crisis has revealed that external economic shocks translate differently within the EU they are asymmetric-, and that diverging unemployment trends and the resulting social expenditure tend to exacerbate fiscal imbalances in countries facing the highest needs of adjustment and the highest threat to their social models. Looking at both the labour market situation and the developments in income and poverty, a similar if more nuanced picture emerges, as the previous text illustrates.

EL LV IE EE IT PT DK SI HU ES UK LT FI EA-17 JP EU-27 FR LU NL CY BE CZ RO US AT BG DE SE MT SK PL

Source: Eurostat, National Accounts [namq_gdp_k]. Note: Seasonally-adjusted data except for EL; data for EE, IE, LU refer to the 2007q1-2012q1 period. Millions of national currency, chain-linked volumes, reference year 2005 (including euro fixed series for euro area countries).

Chart2:Divergingunemploymentrates bygroupsofMemberStatessince200015 14 13 % of the active population 12 11 10 9 8 7 6 5 EU-27 EA-17 EA - North (AT, BE, DE, FI, FR, LU, NL) EA - South and periphery (EE, ES, EL, IE, IT, CY, MT, PT, SI, SK) Non EA - North (CZ, DK, PL, SE, UK) Non EA - South and periphery (BG, LV, LT, HU, RO)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Eurostat, EU-LFS, and DG EMPL calculations.

significantly poorer (see Chart 1). While the EU-27 average is close to zero, significant divergences appear among groups of Member States. The chart above depicts variations in real GDP between the second quarter of 2007 and the second quarter of 2012. On the one hand, many of the newer Member States maintained the trend of economic convergence, with Slovakia and Poland outperforming most significantly with real GDP increases of over 13 % and 19 %, respectively, over the five-year period. The Baltic countries, very severely affected in the early phase of the crisis, also show signs of a robust recovery in the recent quarters. Among the old Member States, divergence is most striking between the North and the South and periphery of the Euro area (EA). Greece, Italy, Portugal (and also Ireland) all experienced output drops in 2008-2009, and have been on a downward slope since then. The North-South divergence is not entirely clear-cut: apart from Ireland, 18

the UK and Denmark also underperformed economically in recent years. This may be at least partially explained by specific conditions, such as overheated property markets. The EA countries have also seen very different developments in unemployment trends, as shown in Chart 2. Whereas labour market North-South divergence has been major issue for the EU, it has definitely become a common feature of the EA over recent years. After converging in the years up to 2004, in favour of southern and peripheral EA member countries the average unemployment rate of the group made up of Cyprus, Estonia, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain became lower than the average rate for Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands, it changed in favour of Northern EA again in 2008. The gap was, in 2011, as high as an unprecedented 7.5 percentage points (percentage points) (3): the(3) By way of comparison, the N-S gap was only 1.5 percentage points in 2011 among the ten non-EA Member States.

Key features of the current European employment and social situation

Chart3:EvolutionofGHDIinrealterms(2005=100) 2005to2011(2012forecast)130

1.2. Latest labour market developments: deepening crisisLabour markets are divergent as stressed above. This is, among other factors, the consequence of asymmetric economic shocks, in the context of a poor macroeconomic situation. The prolonged crisis increasingly affects labour markets, resulting in a rise in unemployment, and long-term unemployment in particular. While inactivity remains low overall, it is high among youth. While the job matching process tends to deteriorate, there is a serious risk of continued segmentation and wages and labour costs are falling in response to the difficult labour market situation.

120

CY IE

EL IT

ES PT

HU EU-27

110

100

90

80

2005

2006

2007

2008

2009

2010

2011

2012

160 150 140 130 120 110 100 90 80 2005 2006 2007 2008 2009 2010 2011 2012 BG* EE LT* LV RO* EU-27

1.2.1. EUemployment impactedbythepoor macro-economicsituationFollowing the economic slowdown in late 2011 and the subsequent renewed if moderate recession of the European economy, the employment recovery from the 2008-2009 recession has come to a standstill. The number of people in employment in the EU grew by a modest 0.3 % in 2011 of the working-age population, owing to the better first half of that year and then has stagnated until autumn 2012. The overall pattern of jobless growth consecutive to a mild recession is reflected in the fact that most of the GDP growth corresponded to an increase in productivity and hours worked, leaving little room for employment growth. Conversely, the GDP losses in Greece and Portugal and stagnation in Spain translated into employment losses, while productivity grew in the latter two countries (see Chart 4). An employment recovery will require a level of economic growth which exceeds the trend in productivity. Strong employment policies focused on both the demand and supply sides of the labour market, as detailed in the April 2012 Employment Package, are important for bringing about a job-rich recovery where growth picks up thanks to improvements in both employment and productivity. Employment maintenance via working time reduction, as was seen in the first year of the crisis, proved to be a temporary response to the economic

130 BE PL DE SE DK FR FI EU-27

120

110

100

90

80

2005

2006

2007

2008

2009

2010

2011

2012

130

AT CZ NL SI SK UK EU-27

120

110

100

90

80

2005

2006

2007

2008

2009

2010

2011

2012

Source: AMECO. Note: * Data available only until 2010.

Economic and social divergence among the Member States has been coupled with a trend of rising social polarisation within many Member States. This trend is visible in many different ways, and, like in the case of divergence among the Member States, it is partly linked to the protracted economic downturn and partly has deeper structural and institutional causes. While social polarisation in the labour markets is observable

mainly through high levels of segmentation, hollowing out of the medium paid jobs (4), and the increasing problem of long-term unemployment, in the social area it is mainly displayed through higher risks of long-term exclusion and recurrent poverty spells.(4) Discussed in detail in European Commission, 2011e: Employment and Social Developments in Europe Review 2011 (ESDE 2011).

19


Chart4a:ChangeinGDPbetween2010and2011andunderlyingcomponents20 15 GDP per hour worked Hours per employed Employment GDP

% change on previous year

10 5 0 -5

-10

EL PT ES IT CY SI IE DK UK NL LU HU BG CZ FR BE MT RO AT FI DE SK SE PL LV LT EE

EU-27 EA-17

US JP

Source: Eurostat, national accounts, DG EMPL calculations. Note: Data on hours worked and productivity missing for BE, LU, MT, RO, UK, US and JP.

Box1:OkunestimationsthelinkbetweenthechangeinunemploymentandGDPgrowthThe issue of jobless growth can also be analysed from the angle of unemployment. An Okun estimation links the change in unemployment to GDP growth (1). In what follows, Okun estimations for the US, the euro area and some Member States were produced for the period 1995q1-2007q4. The residuals of that estimation since 2010q1 are then analysed. Relatively small residuals indicate that growth explains unemployment developments well and in the same way as in the past. On the other hand, residuals that are persistently lower or higher than expected suggest that structural factors have changed the relationship between growth and unemployment in that country. Over the period 1995q1-2007q4, significant Okun estimations were obtained for the US, the euro area, Germany, Spain, France, the Netherlands, Portugal and Sweden (2). Charts 4(b) and 4(c) show the divergent developments in the residuals by country. Unemployment seems to have increased less than expected in Germany and the US. In the case of Germany, it is likely that the Hartz reforms, with their effects on activation and job creation, are an important factor behind this better unemployment development. Structural unemployment has probably declined in Germany. The decline in the US unemployment rate was helped by a fall in the participation rate to the lowest level since 1984. While the common view sees worker discouragement as a main cause for this decline, the participation rate is also subject to a secular trend decline due to ageing. In Spain and Portugal, the shedding of low-productivity labour implies a larger increase in unemployment than expected from the GDP evolution. This shedding is linked to sectoral aspects (focus on construction and manufacturing) and segmentation (temporary jobs not being renewed). Structural unemployment has probably increased in these two countries. Since 2010, the residuals for France and the Netherlands hover around the zero level in a fairly narrow range, suggesting unchanged structural unemployment. The residual for the euro area, by contrast, stood above zero for most of the recent quarters. Moreover, as the Okun estimation for the euro area has a very good fit, the size of the recent residuals are non-negligible, suggesting some rise in the euro areas structural unemployment. In other words, the improvement in Germany is not enough to balance the deterioration in Southern Member States.(1) Okun estimation is generally called Okun's law. The gap version of Okun's law links deviations from potential output to deviations from the natural rate of unemployment. This version is difficult to use in practice as potential output and the natural rate of unemployment are not observable. The basic version, in which the change in the unemployment rate in a given quarter depends on real GDP growth in that same quarter, can be analytically derived from the gap version under the assumptions of a constant natural rate of unemployment and a constant growth rate of potential output. In the estimations presented here, the lagged GDP growth rate was added as explanatory variable, as growth affects the labour market with a lag. The EU, Ireland, Greece and New Member States are not included due to data availability issues. Over the sample period, estimations were not significant for the remaining Member States (including Italy and the United Kingdom).

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Chart4b:ResidualsofOkunestimationssince2010(US,EA,SE)0.9 0.7 0.5 Percentage point 0.3 0.1 -0.1 -0.3 -0.5 -0.7 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 US EA-17 SE

Source: Commission services estimations.

Chart4c:ResidualsofOkunestimationssince2010(selectedeuroareaMemberStates)0.9 0.7 0.5 Percentage point 0.3 0.1 -0.1 -0.3 -0.5 -0.7 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 PT FR ES DE NL

Source: Commission services estimations.

downturn and cannot be relied on as a long-term solution (5). Box 1 complements Chart 4, providing evidence about the inter-relation between unemployment developments and GDP growth. In this context of stagnation or at best slow economic recovery (6), the rising unemployment trend, and its more important longterm and youth components are major challenges. Since mid-2012, more than 25 million Europeans have been unemployed, 10 million of whom had been so()5

Chart5:UnemploymentratesintheEU,USAandJapan, 15-74agegroup,2000Q1-2012Q212 11 % of the active population 10 9 8 7 6 5 4 3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EU-27 EA-17 US JP

Source: Eurostat, EU-LFS, and OECD.

For reference: (1) the serious GDP decline in 2009 (-4.3 %) was driven first by a fall in employment (-1.8 %), then in hours worked per employed (-1.4 %) namely in Germany, Austria and Belgium and also in productivity (-1.3 %); (2) the recovery noted in 2010 (+2.1 %) is mainly explained by a rise in hourly productivity (+2.2 %) and, to a lesser extent, in hours worked per person (+0.4 %), while employment contracted slightly (down 0.5 %). According to the latest European Commission Economic Forecast (European Commission, 2012i), employment in the EU is expected to decline by 0.4 % in 2012 and by 0.2 % in 2013. The projection for this year is for real GDP to contract by 0.3 % in the EU and by 0.4 % in the Euro area. For 2013, growth is forecast at only 0.4 % in the EU and 0.1 % in the Euro area.

for more than 12 months. This contrasts with the United States and Japan where unemployment has been slowly declining. Over the whole of the period 2008-2011, the employed population shrank by 2.0 %, although this percentage is still limited compared to the declines of -4.4 and -4.7 % recorded by the US and Japan respectively. Likewise, in the three years to June 2011, the number of unemployed in the EU rose by 37.3 %,

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as 6.2 million people joined the ranks of the unemployed, compared to 65.2 % in the US (5.6 million people affected). Subsequently, while the unemployment rate has started to decline consistently in the US, dropping by 0.9 pp in the twelve months to June 2012 to 8.2 %, in the EU, after falling somewhat in the year to March 2011 (-0.7 million, i.e. -3.0 %) it began to grow again, by 0.9 pp to 10.4 %. Chart 5 presents developments by quarter since 2000. 21


Chart6:Changesinunemploymentrates(UR)andemploymentrates(ER) from2008to2011inEUMemberStates,EU,EA,JPandUS4 ER 15-64 changes (in percentage points) 2 0 -2 -4 -6 -8 -10

DE LU

MT AT BE JP SE FR IT NL PL RO CZ HU EU-27 EA-17

FI UK

SK US SI

CY PT DK BG EE LV IE

LT

EL

ES

-4

-2

0

2 4 6 Total UR changes (in percentage points)

8

10

12

Source: Eurostat, EU-LFS and DG EMPL calculations.

Chart7:UnemploymentratesintheEU,bygender andforyouth(15-24year-olds),2008Q1-2012Q211 % of active population (total, women, men) Total (lhs) 10 Women (lhs) Men (lhs) Youth (rhs) 9 20 19 8 18 17 16 6 Q1 Q2 Q3 2008 Q4 Q1 Q2 Q3 2009 Q4 Q1 Q2 Q3 2010 Q4 Q1 Q2 Q3 2011 Q4 Q1 Q2 2012 15 23 22 21 % of active population (youth)

7

Source: Eurostat, EU-LFS and DG EMPL calculations.

Looking at the trends in the employment and unemployment rates in EU countries from 2008 to 2011, the effect of the economic slowdown and the persistent uncertainties in the labour markets was very pronounced. The employment rate for 15-64 year-olds, i.e. the working-age population, fell in all but five Member States, while the unemployment rate (among 15-74 year-olds) rose in all but two. The situation in the Baltic States remains worrying despite recent improvements. The situation has worsened significantly in Spain, Greece and Ireland, in terms of both rises in unemployment and contractions in employment. Not surprisingly, looking at the performances of the 27 Member States, there is a negative relationship between those two developments. The statistical correlation is negative (-87 %) to a significant degree. As far as the employment rate for the 15-64 year-olds is concerned, 22

besides Germany and Luxembourg, which recorded rises of respectively 2.4 and 1.2 percentage points from 2008 to 2011, Malta made significant progress too (+2.3 percentage points), Poland showed moderate progress (+0.5 pp) and Austrias employment rate remained unchanged over the same period (see Chart 6). Employment levels in all the other Member States declined, in some cases very significantly (i.e. by more than 5 percentage points), namely in Bulgaria, Ireland, Greece, Spain and Latvia.

11.8 million women), i.e. 2.4 million more than the preceding peak recorded in April 2010 (23.3 million) and 3.1 million (1.7 million men + 1.4 million women) above the latest trough that was seen in March 2011 (22.6 million). At 10.6 %, the EU unemployment rate is 1.2 percentage points higher than in March last year. Female and male unemployment rates are virtually equal (0.1 pp gap only). In the Euro area, the picture is even bleaker, as the unemployment rate has now reached 11.6 %, i.e. 1.7 percentage points higher than in spring 2011. The trend in unemployment is upward in the majority of the Member States and is most worrying for youth, as 22.8 % of active people aged 15 to 24 were unemployed in the EU in September 2012 (23.3 % in the Euro area). Disparities between Member States are at a historical high, with three Member States (Germany, Austria and the Netherlands) recording an unemployment rate for

1.2.2. Some2.5million morepeopleunemployed sincespring2011In May 2012, the number of people unemployed in the EU exceeded the 25 million mark for the first time, at 25.2 million. It then continued to rise, to reach nearly 25.8 million in September 2012 (13.9 million men and


Chart8:Risksofunemploymentfortheyoung,2000,2007and2011inMemberStates5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 2000 2007 2011

Ratio between the unemployment rates of the young and adults

DE LV SK LT DK NL AT IE

SI BG EE EU-27 ES PL PT HU FR MT BE CY CZ FI EL UK IT RO SE LU

Source: European Commission 2012h. Note: Countries are shown in ascending order according to the ratio in 2007.

Chart9:Unemploymentandlong-termunemploymentrates,201125 UR 20 LTUR LTUR for men LTUR for women 15

% of active population

10

5

0

AT

LU

SE

NL

CY

FI

DK

CZ

UK

DE

MT

RO

BE

SI

PL

FR EU-27 IT

HU

PT

BG

EE

LT

LV

IE

EL

ES

SK

Source: Eurostat, EU-LFS.

young people below 10 %, while more than one young person in two wanting to work is unemployed in Greece and Spain (7). Chart 7 presents the developments in unemployment rates by gender and age since the first quarter of 2008 in the EU-27. Although the female unemployment rate was traditionally higher than the male unemployment rate, the trend reversed with the crisis. In the second part of 2009 the EU aggregate unemployment rate for men exceeded that for women, as male-oriented sectors construction, manufacturing industry, etc. - were hit first and hardest by the economic slowdown. But by the end of 2010, services were affected too, pushing female unemployment to higher levels again. Since then both rates have developed in parallel. Earlier this(7) A similar upward trend can be noted in terms of unemployment ratios (see also section 1.2.4). Unemployment ratio (defined as share of young unemployed persons in the whole young population), takes into account a large inactive group mainly in education in that age group and thereby gives more complete picture of the size of the unemployment problem.

year though, while female unemployment growth was slowing somewhat, male unemployment continued to rise rapidly, which explains why it is exceeding female unemployment again. The youth unemployment rate is still more than double the overall unemployment rate (see right-hand side). It rose faster in the first phase of the crisis, tending to stabilise in early 2011 and over recent quarters. However, differences in risks of unemployment for the young (8) among Member States can be only partially explained by the crisis. In 2007, the youth unemployment rate was already three times the adult levels in Belgium, Cyprus, Greece and Finland, while the rate was four times higher in Italy, Luxembourg, Romania, Sweden and the United Kingdom (see Chart 8). The risk of unemployment was higher for young men than for women in all Member States except Latvia, Portugal and Slovenia (in 2007 and 2011) and Lithuania, the Netherlands and Romania (in 2011).(8) Ratio between the unemployment rates of the young and the adults.

1.2.3. Higherlong-term unemployment,especially fortheyoungIn 2011 nearly 10 million unemployed Europeans (accounting for 4.2 % of the active population) had been so for more than 12 months. This is an increase of 3.7 million or 60.8 % in comparison to 2008, while total unemployment rose by less than 40 % in the same period. The countries with the lowest rate of long-term unemployment (less than 2 %) in 2011 were Austria, Luxembourg, the Netherlands, the Nordic countries (Sweden, Finland, Denmark) and Cyprus (see Chart 9). At the other side of the spectrum are the Baltic States, Ireland, Greece, Spain and Slovakia, with 7 % or more of the active population being unemployed for at least one year. Longterm unemployment is analysed in detail in Chapter 1. In 2011, 70 % of all long-term unemployed in the EU-27 were concentrated in the 6 largest Member States. Spain, a country that represents less than 10 % of the EU labour force, accounted for more than 23


Table1:Long-termunemployment byeducationallevel,20-29,EU-27%ofallLTU(20-29) 2008 2011 1. Low 41.4 40.0 2. Medium 48.4 46.1 3. High 9.9 13.7 Total 100.0 100.0 Source: Eurostat, EU-LFS, DG EMPL calculations. %ofactivepopulation (20-29) 2008 6.3 2.7 1.2 3.0 2011 12.0 4.8 2.7 5.6 Growthin numberof LTU(%) 2008-2011 72.8 69.7 145.8 78.5

during those three years in Lithuania (+3.6 percentage points), Malta (+2.7 percentage points), Poland (+2.3 percentage points) and even Germany (+1.3 percentage points), while significant decreases were recorded in Ireland (-2.6 percentage points), Bulgaria (-1.8 percentage points) and Slovenia (-1.5 percentage points). The highest participation rates in 2011 were close to 80 % (80.2 % in Sweden and 79.3 % in Denmark. When comparing the development of unemployment and inactivity as a percentage of the EU population, it can be observed that, while the youth unemployment ratio rose from 6.9 % to 9.1 % between 2008 and 2011, the inactivity rate also rose quite significantly from 55.7 % to 57.3 % (up 1.6 percentage points), which mirrors, among other things, an increasing trend towards prolonging studies. On the other hand inactivity did not progress significantly among adults aged 25 and above, edging down by 0.4 pp, to 22.8 %. Chart 10 presents the specific situation in each Member State in 2011. Taking these two dimensions into account, Greece clearly tops the ranking for the young, given the continuous increase in youth unemployment over the past 2.5 years, at 83.8 % (70.8 % inactivity rate + 13.0 % unemployment ratio), while Malta is in first place for adults, at 39.3 % (36.0 % + 3.3 %). The Netherlands are at the bottom of the list for young people, at 36.4 % (31.2 % + 5.2 %), and Sweden is at the bottom for adults, with only 17.3 % (12.7 % + 4.6 %). Considering the youth unemployment ratio alone, Spain is by far the country facing the highest percentage of young people being unemployed, at 19 %. The inactivity rate for young people in the EU increased modestly over the last three years (by 1.6 percentage points up to 57.3 % in 2011), but the rate and change diverged markedly among Member States. The inactivity rate augmented significantly in Ireland and to a lesser degree in Spain. This is not necessarily bad, provided

21 % of the EU total (more than 2 million long-term unemployed). Moreover, Spain contributed most to the total increase in the number of long-term unemployed in the EU-27 over 2008-2011 (1.6 million out of 3.7 million). Germany represents 12 % of the long-term unemployed, compared to an overall share of close to 18 % of the EU labour force (same for UK with 8.5 and 13 % respectively). Other Member States representing a much higher share in the long-term unemployed figures than their overall share of the EU labour force are: Greece, Portugal, Slovakia, Hungary, Bulgaria and Ireland. By 2011, around 55 % of the long-term unemployed were men and 45 % were women, although, given the different participation rates, long-term unemployment rates are equal (in 2011, it was 4.1 % for women and 4.2 % for men, see gaps by Member State on Chart 9). Since 2008, the gender distribution has shifted, to the detriment of men, partly as a result of the job losses after the construction boom in Spain and the Baltic States. On the other hand, the analysis of transitions in and out of unemployment reveals that long-term unemployment tends to be more frequently followed by inactivity in the case of women. The long-term unemployed have fewer chances to return to employment and therefore it is better to prevent people staying in unemployment if they are to return to a job. While only one in five of the very short-term unemployed (12 months) people remains so after a year. Among the short-term unemployed (

employment and social developments in europe 2012

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