Youth unemployment in Europe: What employers and policy makers can do

eichhorst

Werner Eichhorst

Youth unemployment has become one of the most pressing and highly discussed issues in Europe in the aftermath of the 2008 recession. However, there is major divergence in youth unemployment rates across European countries with massive increases in Spain, Greece, Italy, Portugal and France. Some Central and Eastern European countries also report unemployment rates of more than one-third, while the situation is mostly stable in Germany, the Netherlands, Austria or Denmark.

However, youth unemployment rates are not the best indicators available, as the active share of the youth labor force varies greatly due to enrollment in upper secondary and tertiary education. Measuring youth exclusion via the NEET rates, i.e. the share of young people not in employment, education or training, shows lower values and more contained increases, but the cross-country divergence is also remarkable.

Cross-national differences highlight the crucial interaction of a macroeconomic shock with the institutional arrangement in place, and in fact youth (un)employment is one of the areas where institutions make a real difference. The recent crisis has once again highlighted the structural problems that already existed in better times. In general, there is a particular vulnerability at the early stage of labor market careers that is typical for young people in many countries. But institutions are crucial in structuring the transition from school or education to work. This holds for:

  • the regulation of employment protection (fixed-term vs. permanent contracts) that tends to create dual labor markets with very limited possibilities of a transition to stable jobs in many Mediterranean countries,
  • minimum wages which can be particularly harmful for young people without particular skills or work experience,
  • vocational training, where dual vocational training and apprenticeships appear superior to general education and purely school-based vocational education as the former combine structured learning with early work experience,
  • active labor market policies to deal with the prevention of (long-term) unemployment such as preparatory training, alternative curricula and subsidized forms of employment that are more or less effective in promoting a sustainable access to the labor market.

Countries with high or rising youth unemployment and NEET rates often lack institutional preconditions for a smooth transition from school to work. Youth-friendly labor markets are either flexible (with a low regulatory gap between permanent and temporary jobs, and moderate minimum wages) and/or they have strong vocational training that the raises attractiveness of labor market entrants to employers due to skills acquisition and work experience combined.

neet-rates-eu

Recent initiatives in Europe to promote reforms in that direction are somewhat limited, however, because of the difficulties in implementing vocational training systems. The establishment of (dual) vocational training is one of the most difficult institutional innovations as it requires cooperation between government (training schedules, funding of vocational schools), social partners (committed to promoting vocational training and co-management of the system, including pay agreements), individual employers (hiring apprentices, providing work experience and training by qualified trainers), and, last but not least, young people and their families (accepting vocational training as a reasonable alternative to academic education). Where they exist at a relevant scale, these systems have major historical and societal foundations that are hard to transplant. However, existing regional or sectoral networks of employers could establish pragmatic versions of structured learning and joint schooling when there are shared interests and a critical mass of firms supporting it as well as backing by regional governments. Experiences with pilot projects, regional or sectoral clusters of employers or traditional apprenticeships can be instructive in this respect.

The main challenge is to make on-the-job learning more systematic and to bring school-based vocational training or general education closer to labor market needs. To achieve this, employer participation in more effective vocational training is crucial. Hence, ‘simplified’ versions of dual VET can work, bringing training closer to employers’ demand and real work experience. For example, if a number of employers in some region or sector are able to identify a joint interest in dual VET as a way to promote the productivity of their workforce, it could be realistic to start with a dual VET cluster, ideally with the support from the government who would need to take a supporting role with regard to the vocational schooling components. A basic agreement regarding funding, management and curricula could be a good starting point. Employers in countries with high youth unemployment do not only have a social responsibility, but they have to see that deficits in skill formation with young people will also harm their business performance in the future, particularly in a situation of demographic aging.

A lack of skill formation will certainly undermine future attempts at reviving economic activity. In the short run, and at the individual level, mobility to regions or countries with tight labor markets in order to find a job or an apprenticeship can be a beneficial response to avoid unemployment on the one hand and labor shortages on the other. But employers in countries with high unemployment are well advised to create better opportunities for young people as a means to ensure their own competitiveness. It could also make sense to collaborate across borders to ensure proper vocational training when it takes long to establish such capacities.

It must also be noted that youth unemployment cannot be overcome by targeted publicly sponsored active labor market policies, such as youth guarantees promoted within the EU. These measures require good targeting and well-established implementation capacities. This is particularly difficult in countries or regions with high youth unemployment. Rather, youth employment benefits from macroeconomic improvement and labor market institutions that are conducive to employment growth and labor mobility. Improving VET systems remains relevant even if structural and institutional changes need to interact with attempts to increase certain types of job opportunities.

But other elements maybe equally important in order to create labor market conditions that are more conducive to a smoother transition from school to work. In this context, along with the strengthening of vocational training, the highly dualized structure of labor markets observed in some countries such as Italy, Spain or France needs to be addressed. Where there is a strong divide between employment protection for permanent contracts on the one hand and the regulation of temporary contracts or self-employment on the other, young people typically get stuck in chains of fixed-term employment spells or other forms of flexible employment as employers are very reluctant to hire youths on a permanent basis, especially in the absence of vocational training.

Reducing the rigidity of dismissal protection while increasing employment security for labor market entrants according to tenure could be a solution, and practical work experience and training could then further ease the successful integration of young people into stable jobs. In this context, employers, while exposed to strong incentives to hire young people on a temporary basis, should definitely be aware of the long-term consequences of having a large segment of cheap and flexible labor force lacking specific skills. This might undermine more quality-oriented business models. Hence, stronger investment in skills via vocational training based on some cooperation between employers (and with other actors) can also help make permanent employment more attractive from the employers’ point of view.

This article also appeared in the World Commerce Review, September 2014.

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