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Brussels, 25 November 2010

Employment in Europe 2010: Frequently asked questions

The Employment in Europe report has become one of the main tools of the European Commission in supporting Member States in the analysis, formulation and implementation of their employment policies. As in previous years, the Employment in Europe report 2010 addresses topics that are high on the European Union's employment policy agenda. It gives a comprehensive overview of the employment situation in the EU and of the labour market measures taken by the Member States. This year it analyses the effects of market segmentation between "temporary" and "permanent" contract holders (insiders and outsiders), particularly in relation to young people.

Given that the economic recovery has been underway for a year, why according to Employment in Europe findings has employment not picked up?

Although it has now been more than a year since the EU economy started to come out slowly from deep recession, the recovery is proving to be fragile and it may take some time yet before it is robust enough to trigger a clear upswing in the labour market. Nevertheless, the labour market is now showing consistent signs of stabilisation, and we are seeing the first signs of recovery in some Member States. Unemployment in the EU is broadly stable, while in some Member States it has now started to fall. Furthermore, companies are becoming more optimistic about employment prospects and consumers' unemployment expectations are easing.

On a general level, it is to be expected that job creation for the EU as a whole would be subdued during the initial stages of the recovery. This reflects not only the usual lag with which the labour market reacts to a change in economic activity, but also the fact that there has been substantial labour hoarding during the crisis alongside reductions in working time, resulting in widespread under-employment. The initial adjustment to the rise in economic activity has so far mainly come from a reversal of the widespread reductions in working hours rather than through an expansion in employment.

Why have job losses been so much worse in some Member States than in others?

Countries such as the Baltic States, Ireland and above all Spain have experienced comparatively significant job losses as a consequence of the economic crisis. In contrast, the reaction has been relatively subdued in countries such as Austria, Belgium, Italy, and above all Germany.

There are several reasons for the comparatively stronger effect on employment in certain Member States. One key factor is the structure of the economy and the importance of specific sectors most affected by the crisis. For example, the construction sector – one of the sectors hardest hit by the crisis – accounts for an especially high share of national employment in countries such as Ireland and Spain. In this context, to a certain extent the variation across countries reflects productivity levels in the sectors which have been hit hardest. For example, in Germany the manufacturing sector was badly hit by plummeting exports but high productivity levels in this sector led to a comparatively small fall in employment relative to that in GDP, while in Spain the large contraction in the relatively low-productivity construction sector has led to a large fall in employment relative to the decline in GDP.

Another reason is the widespread use of internal flexibility in countries such as Austria, Belgium and Germany as opposed to the relatively limited use of such arrangements in the Baltic States, Ireland and Spain. Overall, the more moderate employment impact in the former countries reflects a greater willingness in these Member States to adjust to falls in demand by reducing hours worked and productivity rather than the number of workers in employment.

Furthermore, high shares of workers in temporary contracts, who can be relatively easily dismissed, also in part explain the bigger effect on employment in certain Member States such as Spain. Indeed, analysis in the report indicates that extensive use of temporary employment contracts in countries with highly regulated permanent contracts is likely to amplify the volatility of employment to economic shocks.

Who has suffered most from the crisis and why?

Certain groups have been affected much more than others by a fall in employment during the recent recession. The groups most affected to date have been men, young people, the low-skilled and non-EU migrants and, above all, those in temporary employment who can be relatively easily dismissed.

The different gender impact of the recession on employment strongly reflects the different sectoral concentrations of male and female employment. To date, the economic downturn has had a much greater impact on male-oriented sectors, such as the construction and manufacturing sectors. Conversely, women more often work in sectors so far shielded from the crisis — such as the public sector, health, education and the social sector. Nevertheless, in the future, female employment may give more cause for concern as those are precisely the sectors that will be more affected by upcoming fiscal tightening.

In terms of age, young people (those aged 15–24) have been the most affected by job losses, with a decline of 11.4% since the crisis began. This reflects not only the high share of temporary employment among young people but also their disproportionate concentration in certain cyclically-sensitive industries and the fact that they are particularly vulnerable as they have to make the most frequent transitions.

In terms of skill levels, the crisis has affected the traditionally most vulnerable low-skilled most severely, highlighting the need for an effective new skills agenda. Among different nationality groups, the particularly strong relative decline in non-EU migrants' employment in part reflects the fact that they are over-represented in sectors such as the hard-hit construction sector, but also the high share of migrants employed in elementary occupations, and as craft and trades workers – i.e. in the low-skilled occupations which have been most at risk in the downturn.

To what extent did short time working arrangements contribute to the stabilisation of employment during the crisis?

It is estimated that on average the fall in employment growth over the 2008-2009 recession has been counterbalanced by 0.7 percentage points (on an annual basis) in the Member States that have implemented short-time working arrangements (STWA). Nevertheless, these arrangements also pose the risk that enterprises become overstaffed, necessary restructuring is delayed, workers lose the incentive to upgrade their skills, deadweight losses accumulate, and funds get diverted from productive purposes such as training. In order to limit these risks a STWA criteria should be subject to regular review, and employees should be given appropriate training to enhance their employability. All in all, further analysis is needed in order to determine whether the employment initially saved by STWA will persist after the crisis.

How do we phase-out the crisis-related labour market measures?

Some labour market measures will have to be phased out gradually once the recovery is secured, such as short-time working arrangements, but measures that have a positive impact on the structural working of the labour market, should be maintained and reinforced, such as increases in training, activation and other flexicurity policies that facilitate job reallocation and workers’ re-skilling.

Too early a withdrawal may undermine confidence and thus depress aggregate demand with consequent knock-on effects on companies and employment. Too late a withdrawal on the other hand, may delay the necessary structural adjustments, cause significant hysteresis effects in the labour market, and contribute a significant additional burden to the public finances.

Do we need training in times of an economic downturn?

Upgrading skills is not only required to promote smart, sustainable and inclusive long-term growth, but also to increase the speed and intensity of the economic recovery. For instance, a green stimulus package will be largely ineffective without a sufficient supply of green-collar professionals with adequate and appropriate skills for green jobs.

In some Member States the crisis has acted as a catalyst for improving the flexibility of training services by decentralising administration, shortening the waiting period for training, subsidising more training places and intensifying the scope of training for those at risk of being laid off, young and older workers, and the long-term unemployed.

In several Member States new STWA measures were introduced, or existing schemes were modified, to encourage the combination of temporary short-time work with training. Nevertheless, relatively few short-time workers participate in training when it is not compulsory.

What does labour market segmentation mean and what are its effects?

A labour market is said to be segmented when two categories of workers coexist: i) a group of stable workers with permanent contracts and; ii) another with temporary contracts with limited opportunities to move into more stable or better paid jobs.

This phenomenon has to a large extent been created and/or worsened by two-tier reforms of employment protection legislation introduced in several Member States in recent decades. Those reforms have substantially deregulated temporary contracts, while keeping existing rules on permanent contracts largely unchanged. As a result, the proportion of new recruitments made on temporary contracts has dramatically increased, leading to a rising share of temporary work over total employment, especially affecting younger and un-skilled workers.

Although there are clear employment gains associated with these reforms, labour market segmentation also generates a number of undesirable side-effects. The legal asymmetry (between the two types of contracts) reduces firms' incentives to transform temporary into permanent contracts (at the expiry date of the former), which can lead to prolonged situations of precarious employment for many young workers (well into their thirties in those Member States which are particularly affected), coupled with limited incentives for in-work effort and pursuing training activities throughout the life-cycle. The latter two effects tend to depress the growth rate of productivity. Temporary workers tend to receive lower wages and are given fewer training opportunities than permanent workers with similar qualifications and job descriptions. Finally, as shown by the 2008-2009 recession, in segmented labour markets, the brunt of labour market adjustment falls predominantly onto temporary/young workers.

Figures and graphics available in PDF and WORD PROCESSED

Source: Eurostat

Figures and graphics available in PDF and WORD PROCESSED

Source: EU SILC, using the longitudinal component of the anonymised microdata set. DG EMPL calculations.

Notes: 2006-2007 averages for CY, CZ, HU, LT, LV, PL, SE, SI, SK and UK; 2004-2007 average for LU; 2005-2006 average for IE.

Odd-ratios are calculated as the ratio of temporary-to-permanent to temporary-to-temporary transitions.

The report advocates the extending the use of open-ended contractual arrangements? How can this help to address the problem of segmentation?

Extending the use of open-ended contractual arrangements with a sufficiently long probation period and a gradual increase of protection rights, access to training, life-long learning and career guidance for all employees could reduce the existing divisions between those holding temporary and permanent contracts.

Temporary contracts should remain possible although they should be limited to genuinely temporary tasks. Thanks to the probation and gradual increase of protection rights, the open ended contractual arrangement could become a mode of recruitment so that the burden of flexibility would no longer fall disproportionately on a segment of temporary workers.

Nonetheless, extending the use of open-ended contractual arrangements alone cannot solve all problems related to segmentation, and a comprehensive flexicurity package, tailored to national specificities and preferences would be needed.

Why is the situation of young workers (resulting from the 2008-2009 recession) particularly worrying?

Young people are particularly vulnerable at the moment of moving from school to work, especially the least qualified who have the greatest difficulties in getting a foothold in the labour market. Econometric estimates show that tertiary educated individuals are at least twice as likely to experience good transitions (e.g. from joblessness to employment or from temporary to permanent employment) than individuals with only primary education. The share of NEET (Not in Education, Employment or Training) youth provides a good measure of employment integration of young labour market entrants and varies significantly within the EU from as low as about 4% in Denmark and the Netherlands to as high as 16-20% in Italy, Cyprus and Bulgaria.

Figures and graphics available in PDF and WORD PROCESSED

Young people are more vulnerable to economic fluctuations than older people. In fact, the sensitivity to the cycle of employment rates for young people is higher than for prime-age adults.

Unemployment spells at early ages have negative and lasting effects on future employment and wage prospects. Moreover, given that temporary workers tend to suffer the brunt of the adjustment in downturns, together with the high incidence rate of temporary work for younger workers, it is not surprising to see that young workers were especially affected by rises in aggregate unemployment between 2007 and 2009.

Figures and graphics available in PDF and WORD PROCESSED

Evidence from a number of countries suggests that young people with temporary jobs (rather than permanent ones) tend to have a higher incidence of co‑residence with their parents, which tends to delay emancipation, household formation and childbearing decisions.

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