Saturday, November 29, 2014

Europe’s Fast Track to Youth Employment

BRUSSELS – Italy’s new prime minister, Matteo Renzi, wants to attack high youth unemployment by cutting taxes on labor. There is much to be said for that approach – not only in Italy, but throughout Europe, where direct and indirect taxation on employers and jobs accounts for half of the total tax take, while taxes on capital comprise only a fifth. But tax reform will be a long and difficult slog, and there are much faster ways of getting young people into the workforce.

Thirty years ago, I took a long, hard look at the unemployment scourge then hitting Europe in a book called World Out of Work. The scourge is back, and it seems more intractable than ever. Yet there are three shortcuts to ending the jobs crisis in Europe, even if few EU governments seem interested in them.

The first shortcut is obvious: underwrite young entrepreneurs with unprecedentedly generous bank guarantees and tax holidays. The second is the much less obvious policy of raising female employment through cheap or even free childcare arrangements. And the third is the wholly counter-intuitive idea of making youth unemployment a great deal more manageable simply by re-calculating the statistics (that sounds phony, I know, but bear with me).

Even with respect to the obvious proposition of encouraging more people, and especially the young, to start their own business, governments have adopted the wrong approach. Yes, there are myriad schemes for subsidizing start-up companies and supplying centralized services and expertise in special business parks. But the first obstacle entrepreneurs usually encounter is the banks.

Banks hate risk, and start-up businesses are very risky. Europe’s business culture, unlike that of the United States, stigmatizes failure. American tycoons often have a string of bankruptcies before hitting the jackpot, but in Europe banks never give second chances – and are extremely cautious about giving a first.

That is where government comes in, guaranteeing the banks’ financing of new companies. In austerity-bound Europe, where banks are nursing their credit business to re-build their own balance sheets, underwriting entrepreneurial initiatives would kick-start growth.

A good many of those start-ups will fail. But so what? The economic activity generated just by their launch would generate new tax revenues that more than cover the cost to the public purse.

The key to EU governments’ underwriting of entrepreneurs is simplicity. The essence of bureaucracy is complexity, which is the greatest barrier of all to start-ups. Benefiting from support programs must be made easier, even if common-sense rules are more vulnerable to abuse than red tape. Ease of access is essential, as are tax holidays spanning several years (the cost of which will be offset by a fall in bankruptcies).

Politicians and journalists often suggest that people compete for jobs, the implication being that bringing more women into Europe’s workforce would deny jobs to men. That is not true, of course: economists deride the idea that there is a given number of jobs to be divided up as the “lump of labor fallacy.” We need as many people working as possible, generating economic activity and paying taxes.

The value of that is illustrated by the US, where McKinsey analysts estimate that the entry of many more women into the labor market since the 1970’s has boosted the American economy by 25%. In northern Europe, and especially Scandinavia, upwards of 70% of women work, compared to less than half in southern Europe. One major inhibiting factor, the high cost of preschool and childcare, could easily be addressed by governments.

Now for the statistical shortcut. The headline totals for youth unemployment (those under 24 years old) – around 55% in Greece and Spain, roughly 40% in Italy, and 30% in Ireland – are so daunting that they discourage policy initiatives. Yet they are skewed by lumping the young in with older people. When the number of jobless young people is considered as a ratio of the youth population, the youth unemployment rate falls to 19% in Spain, 13% in Greece, and 12% and 8% in Ireland and Italy, respectively. That is still not good enough, but these figures make training and job creation schemes realistic instead of hopeless.

When looking at Europe’s unemployment problems, it helps to remember that the greatest long-term challenge is not a lack of jobs but the worsening labor shortage sapping EU countries’ economic vitality. Growth is tightly linked to changes in the labor market. While the US is blessed by a growing population (set to rise from 300 million to 400 million by mid-century), the EU is cursed with demographic decline (to 450 million by mid-century, from 500 million now).

Even if Europeans were to awake to the need for immigrants and accept 100 million of them by 2050, the labor market would not increase in size. And aging will have cut the ratio of pensioners to workers. Today, there are four workers for every pensioner; by midcentury, there will be only two. With no time to lose, Europe cannot afford to miss its shortcuts to employment growth.

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    1. CommentedJohann Savalle

      In a word, I really like the article!

      Now, to go in the sense of Jason Gower, one post before, I believe there is a deep cultural problem in Europe, which is a strong barrier to entrepreneurship.
      Too much focus on local and national news, not enough opening to the world, and or mutual understanding of people across countries.
      Innovation and opportunities cannot be only local, we need to empower young people with a global vision of the world they live in, if we want to see things improve.
      Which is why, I think a forth point to be added to your article, would be a solid educational program to provide people the culture they lack in order to be able to work together in Europe.

    2. CommentedJason Gower

      This article focuses on youth employment and rightfully so as this is a major problem that has the potential to destroy the career prospects of these young people before they even get started.

      However, I would like to highlight the idea of entrepreneurship as a growth engine for Europe in general. The problem is, of course, that you can't just flip a switch and tell these young people to go create. There has to be a culture of entrepreneurship and competitiveness that motivates people (young and old) to innovate and create, with a prospect for success that outweighs the risk of failure (monetary or otherwise). This culture and these institutions must be developed in order for innovation and entrepreneurialism to have the impact that the author suggests.

      While there is room to criticize the downside of the US' extreme brand of capitalism, it is fueled by an entrepreneurial culture and competitiveness that exists at all levels: from early childhood academic and athletic competition, to competitive university admissions processes and eventually work environments, right or wrong, kids are taught to value winning. Add to that the entrepreneurial success stories that are at the core of American history and this culture continues to fuel itself to this day. As mentioned, the downsides of this culture are open to criticism but it is what it is and is difficult to replicate through legislation and subsidies.

    3. CommentedJoshua Ioji Konov

      The risk should be lower if a longer term market balance is to be succeeded, well the risk for SME comes from the lack of business laws that could marginalize the Large Transnationals' advantage....

    4. CommentedGerry Hofman

      A good article of someone with bright, new ideas to solve an old problem. While to some visionaries these ideas may seem like old hat, finding a politician to back them will already be a hard task. Young people must be encouraged in every possible way to develop their ideas and initiatives. People create work by matching a perceived demand with a novel solution or by producing something entirely new. People thrive when they can apply themselves to the real world, and wither away when denied this opportunity.
      A culture of encouragement may finally lift Europe up to the level of the US, where initiative and innovation are widely admired qualities. Perhaps one day a utopia will be handed to all of us, but until that day we should teach our kids to go out and fight for a place in this world.

    5. CommentedZsolt Hermann

      I do not think we can "tackle" unemployment, and bring back the time when most people worked on something in production, as it used to be.
      The most famous example of 100% employment used to be in the Communistic countries where on paper everybody had a job and salary, although most did nothing useful, and the salary was just enough to get by.

      There are two main reasons why unemployment will not only remain but will reach almost the whole of humanity:

      1. Similarly to Communistic countries even today most, around 90% of people are working on producing obsolete things. The reason it is not so obvious today is that the refined and brainwashing marketing also forces people to consume, keep buying those obsolete things to produce profit for a small minority.
      The problem is that this excessive, artificial and many times harmful over-production over-consumption has already exhausted the human resources and the system's resources, social inequality, debt burden is already uncontrollable and unemployment is rising.

      2. Even now we have the necessary machinery to replace humans in almost any production work, making human workforce unnecessary. As the artificial and thus unsustainable global economy continues collapsing this "robot breakthrough" becomes meaningless, but still at the moment it also contributes to the big picture.

      Since after the full collapse of our present unnatural system we will have no other option but to return to a necessity and available means based lifestyle, where 5-10% of the population can produce everything people need for a modern, healthy, comfortable human lifestyle in the 21st century and beyond, we need to figure out what to do with the billions of people whose work is not required.

      We could organize the necessary production work in a way that most people work 2-3 hours a day, but the rest of the time would be devoted to the most important human activity we mostly forgot: to build and sustain positive interconnections in between people, to rebuild the family, the small community and then to build increasing, mutually interconnected circles around it to adapt to the globally interconnected human network we evolved into.

      Of course today we have no idea how to do this since our education and our whole life is concentrated on the consumer life, the conveyor belt we step on as soon as we wake up and go to bed from it.
      Thus the first step is a global, integral education program for youth and adults alike in order to help people understand the global system we exist in, our own nature and how this nature can be adapted to our existential conditions.

      When this new human system starts to emerge from the dust of our collapsing present system we will understand that the negative connotations when saying "crisis", "unemployment" can actually be turned positive, we are in an unprecedented revolution, we are liberated from the artificial and self-destructive bubble we have been building blindly.
      A new, totally free and happy human being, existing effortlessly, emerges in the mutually supportive and complementing human environment that is in harmony within itself and with the surrounding natural system.

    6. CommentedTom Walker

      So people don't compete for jobs, eh? What a surprise! What a crock. People DO compete for jobs. There doesn't have to be a "given number of jobs to be divided up" for people to have to compete for jobs.

    7. CommentedRalph Musgrave

      Given high youth unemployment, I’m baffled as to where the logic is in subsidising just ONE FORM of youth employment: young entrepreneurs. Why not subsidise ALL FORMS of youth employment? That (roughly speaking) is what “Jobs Growth for Wales” does, and it seems to be successful. See: