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.

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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.