Saving Europe’s Lost Generation of Workers
MILAN – More and more European young people are beginning to think just like Paul Nizan’s character Antoine Bloyé, who said, “When I was twenty, I would not call that the best time in my life.” The global financial crisis has hit them hard. The slow recovery from the recession may be even worse. Young people who entered the labor market through the backdoor of temporary contracts are now the first to be forced out as their contracts expire.
For more than a decade, temporary employment has been the engine of job creation in Europe. Now, unsurprisingly, these temporary workers form the major pool where jobs are being destroyed.
Since the beginning of the recession, in the third quarter of 2008, the European Union has lost five million jobs among those under 40 years old. Almost 90 per cent of total job losses have been concentrated in this age bracket. Those who are now leaving school and entering the job market run the risk of becoming a lost generation, like their Japanese cohorts who began their working lives at the beginning of Japan’s downturn in the 1990’s.
Due to high economic uncertainty, firms are offering only fixed-term contracts. That is exactly what happened in Sweden during its financial crisis in the 1990’s, when the share of temporary workers in total employment increased from 10% to 16%, despite massive layoffs from fixed-term contracts.
Such contracts involve less investment in on-the-job training, as temporary workers offer a sort of buffer to employers. Temporary workers also do not have access to bank loans and mortgages in many countries. Thus, the credit crunch is becoming a “youth crunch,” as highlighted by a recent survey carried out by the British Council in several European countries. On top of all this, rapidly growing public debt implies that new entrants to the labor market will sooner or later face a mountain of taxes.
In countries like Germany, Italy, and the Netherlands, the rise in unemployment has been contained so far by massive use of short-time working schemes, which freeze workers with permanent contracts into their current jobs. This strategy will pay off only if a sustained economic recovery does not require a significant reallocation of labor. Recessions are typically times of reallocation, where the true comparative advantages of a country unfold. What is certain is that freezing workers in their current jobs under today’s conditions makes entering the labor market even more difficult for youngsters.
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Aging countries seeking to recover the ground lost in the current recession quickly cannot afford to lose entire generations. They need to define as soon as possible a labor-market entry strategy that encourages employers not only to hire young workers, but also to train them. That requires contracts that do not come with a fixed expiry date.
Short-term contracts become a self-fulfilling prophecy, insofar as training is not provided on the job, and hence such workers are less productive and more vulnerable to shocks. Investment in the human capital of new cohorts (which is largely accumulated on the job) would benefit employers by increasing productivity.
An entry strategy for young workers based on completing the reforms of employment protection carried out in most OECD countries in the last 20 years could offer them a clear “tenure track.” Currently, there are no long-term prospects after the expiration of a temporary contract. Governments could promote entry into the permanent labor market in stages by introducing graded employment protection and so avoiding the formation of a long-term dual market.
Under this scheme, job-security provisions, mainly in the form of mandated severance payments, should increase steadily as workers acquire seniority. This would not discourage new hires under open-ended contracts, as employers would continue to benefit from substantial flexibility at the start of a worker’s employment, when the quality of new hires is being assessed.
Cohorts entering the labor market during recessions typically ask for far more protection and state intervention during their entire working life than cohorts that enter the labor market in normal times. Neglecting the problem of entry into the labor market could backfire by increasing pressure for more public expenditure just when governments should start reducing the huge public debts accumulated during the recession. A reform offering a “tenure track” imposes no burden on public finances, and could avoid further distortions and highly costly measures later on.
Far too many post-mortems of the economic crisis are now being written. They are misleading and dangerous, not only because the crisis in the labor market is not yet over, but also because they contribute to complacency, thereby reducing pressure for reform. The current recession will be truly over only when new cohorts of workers are able to enter the labor market quickly and through the main door.