Youth unemployment: It’s growth, stupid!

European leaders are rightly concerned about the record level of youth unemployment in the EU. According to the latest Eurostat figures, the rate of unemployment among those under the age of 25 reached over 23 per cent in the EU and over 24 per cent in the eurozone in April 2013. Four countries (Greece, Italy, Portugal and Spain) now have youth unemployment rates above 40 per cent, of which two (Greece and Spain) have rates above 50 per cent. The alarming situation has prompted European Council President Van Rompuy to place the issue at the top of the agenda at today’s EU summit. The main outcome will be implementation of a €6 billion scheme giving “young people who are not in education, employment or training back to work or into education or training within four months”.

Unfortunately simply targeting measures at young people is unlikely to make much difference to the problem. This is because movements in youth unemployment rates tend to be more correlated with changes in total unemployment rates and growth than with factors specific to youth unemployment, such as training or schooling. Actually youth unemployment rates, not only in the EU but also in Japan and the United States, are typically about twice as high as total unemployment rates, a proportion that is fairly constant across economic cycles.

True, within the EU, the relative incidence of youth unemployment (measured as the ratio of youth to total unemployment rates) varies a great deal between countries. For instance in April 2013, the incidence ranged between a low of 1.4 in Germany and a high of 3.4 in Italy. But what is remarkable is that the incidence of youth unemployment has remained extraordinarily stable over the economic cycle. In nearly all EU countries, it was almost the same in 2007, before the start of the crisis, as it is in 2013.

What this means is that the sharp rise in youth unemployment rates since 2007 almost exactly parallels the increase in total unemployment rates, and is not caused by developments that affect specifically young people, but rather by deficient growth. Even the staggering increase in youth unemployment rates in Greece, Italy, Portugal and Spain from an average of 20 to 50 per cent between 2007 and April 2013 occurred with no change in the relative incidence of youth unemployment in these countries (it even decreased a bit in Greece). Rather it accompanied the surge in the overall unemployment rates there from an average of 8 to 21 per cent. Needless to say, had Greece, Italy, Portugal and Spain succeeded in reforming their labour market policies along the lines of Germany’s vocational system prior to the crisis (though clearly a big endeavour since the German system has roots going back to 1888), their youth unemployment rates would have increased far less than they did.       

Given that his country ranks first among all EU members in terms youth unemployment incidence, the new Italian Prime Minister, Enrico Letta, is right in wanting to have soon a national youth unemployment action plan and in asking that it be backed by EU resources. But for the other EU countries, especially those with youth unemployment rates above 40 per cent, and even for Italy, the priority to cut youth (and adult) unemployment should be growth.  

Six years into the crisis, the EU sadly still lacks a proper growth strategy. The aim of such strategy should be twofold: to close the output gap and reduce unemployment as quickly as possible and to gradually boost potential output growth. To achieve this twin goal, Europe needs a two-handed approach consisting of both macroeconomic and structural measures. The measures should include: the rapid implementation of the banking union and the cleaning up of bank balance sheets to solve the credit crunch in EU countries; the creation of a European investment guarantee fund (as suggested by Philippe Maystadt, European Policy Centre chairman) to help channel foreign investment to crisis countries; labour market and social policy reforms aimed at promoting greater economic flexibility and better social protection necessary to foster growth; the removal of all barriers that still fragment and prevent entry to the single market, Europe’s most powerful engine for growth; and for the aggregate eurozone, a less restrictive fiscal policy and a more expansionary monetary policy. The right sequencing should be the banking union and macroeconomic policies first, and the other measures shortly thereafter. If Europe is serious about preventing a lost decade for its citizens and a lost generation of jobless youth, it must act soon with far more potent measures than simply a youth guarantee scheme.