Latest EU long-term unemployment proposal – nary a job in sight!

Last week (September 17, 2015), the European Commission announced – Long-term unemployment: Europe takes action to help 12 million long-term unemployed get back to work. The press release summarised the latest proposal from the European Commission – On the integration of the long-term unemployed into the labour market – which outlines a series of initiatives that aim to “to better help long-term unemployed return to work”. I studied the proposal in detail and came to a stark conclusion – there is nary a job in sight!

The starting point is that long-term unemployment in the EU Member States remains high some 7 years into the crisis.

The EU say that:

Long-term unemployment (unemployment lasting more than a year) doubled since 2007 and accounts for half of total unemployment: 12.1 million people, i.e. 5% of the active EU population, 62% of whom have been out of work for at least two consecutive years in 2014. At EU level, long-term unemployment remained at very high levels during 2013 and 2014.

At the start of the crisis (March-quarter 2008), long-term unemployment was 41 per cent of total unemployment in the Eurozone (19 nations). As the labour markets contracted through 2008, that proportion actually fell to 32.8 per cent of total unemployment by the March-quarter 2009.

That is a normal dynamic at the outset of a sharp crisis, where thousands of newly-laid off workers or school leavers who cannot find work flood into the unemployment pool and temporarily alter the balance between the flows across the unemployment duration categories.

So initially, the proportion of long-term unemployed in total unemployment (PLTU) falls and that signals a worsening crisis. Eventually, as the rate of entry in the unemployment pool ebbs those stuck in the pool due to poor employment growth steadily work their way through the duration categories and more cross the 12 months threshold into long-term unemployment.

Please read my blog – Long-term unemployment behaviour reflects austerity bias in Eurozone – for more discussion on this point.

In the March-quarter 2015, the PLTU had risen to 51.2 per cent but had declined marginally over the 12 months to March 2015.

The consequences of this sort of labour market dislocation are obvious. The EU proposal notes that:

Long-term unemployment can lead to poverty and social exclusion. It also contributes to passing on poverty to the children in jobless households, as it has been shown that educational achievement is lower among children in unemployed households. Employment would open a way out of poverty for both the workers affected and their families, as half of those finding a job escape the risk of poverty.

I agree with that assessment completely. Above all else, the immediate accession of employment is what is necessary to reduce the trends towards increasing poverty and alienation in most advanced nations.

Stimulating employment growth is essential and should be prioritised.

In an early August I wrote a blog where I analysed the movement in long-term unemployment in the US and Europe – Long-term unemployment behaviour reflects austerity bias in Eurozone.

The intention was to counter arguments in the conservative press that were emerging to massage away the causality between policy austerity and the elevated levels of long-term unemployment in Europe relative to the US.

The conservatives claim that “generous unemployment benefits”, minimum wage rules, etc are to blame for the European malaise.

However, I explained in that blog how duration effects arise when there is entrenched recession as a result of a collapse in private spending followed by an extended period of policy contraction.

The EU Proposal rehearses the standard line that:

Even when recruitment rises again in the Member States, the risk is that many long-term unemployed will be left behind as they are the furthest from the labour market. The longer people are out of work, the more difficult it is for them to be hired again as their skills are gradually eroded.

The reality is that it depends on how strong the employment growth is.

But the overwhelming emphasis at the EU level is on addressing “structural barriers linked to rigidities on the labour market and inadequate skills or insufficient investment in human capital”.

The EU answer – increase the “specific active support to long-term unemployed to return to the labour market” – which tells us that they are dodging the essential reason there is long-term unemployment.

Which is? A systemic failure of the economies in question to produce enough jobs, which is predominantly a demand-side issue. Jobs are created in response to spending not making the long-term unemployed more “active”.

The EU proposal talks about “employability” in relation to its new active approach.

The neo-liberal era has been characterised in part by the abandonment of a commitment to full employment by governments and a new obsession with full employability.

The former requires the state to take responsibility for ensuring there are enough jobs to meet the desires for work by workers. It is a demand-side strategy. If the non-government sector doesn’t create enough work then the government has to step in either to stimulate more private job creation (via targetted or general spending/taxation initiatives) or directly create public sector jobs.

Full employability blames the victims of the job shortage and focuses policies (sticks and carrots) on the individuals without regard to whether there are sufficient jobs to go around.

In the March-quarter 2015, the vacancy rate for the Eurozone 19 was 1.7 per cent for all firms in the Industry, construction and services sectors. That figure has been relatively unchanged since 2010.

Prior to the crisis, the figure peaked at 2.4 per cent (March-quarter 2007) and it dropped to a low of around 1.3 per cent in the December-quarter 2009.

The job vacancy rate “measures the proportion of total posts that are vacant” so it is a measure of the demand strength of the economy.

The data published by Eurostat makes it very difficult to actually calculate how many job vacancies a 1.7 per cent vacancy rate is equivalent to. In the first-quarter 2015 (excluding France, Italy and Ireland) there were 1,576,967 unfilled vacancies.

In the same quarter, the Eurozone unemployment rate was stuck at around 11.7 per cent which means that there were some 18,655.9 thousand people without jobs.

So we might guess that the unemployment to vacancy rate (how many workers want jobs relative to how many unfilled jobs exist) might be rather high.

This graph published in the Eurostat 2011 edition of its – Labour market statistics – shows the job vacancies per 1000 unemployed in 2010 for various European countries.

While the situation has changed a little since then – worsened for many countries and improved for others – the overall conclusion is that the UV ratio remains very high and signals a lack of spending overall.

The new EU proposal to combat long-term unemployment – by increasing “the transition rates to employment of the long-term unemployed” would focus on “three concrete steps which open a pathway to labour market integration”:

(1) encourage registration with an employment service;

(2) assess individual needs and potential of the long-term unemployed before reaching 18 months of unemployment;

(3) offer a job integration agreement to the long-term unemployed at the latest when they have reached 18 months of unemployment.

… a skills audit and lead to counselling and guidance based on the person’s experience, job search history, gender related employment barriers and taking into account labour market needs.

Not a job in sight!

What might a “job integration agreement” involve? Well it might include:

… mentoring, help with the job search, further education and training as well as support for housing, transport, child and health care services or rehabilitation.

Not a job in sight!

There are a lot of implied services that would be delivered but no job creation.

The underlying assumption is that long-term unemployment represents a constraint on a person’s chances of getting a job.

The so-called negative duration effects are meant to play out through loss of search effectiveness or demand side stigmatisation of the long-term unemployed.

That is, they become lazy and stop trying to find work and employers know that and decline to hire them. Over this period, skill atrophy is also claimed to occur.

It has been common for mainstream economists and policy makers to postulate that there is a formal link between unemployment persistence, on one hand and so-called ‘negative dependence duration’ and long-term unemployment, on the other hand.

This is the so-called ‘irreversibility hypothesis’, which claims that the long-term unemployed require extensive re-training before they are ready for work.

Further, if the government tries to stimulate employment growth to reduce the long-term unemployment rate, the irreversibility properties will mean that wages growth will rise strongly as employers compete for skilled workers and ignore the long-term unemployed and inflation will result.

The long-term unemployed thus represent a constraint on non-inflationary growth and the only solution is to force them to upskill through various rules on their income support payments, including cancellation.

Although negative dependence duration (which suggests that the long-term unemployed exhibit a lower re-employment probability than short-term jobless) is frequently asserted as an explanation for persistently high levels of unemployment, no formal link that is credible has ever been established.

Once you examine the dynamics of the data you quickly realise that short-term unemployment rates do not behave all that differently to long-term unemployment rates. The irreversibility hypothesis is unfounded.

The following graph shows the PLTU (%) and the unemployment rate for the Eurozone Member States from the March-quarter 2005 to the March-quarter 2015. This is the longest sample that is available from Eurostat at this level of aggregation.

The relationship between PLTU and the unemployment rate is very close. As the unemployment rate rises (falls), the proportion of long-term unemployment in total unemployment rises (falls) with a lag of a quarter or so.

Several studies have formally examined this relationship. My earlier work has found that a rising proportion of long-term unemployed is not a separate problem from that of the general rise in unemployment.

This casts doubt on the supply-side policy emphasis that OECD governments have adopted over the last two and a half decades and which is centre-stage in the latest EU proposal.

While the mainstream economics profession may claim search effectiveness declines and this contributes to rising unemployment rates, the overwhelming evidence is that both are caused by insufficient aggregate spending in the economy.

The policy response then is entirely different and supports fiscal stimulus measures being used to create jobs growth.

It doesn’t really matter which geographic unit we choose, the same sort of relationship will emerge. Take Italy, for example.

As the unemployment rate fell in the period 1998 to 2007, the proportion of long-term unemployed in total unemployment also fell – see next graph.

Between the March-quarter 1998 and the September-quarter 2007 (the low-point unemployment rate quarter before the crisis), total unemployment in Italy fell by 1,300.9 thousand.

The decline saw a fall in long-term unemployment of 983.5 thousand and a decline in short-term unemployment of 347.4 thousand over that period.

So in a growth phase, it is clearly wrong to assume that employers sequentially sample the short-term pool then the long-term pool.

A similar story can be told for most nations.

In an early August I wrote a blog where I analysed the movement in long-term unemployment in the US and Europe – Long-term unemployment behaviour reflects austerity bias in Eurozone.

The intention was to counter arguments in the conservative press that were emerging to massage away the causality between policy austerity and the elevated levels of long-term unemployment in Europe relative to the US.

The conservatives claim that “generous unemployment benefits”, minimum wage rules, etc are to blame for the European malaise.

However, I explained in that blog how duration effects arise when there is entrenched recession as a result of a collapse in private spending followed by an extended period of policy contraction.

To argue that long-term unemployment is a constraint on growth and therefore needs supply-side programs rather than direct job creation, you would have to find that even during growth periods, long-term unemployment was resistant to decline.

How have the LTUR and STUR behaved over the business cycle? Is there evidence that the LTUR is resistant to growth as is claimed by the irreversibility hypothesis?

What the data for most advanced nations I have ever studied reveals is that when employment growth is strong there is a sharp decline in the long-term unemployment pool as total unemployment falls.

The GFC downturn pushed up short-term unemployment in 2008 as the newly laid-off workers or new entrants who cannot find work. The long-term unemployment pool then rises in a lagged fashion if the initial rise in unemployment persists and people move through the unemployment duration categories.

The data overwhelmingly tells us that there are insufficient jobs (by a large margin) to satisfy the desires for work of the unemployment.

The unemployed cannot search for jobs that are not there.

I hold the view that if the unemployed have a responsibility actively seek work then the Government has a responsibility to use its fiscal capacity to provide sufficient work.

The non-government sector has never provided sufficient employment to satisfy the preferences of the workforce.

There are hundreds of thousands of jobs that can be created which meet current unmet community needs and would help people and the natural environment and which would be accessible for any skill level.

In that context, the European Commission would be better advised to immediately announce a – Job Guarantee – which would solve the unemployment problem – including the lack of jobs for long-term unemployed – immediately.

In that context, skill development would be most effective.

Creating full employment in this way then creates a dynamism in the non-government sector because they have to ensure the jobs they create will entice the workers out of the stable Job Guarantee pool.

The importance of squeezing firms to offer on-the-job training is detailed in this New York Times article (November 30, 2013) – .

We learn that when German firms set up manufacturing plants in the US, they found it hard to get skilled workers in the locations they had settled on. The answer was to offer apprenticeships to local workers, which was a strategy they directly imported from their experience in Germany.

While the US scheme was partly funded by the state through schemes like tax credits it was the fear of losing market share that drove firms to offer training in a paid-work environment.

Conclusion

There is no doubt that education and training schemes that aim to raise the productivity of the workforce offer long-term benefits to the individual and society – as long as the trainee has a job that they can use new skills in.

It is relatively pointless churning the unemployed through a series of supply-side training programs, mentoring schemes and other less palatable activation policies (threats to withdraw income support etc) if there are insufficient jobs to go around.

All that is achieved (if anything) is that the unemployment queue might be reshuffled a bit.

However, when there is full employment, supply-side schemes to enhance skills are very productive and effective.

The neo-liberal era has forgotten that the demand-side of the labour market creates the work and the supply-side brings the skills. Without boosting the former, policies that focus on the latter are wasteful and soul-destroying.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.