How the labour market works: a state of the art analysis

Roxana Sandu, 9 October 2014

Unemployment has been increasing since 2008, reflecting the lack of economic growth but to some extent, also the choices of policy-makers.

Some Facts:graph1

In the European Union, unemployment rate is very high, of 10.5% in 2014. Looking at the long term unemployment rate, we notice that it has been increasing over time being around 5%. Youth unemployment is also very high in the EU, of 22.8% in 2014.

As expected, individuals with lowest education tend to have a higher unemployment rate. With respect to total unemployment rate, there is little difference between men and women. Migrants coming from non-EU countries  show an unemployment rate above the average and certainly higher than that of  EU migrant workers. Intra-EU migrants are in general more skilled, even with respect to native population. However intra-EU migration is under public debate, especially when it comes to social benefits. In fact, these workers are less protected by legislation and have acted  as a buffer during the crisis and therefore, made worse-off.

Source: The Economist (2012)

Source: The Economist (2012)

So how can these issues be addressed?Clearly there is a strong correlation between unemployment and education. Descriptive statistics and strong empirical evidence suggests that unemployment rate increases for lower education levels. Given that youth unemployment is very high, without doubt, for those with a lower educational levels,  investing in education is the smart choice to make. Better-educated individuals, have a higher probability of employment and should have access to better careers and better future wages. However, education may be part of the solution to reduce unemployment, but for sure, it is not the complete answer.

Outside academic institutions, the labour market is increasingly tough and competition is fierce. Low labour demand has already created a high degree of mismatching between field of study and employment, i.e. horizontal mismatch,   as well as between degrees of education and employment, i.e. vertical mismatch. Empirical literature suggests that structural imbalances as well as business cycle influences the degree of mismatching in the labour market. In recession, high-educated individuals may accept jobs that do not match perfectly their profile. Entering the labour market in recession may influence the next 5 years of labour market placement, researchers say.

Furthermore, lower quality of academic selection procedures induces a higher mismatch. To correct this, higher criteria when entering higher education may decrease the degree of mismatch on the labour market, as individuals educated in a more demanding program or certain fields of study may do better.

Not only that mismatch exists in the labour market, but also, high inequality in terms of returns across people with similar education level exists. Naturally, firm characteristics may determine wage differences across employees. However, family background is even more relevant: empirical research shows that growing up in a family with wealthy or well-educated parents, gives ceteris paribus a greater advantage in terms of expected wage and opportunities. Over time, within group inequality has increased and social mobility has weakened.

Of course differences across countries in the European Union exists; for example  in Germany, the unemployment rate is very low, while in Nordic countries the degree of mismatch is lower.

Furthermore, countries that offer more social protection, such as employment legislation and unemployment benefits have a better skills match, but at the cost of increasing long-term unemployment rate due to longer unemployment spells.  However, labour markets participants would not feel constrained to accept just any job, maximizing human capital in the long-run.

All in all, the truth is that in order to get jobs back, economic growth is needed. Demand for high-skilled labour force would reduce the degree of mismatch. However, so far, government spending in most Member States did not provide enough support, while austerity measures clearly has an impact on the economic recovery. High unemployment, migration and skills mismatch are the costs to be paid. To solve these issues, not only fiscal incentives for job creation must be put in place, but also a social compact must be implemented. Europe needs to insure sustainable economic growth but also it needs to coordinate more on social issues. Policies and legislative measures are needed at EU level in order to develop and create a true European labour market and protect its mobile labour force.


*I wish to thank  Dr. David Rinaldi for useful comments.

References: ETUI-ETUC Conference Europe at Crossroads


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