European Commission

 Employment in Europe: it could have been worse but there´s still work to be done

Issue 19 | October 2010

Employment declined in most of Europe during 2009, but the impact of the crisis varied across the EU depending upon labour market structure, macroeconomic position and the policy measures in place.

About 4 million jobs were lost in Europe in 2009, and despite moderate signals of economic recovery in the second part of the year, in some countries the gradual but steady decline in employment shows no sign of abating. In Labour market and wage developments in 2009¹ , ECFIN analyses the impact of the recession on labour markets throughout the EU in 2009 and draws important policy conclusions. While jobs have been lost in nearly all European countries, some Member States have fared better than others. In 2009, unemployment surged to record highs in the Baltic countries, Spain and Ireland while posting relatively small increases in Austria, Belgium, Finland, Italy, Luxembourg, Malta and the Netherlands, and actually declining in Germany.

“The varied impact of the recession on employment is the result of differences in the structure of labour markets, the over-expansion of certain sectors and competitiveness divergences,” explains Alfonso Arpaia, head of sector in the unit for economic policy strategy and analysis of labour markets.

Labour market segmentation

One issue is the widespread diffusion of temporary contracts in certain markets and sectors. Although they promote labour flexibility, these contracts have made it easier for employers to shed specific categories of workers. Segmentation within labour markets is thus becoming a problem. There is a wide gap between the protection of workers on permanent contracts (the insiders) and that of those on temporary or insecure contracts (the “outsiders”). The outsiders, often young people, are usually the first to go during a downturn.

“The burden of adjustment is not evenly spread; it’s focused on specific groups and sectors,” observes Arpaia. “Segmentation is not only an issue of equity, it also impacts efficiency; it reduces the incentive for firms and individuals to invest in training and human capital development.”

Short-time working arrangements and wage flexibility

Countries that have fared well during the recession have relied on short-time working arrangements and wage flexibility to reduce the impact of the recession on employment. Short-time working arrangements, in which working hours are reduced and workers paid a replacement income from publicly managed funds, allow firms to reduce labour costs without firing workers. Short-time working arrangements should be used prudently, however, as they could slow structural adjustment in some industries. Similarly, time accounts allow workers to draw down their over-time “account balance” during periods of slack demand.

Policy reform

The crisis has revealed weaknesses in European labour markets and underlined the need for further reforms. Any reforms need to account for the fact that the burden of adjustment has been unequally spread across socio-economic groups, and should have low or neutral budgetary impact. In a period of fiscal consolidation, public expenditure should focus on high-risk groups such as the young, low-skilled workers and the long-term unemployed. Policies should facilitate job reallocation and worker re-training; unemployment benefits could be made conditional upon participation in re-training programmes, for example. Temporary labour market measures should be gradually withdrawn as the recovery takes hold since they risk locking labour into declining activities. There also needs to be a better adjustment of wages to sector-specific and local conditions, according to Arpaia, “and for that we need enhanced social dialogue in some countries.”