Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Youth Unemployment in Euro Area Requires Multipronged Solution

December 9, 2014

  • Higher growth can strengthen youth employment
  • Labor market reforms can help reduce persistent youth unemployment
  • Policies likely to work best as comprehensive package

The decline in economic growth in the euro area due to the financial crisis accounts for half the increase in youth unemployment in the region, according to IMF staff research released today.

Vocational training in Essen, Germany; vocational training corresponds to lower youth unemployment (photo: Maximilian Stock Ltd./Science Faction/Corbis)

Vocational training in Essen, Germany; vocational training corresponds to lower youth unemployment (photo: Maximilian Stock Ltd./Science Faction/Corbis)

Jobs and Growth

And in the most vulnerable euro area economies—Cyprus, Greece, Ireland, Portugal, and Spain—the lack of growth accounts for about 70 percent of the rise in youth unemployment, the report finds.

The financial crisis has exacted a severe toll on society in the euro area. Nowhere is this more apparent than in the headline-generating figures for youth unemployment, which peaked at over 50 percent in some countries in September 2014. Even today only 4 out of 10 workers between the ages of 15 and 24 in the most vulnerable euro area countries are employed. And if the euro zone’s recovery slows, these numbers could start to climb again.

Young workers are critical

While high unemployment is always undesirable, youth joblessness can be especially problematic in the euro area, which has an aging population and suffers from large amounts of unused labor and capital. And the longer unemployment lasts, the greater the erosion of skills and employability, and the more corrosive the effects on social cohesion and institutions.

Without a vibrant young workforce, economies cannot afford to fund their social safety nets. They become vulnerable to slowing innovation and competitiveness and reduced growth potential, especially if their most talented youth choose to study and work abroad. This makes it especially alarming that a growing share of youth—reaching some 40 percent at end-June 2014—has been unemployed for longer than a year, joining the ranks of what are defined as the long-term unemployed.

It is easy to blame the financial crisis in the euro area for the perilous state of affairs. But that doesn’t tell the whole story. Youth unemployment varies across the region. Some countries—Ireland, Greece, Spain, and Portugal—experienced a surge in unemployment during the crisis. But, with the exception of Ireland, these countries’ youth unemployment rates were already persistently above average before the crisis. In Italy and France, too, the high youth unemployment rates are, for the most part, a precrisis legacy.

Growth is good

The report finds that young workers are about three times more sensitive to changes in economic activity than adult workers, owing to their more fragile employment conditions. For example, they are three times more likely than adult workers to be hired on temporary work contracts. In vulnerable economies, youth employment is concentrated in sectors—such as the construction sector—that are more susceptible to the business cycle and in small and medium-sized enterprises, which have been hit particularly hard by the financial crisis.

The remedy lies in robust output growth. But without strong policies, such robust growth is not in the cards for the euro area.

But growth is not enough

Growth alone will not solve the problem, especially where high youth unemployment predates the crisis. Fortunately, the report finds, a number of labor market reforms can help reduce youth unemployment. For example, making it less costly for firms to hire workers can increase the demand for labor, thus reducing unemployment. In particular, it might be helpful to ensure that minimum wages are set taking into account other wages in a country. Because of their relatively low skills and experience, young workers are likely to be hired at minimum wages, and would be priced out of the labor market if the wages they are paid are high relative to those applicable to the rest of the work force.

Employment structures where some workers are on temporary contracts with low job protection while others are on highly protected permanent contracts add to youth unemployment because young workers tend to fall in the former category. Given the large-scale job destruction that has already taken place during the crisis, policymakers should aim to reduce this labor market duality by easing protection on permanent jobs. Finally, vocational training to enhance job readiness and skills and well designed cost-effective active labor market policies to support the unemployed and help them transition to jobs can also moderate high youth unemployment.

Multifaceted solutions

A complex problem requires a complex solution. The answer to high youth unemployment lies in jumpstarting economic growth and implementing labor market reforms.

A revival of growth requires strong support for output demand across the euro area. This includes support for private investment through accommodative monetary policy, a concerted effort to clean up bank balance sheets to revive credit, an increase in public investment in countries that can afford it, and a broad range of reforms in product and labor markets.