Transcript File
MR. EDWARDS:
Hello, I'm Bruce Edwards, and welcome to this podcast produced by the
International Monetary Fund. In this program inequality is growing in
Europe, but this time it's between generations.
MR. PITT:
This is not an issue of old versus young, it is basically if the young are
better off we are all better off in the end. The economy can grow, more is
there to be distributed to everybody.
MR. EDWARDS:
Incomes for Europe's youth declined after the 2007 global financial crisis
largely due to unemployment. And while things have recovered somewhat the
trend towards short-term work and less stable jobs has meant incomes have
not grown and young people are now more likely to fall into poverty.
Meanwhile, Europeans 65 and older have seen their incomes increase by ten
percent. A new study by IMF staff looks at this growing inequality and
poverty across generations in Europe and how it could have long-term
effects on Europe's economy if not addressed.
Alexander Pitt is an economist in the IMF's European Department and
co-authored the report. So why this growing income disparity between the
young and the old in Europe?
MR. PITT:
Well, the global crisis and how it has played out in Europe has had very
different impact on different age groups. And when we look at the overall
Gini coefficient, a measure of inequality, that hasn't changed very much.
But if you look at what happens to different age groups there you see that
for the young their poverty rate has increased, the likelihood of living in
relative poverty has increased, the incomes have essentially stagnated,
first declined, now recovered a little bit, but stagnated over the past ten
years, whereas for older people, pensioners, incomes have increased and the
risk of poverty has declined dramatically. The reason for that is that the
crisis has played out via the labor market and fiscal policy. As we know,
unemployment has risen and the young, who faced higher unemployment rates
already before the crisis than the average population, have been especially
hard hit. And not only unemployment, but also more precarious employment,
less stable jobs, less well paid jobs. And at the same time social programs
had to be restrained because fiscal strains have emerged and governments
are forced to save. But in doing so governments have generally protected
pensions because of -- in taxation rules, for example. And, of course, old
people are not dependent on the labor market if there is even pension.
So you have the labor market impact and fiscal impact, and both have played
basically against the young.
MR. EDWARDS:
And so what are the broader implications for Europe's economy if these
issues aren't addressed?
MR. PITT:
Well, I mean as the Managing Director has said, it's a dream deferred. And
if that dream of stable employment and career opportunities has to be or is
deferred too long for the young, then we basically are raising a lost
generation. And that has not only implications for the people themselves,
for the youngsters today, but also because I mean they earn less, they save
less, they earn fewer pension rights, and they have to carry the burden for
the older, to pay the pension for the older generations. But it's also a
broader economic problem because they are less productive, they are less
skilled, and that undermines the growth potential of the entire economy
with detrimental consequences for everybody.
MR. EDWARDS:
So one of the findings in the paper is that the older population seem to be
more financially secure than they were perhaps if the same group was
perhaps ten years ago. Why is that?
MR. PITT:
Well, the older people they live essentially off pension and pensions have
been indexed either to ages and/or inflation and are therefore to some
extent decoupled from the volatility of the economy, which I mean ten years
ago of course with the global crisis has been very high.
MR. EDWARDS:
So how much of this is about the traditional labor market institutions,
minimum wage, unemployment insurance, that have not adapted to today's work
environment?
MR. PITT:
Well, the classic welfare state, the modern welfare state, has been built
in the post war years, is centered around the model of lifelong employment,
fairly stable job. But this is no longer necessarily the case. I mean those
jobs are becoming rarer and many more people have to now make do with
short-term temporary jobs, part-time jobs -- even if they want to work
full-time, and in general more flexibility is required. And that means
that, for example, in some unemployment schemes that what you can get out
of it, in case you are getting unemployed, depends on what you put in
before. And if you are in a volatile situation or earn very little, or have
always these spells of unemployment you cannot acquire the same rights as
if unemployment is something happens to you once or twice in your working
life and before that you have a reasonably stable employment situation.
So the system is basically not adapted to the modern flexible world of
work. And I mean specifically on labor market institutions, for example,
such people in what we call gig economy, they are so much more difficult to
organize. And one of the findings in our paper is that the degree of
coordination and organization in the labor market between employers and
employees, that's a very important determinant of how unemployment affects
the young. And where that works well, I mean the classic example is Central
Europe, Germany, Austria, these countries where these institutions are
strong they have been hitless, the youth have been hitless in those
countries.
MR. EDWARDS:
So stronger unemployment insurance schemes and --
MR. PITT:
It could be stronger unemployment insurance schemes, but it could also be
better labor market coordination between the different actors. It's not
just antagonistic necessarily, employers versus employees, but one tries to
find solutions together, I mean including through education, for example.
MR. EDWARDS:
And do you think that this unemployment issue has to do with fewer
employment opportunities, or is that young people don't have the skill set
that allows them to take advantage of those employment opportunities that
exist?
MR. PITT:
It's probably a bit of both. Of course the economic downturn in 2009-10,
and in subsequent years in several European countries makes it impossible
even with your best educated young entrant into the labor makes, makes it
very difficult to find a job. But at the same time, we have also seen that
these schemes that emphasize skills and in particular skills that are not
theoretical but actually that companies need. So if curricula are designed
between employers, employees, and the state support as well, that can help
a lot to cushion the blow and also adapt the young to a labor market so
that they really have the skills that are in demand.
MR. EDWARDS:
So the recommendations in this paper are about -- mostly anyway -- spending
more on social protections for the young. Does Europe have sufficient tax
base to cover the expense of that?
MR. PITT:
Well, I mean, as we know, taxation in Europe is in general quite high, but
it should not be impossible to finance better social protection. I mean in
some areas money can be shifted around from less efficient uses to more
efficient uses. For example, active labor market policies, expenditure on
that could be directed or focused on areas where skills are imparted. So
that would help the young not only to just get some temporary job to
(inaudible) them, but also to learn something that they can move into the
first labor market.
But, also, I mean there is a tax base that is not tapped, or not sufficient
tapped perhaps. Wealth taxes have been declining or are very low in many
countries. And the progressivity of income taxation has also been declining
over the last several decades already. So if some of that potential could
be tapped that would go a long way. I mean the sums involved are probably
not very large that are needed and, yes, as I said, taxation is high in
Europe, but the resources are there.
MR. EDWARDS:
Do you think there's a political implication of drawing more from the aging
population?
MR. PITT:
Yes. I mean the political dimension is of course not easy. But, for
example, France has introduced a reform where social security contributions
have been reduced, especially for low wage earners, and at the same time to
counter finance that taxation of total income, including pension, has been
increased. So that is a shift from pensioners to younger people.
I think most importantly we should view this as business investment,
investment in the future of not only the young people themselves, but in
the future of our economies, of our societies. And that also implies that
this is not an issue of old versus young, it is basically if the young are
better off we are all better off in the end. The economy can grow, more is
there to be distributed to everybody.
MR. EDWARDS:
That was Alexander Pitt, Senior Economist in the IMF's European Department
and co-author of "
A Dream Deferred: Inequality and Poverty Across Generations in Europe",
which you can find at IMF.org.
If you liked this podcast subscribe on iTunes or on your favorite podcast
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