In recent months, the agenda of economic discussions in Europe has changed: Grand reforms are no longer being demanded, nor are the troubled countries in the southern part of the continent being asked to reduce their bloated fiscal deficits as rapidly as possible. Now that the deficit goals have been toned down and postponed, many observers are saying that stimulus and investment measures aimed at growing the economies of Europe are the best road for ending the crisis. The first goal of the European Commission's new policy proposals is to do away with one of the most serious problems suffered by some of the countries: the high level of unemployment among young people.
Among young people less than 25 years of age, the unemployment rate in the eurozone nations was 24.4% in April. The rate for the European Union as a whole was 23.5%, according to the latest numbers released by Eurostat, the European Commission's bureau of statistics. Overall, five and a half million young people in the EU lacked jobs last April. The situation in Spain was one of the most serious in the region. In that country, the youth unemployment rate reached 56.4%, which translated into absolute numbers of 964,000 unemployed young people under the age of 25.
In order to deal with this problem, Germany and France are preparing a plan that would mobilize up to 60 billion euros in soft credits for companies that commit to hiring workers who are younger than 25 years old. The plan will be based on a new six billion euro fund aimed at addressing youth underemployment, which European leaders created in February as part of the EU budget for the 2014-2020 time period. The idea is for the European Investment Bank (EIB), the EU community's financial organ, to utilize this fund as a guarantee for obtaining up to ten times as much in financing from the markets (the above mentioned 60 billion euros), which it would then lend to companies that participate in the program.
According to Rafael Bonete Perales, a professor at the University of Salamanca, one of the main benefits of the initiative is that it "prevents nations from increasing their public spending by using funds derived from budgetary support mechanisms to enact measures aimed at incorporating young people into the labor market." Instead, Europe as a whole has taken on the responsibility of financing part of the effort through the European Social Fund, its financial instrument for boosting employment. Bonete Perales notes that the money will be most effective if it is used "to finance the training of those unemployment workers who have fewer qualifications, so that they could acquire the skills and competencies that are required by the most dynamic sectors of the economy."
José-Ginés Mora, a visiting professor at the University of London's Institute of Education, agrees that the fund must be used for boosting the training of young people, but he adds that it must be accompanied by a large dose of practical experience. "They have to create incentives for the creation of job contracts that include training inside the companies," he notes.
Following by Example
During the debate that has opened up in the EU about this topic, some people have cited Germany as an example of a country with a flexible labor market that has low rates of unemployment. Currently, Germany's unemployment rate is 6.9%, according the latest seasonally adjusted data published by the country's Federal Employment Agency.
In 2002 Germany carried out a significant reform of its labor market, with a goal of liberalizing it, by designating what are known as "mini-jobs" — part-time work that allows people to make up to 450 euros each month, tax free. This option has been attractive to many unemployed workers and young people because it provides an introduction to, or a way to stay engaged in, the labor market.
Moreover, "mini-jobs" give more flexibility to companies when it comes to hiring workers with fewer skills and low productivity. Critics argue, however, that these employees are poorly paid, and that they are unable to take advantage of the same social benefits as those with full-time, long-term work, which in turn creates social differences between the different demographics.
Mora supports the option of "mini-jobs," so long as it were to involve "jobs that have a reduced work day or which are internships. If we are talking about jobs that do not provide workers with fundamental rights, this does not seem acceptable to me."
Bonete Perales, however, opposes the notion of bringing this model to other countries in the eurozone because "the mini-jobs generate more inequality within society. This inequality winds up damaging the possibilities for growth, and it is a source of future problems that negatively affect social cohesion." He suggests the model should only be used in very specific situations and that the jobs should be transitory. Bonete Perales adds that mechanisms must be adopted for making it easier for workers to leave a state of inactivity as rapidly as possible. In any case, he says mini-jobs have an impact that "is not at all decisive when it comes time to creating regular employment."
The Spanish Problem
With respect to the specific situation in Spain, Mora is very pessimistic about possible solutions for the problem of youth unemployment because of the special characteristics of the country's labor market. "The Spanish labor market has never functioned well," he points out. "In 2006, we had almost two million unemployed, and many of them were young. That year, at the peak of the boom, I participated in a European survey known as REFLEX, which showed that Spanish university graduates had the highest unemployment rate in Europe, as well as the lowest salaries, except for that of the Czechs. The labor conditions of trained and untrained workers have been bad even outside times of crisis. Now, when there is a crisis, things are terrible."
According to Mora, the situation is caused by various factors. Among them, the Spanish economy has not developed a strong knowledge sector "and, as a result, it has little capacity for absorbing young people, as well as an obvious lack of flexibility in its labor market, since there is neither labor, territorial mobility nor are there part-time jobs."
In an effort to solve the problem of youth unemployment, the government of Spanish Prime Minister Mariano Rajoy introduced a set of reforms that were approved by the country's legislature in January 2012. Known as the "Contract for Training and Apprenticeship," the effort is aimed at boosting the hiring of those workers who are younger than 30 years old. Those companies that add young people to their rolls can benefit from reductions of as much as a 100% of the taxes they would ordinarily pay to Social Security.
"This doesn't help at all," notes Rafael Pampillón, a professor and director of economic analysis at the IE Business School. He says that the reforms add a new sort of contract to the Spanish labor market, which is infested with them. "Here's what they have to do in order to boost the hiring of workers in general and of young people in particular: Simplify the labor laws, creating a single labor contract while unifying and lowering severance pay. This would make the labor market much more flexible and make it much easier for companies to increase their work forces."
Bonete Perales doubts that such changes in labor legislation will be very useful. "They can help somewhat, but the hiring of workers is linked to whether or not business people consider the economic situation favorable for selling their goods and services," he says. "As long as conditions for bank loans are not normalized and demand is depressed, due in part to the austerity measures that have been adopted, it is very hard to increase the hiring of young people." As a result, he adds, the government should provide within the EU measures aimed at expanding the economy, and enabling small and midsize companies to access financing at a reasonable cost.
According to Mora, along with the incentives proposed by the EU for job promotion, the goal of the measures implemented by the Spanish government must be to "enable young people to have job experience … for example, by providing corporate internships that include training."
The Bank of Spain has proposed combatting the youth employment problem by eliminating the minimum salary in some sectors. At this time, it is fixed at 21.51 euros a day, and 645.30 euros a month. "In order to create jobs over the short run and introduce greater flexibilities in salaries, you have to explore new formulas that permit, in special cases, temporary deviations from conditions established by collective bargaining," according to a report released by the Bank on May 31.
"This is a very good idea," Pampillón notes. "It makes no sense to establish a minimum salary. What happens if someone wants to work for a salary below what is stipulated by the law? Lower salaries would give opportunities to young people to access the labor market and gain experience, which is what they really need in order to start a career and then improve their working conditions and find a better job."
Pampillón suggests that another way to incentivize companies to hire young people would be to lower the social contributions that companies pay for each worker. This is a recurrent demand of Spain's business organization, the Spanish Confederation of Business Organizations. "When they reduce the taxes on work, that money always winds up going to the worker, through higher salaries or more jobs. To compensate for this loss in revenues, the government could raise the VAT [value added tax] to some extent. This is a tax that many developed economies have put into place."
The experts agree that the actions taken by politicians to alleviate youth unemployment in the coming months will only determine the future of millions of Europeans, but also figure prominently into the future of the European Union itself. The inactivity of these workers could have devastating consequences from a social and economic point of view. According to estimates by the European Commission, unemployment in this segment of the population generates total losses of 153 billion euros annually in the EU as a whole, due to the cost of unemployment benefits and the loss of revenues from taxes and Social Security. That translates into 1.2% of Europe's annual GDP. In the case of Spain, that amounts to about 16 billion euros.
In any case, Bonete Perales says that the best way to help young people is for the economies of Europe to grow as they did in the past. "Without a solution to the eurozone crisis, there is very little that governments can do to reduce youth unemployment," he notes.