Can Welfare and Labour Market Regimes Explain Cross-Country Differences in Unemployment of Young People During the Crisis?
Key words: youth unemployment, institutions, labour market regimes
The financial and economic crisis, beginning in the year 2007, produced painful outcomes in the labour market and society in general. Mass unemployment – a phenomenon previously thought to have been left in Europe’s past – is nowadays widespread in many European Countries. A number of studies (Bell and Blanchflower 2011; Cahuc et al. 2013; O’Higgins 2012; Scarpetta, Sonnet and Manfredi 2010) point out that youth unemployment in particular has become a major problem. The number of young unemployed individuals under 25 years of age increased from 4.2 million in the year 2007 to 5.6 million in the year 2013, and the youth unemployment rate increased from15.7 % to 23.6 % in the same time period (Eurostat 2015). Less recognised is the fact that the increase of long-term unemployment was much higher for young people than for adults. This unexpected finding is of particular concern because of the long lasting negative consequences that occur when unemployment goes beyond being only a short and temporary experience for young people.
If we look at youth unemployment ratios and youth long-term unemployment (Eurostat 2015) we see remarkable cross-country variation, which is not exclusively explainable by the different economic developments of the respective countries during the crisis. On the one hand, there are countries like Finland and Sweden, which have the lowest percentage of youth long-term unemployment. Despite a noticeable decline in economic growth, Finland was able to reach the same level of long-term unemployment as before the crisis. But the youth unemployment ratios of Finland and Sweden are higher than in countries like Denmark, Austria, the Netherlands, Lithuania, Luxembourg and Germany. Germany, Austria and Luxembourg have the lowest youth unemployment ratios in the EU, though in these countries young unemployed individuals have a higher risk of being unemployed long-term compared to Finland and Sweden. Denmark seems to be a special case. Denmark was able to keep the youth unemployment ratio and youth long-term unemployment relative low, despite the fact that Denmark was badly affected by the crisis with three years of GDP contraction. On the other hand, the countries with the highest percentage of youth long-term unemployment are Slovakia, Italy, Greece and Bulgaria. Interestingly, it can be observed that in Slovakia the growth of the GDP by about 10% since 2007 has not lead to the easing of tension on the youth labour market.
This background leads to the research question of how cross-country differences in youth unemployment and in particular in long term unemployment can be explained. Siebert (1997: 39) points out that “any labour market is surrounded by an array of institutional arrangements that form a complex web of incentives and disincentives on both sides of the market”. Therefore, it is a plausible assumption that institutions and labour regimes contribute to cross-country differences. The literature, however, provides no consensus on the influence of institutions on unemployment (e.g. Baccaro, Rei 2007; Bassanini, Duval 2006, Blanchard 2006; Nickel 1997; Stockhammer, Klär 2011). Sturn (2013) shows that it depends on the labour market regimes as to whether institutions reduce or increase unemployment in a country. The knowledge concerning the relation of youth unemployment and institutions is even less satisfying. There are only a few works with this focus (e.g. Biavaschi et al. 2012; Breen 2005; Isengard 2003).
The present article tries to deepen existing knowledge by analysing EU member states for the period between 2007 and 2013 (N=196 country-year observations). This article first tests a possible influence of labour market institutions on youth unemployment and on long-term unemployment. Second, it examines the interaction between labour market institutions and labour market regimes. To avoid violating the assumption of the normal distribution of residuals and auto correlations, time-fixed effects with robust standard errors were considered.
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 Department of Economic, Welfare and Social policy, Chamber of Labour, Linz, Austria.