Unemployment in Europe / Worsening labour market matching and growing structural unemployment in a number of countries writes EC

“After four years of deteriorating labour market outcomes, the first signs of stabilisation in EU unemployment are becoming manifest against the background of GDP growth turning positive, improving sentiment, and recent reforms. Major labour market disparities persist across the EU and the euro area” writes the European Commission’s Directorate-General for Economic and Financial Affairs in Labour Market Developments in Europe, 2013. (adapted quotes to follow)

There is evidence of worsening labour market matching and growing structural unemployment of persistent nature in a number of countries, notably those mostly affected by current account reversals and debt crises. Upward changes in structural unemployment rates appear to be mostly driven by persistently lower job finding rates ensuing from worsened labour market matching across skills and sectors, and an increased duration of unemployment spells the Commission concludes.

Labour dynamics continued to differ substantially across countries. While employment growth was robust in the Baltics, Germany, Hungary, Malta, Romania, employment losses were recorded especially in Bulgaria, Croatia, Cyprus, Greece, the Netherlands, Spain, and Portugal. Differences in unemployment dynamics reflected to a large extent GDP growth differences, but a relevant role was played by different responses of employment to economic activity. In particular, in the countries deeply affected by debt crises and deleveraging, the worsening of the labour market was stronger than it was expected on the basis of GDP growth, which suggests that employers’ expectation on economic prospects could have played a role. Overall, the patterns of labour market dynamics across the EU further contributed to increasing the already high degree of dispersion of unemployment rates, with the relevant exception of the Baltic countries, where the high unemployment levels are falling at a rapid pace.

While the first quarter of 2013 was characterised by a severe GDP contraction and a widespread rise in unemployment rates, quarter-on-quarter growth turned positive in the second quarter, technically putting an end to the recession. Labour market stabilisation followed swiftly: a halt to unemployment growth was recorded since March 2013 both for the EU and the euro area aggregate. These aggregate figures are mostly the result of unemployment dropping in a number of non-euro-area countries (Hungary, the Baltics) but also moderate unemployment reductions in a number of euro- area countries that were characterised by major labour market deteriorations until 2012, including Ireland, Portugal, Spain.

Recent labour market developments could be interpreted as a swift reaction to a recovering economic activity, linked to improved expectations or the materialisation of the effects of structural reforms. However, the dynamics of activity rates and discouragement effects need also to be considered, as well as one-off factors. All in all, it is too early to judge if these recent developments prelude to an inversion of the upward trend in unemployment rates. However, on the basis of the current outlook for economic activity, a substantial trend reversion seems unlikely in the near term, as the ‘Okun relation’ between unemployment changes and GDP growth suggests that a weak recovery is hardly sufficient for a sustained and substantial reduction in unemployment.

The euro-area Beveridge curve, describing the negative relation between vacancies and unemployment, has been affected by major demand shocks in 2009 and in 2011, leading to less vacancies and more unemployment. In 2012, growing unemployment is matched by a rise in vacancies, which may indicate the start of a typical adjustment process where the recovery of vacancies leads that of employment. Since the start of the crisis, the euro area Beveridge curve has shifted outward, meaning growing mismatch: a given number of vacancies coexisting with a higher level of unemployment. However, it is difficult to tell at the current stage to what extent such a shift is permanent or mostly temporary, linked to an incomplete adjustment to recent demand shocks. Moreover, while in some countries there is evidence of a likely long-lasting outward shift in the Beveridge curve, for a few countries the evidence rather points towards an inward shift.

With a view to dig deeper into the analysis of cyclical versus structural unemployment in the EU, the analytical chapter of the report takes a number of steps forward. First, it analyses the main features of the Beveridge curves of EU countries and of frictional unemployment, with a view to isolate temporary changes in the vacancy-unemployment relationship from structural shifts. Second, it explores microeconomic aspects of labour market matching, to shed light on whether mismatches became more serious across skills, economic sectors, or geographical locations. Third, it digs deeper into the notion of the Non-Accelerating Wage Rate of Unemployment (NAWRU), with the objective of isolating permanent from transitory changes.

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 via Labour Market Developments in Europe, 2013