You've Got to Move

 
The collision of demography and politics in the current crisis should push EU policy makers to move quickly on some of the unfinished business of European integration. In response to my recent post on the outmigration of qualified young people from the parts of Europe undergoing the worst of the recession, Steven Hill asked why that is a bad thing - isn't that what labor mobility is supposed to mean?

Yes, in the US, at least before the housing collapse meant that many people are stuck with homes they can't sell, people in areas with high unemployment moved to places where jobs were more plentiful. And that is how labor markets should work.  In Europe, though, even beyond the difficulties imposed by factors like language and culture, there are impediments to labor mobility that need policy action.  The portability of pensions is an issue that has to be solved.

While state pensions are relatively straightforward and EU workers who retire in a different EU country than the one(s) where they were employed can apply for the accumulated pensions.  However, in the case of private supplementary pensions, which are not covered under current EU regulations, many people face the loss of significant contributions when they move across borders, which is an obvious disincentive for mobility. 

One thing we know from the crisis is that state pensions in the future will be wholly inadequate to support the elderly. Lower state revenues and aging populations will put tremendous pressure on pension systems. Dependency ratios (the proportion of the very young plus the old to the working population), already high in Europe, are expected to double by 2060 in low birthrate countries, which also in large part are the countries in the worst financial shape. This makes it imperative to put incentives into place for additional savings beyond state schemes, to ensure that retirees are able keep accumulated private funds wherever they live and to sort out how they are to be taxed.

Recently, Benoît Cœuré, a member of the Executive Board of the ECB, noted that the European Council has taken measures to increase mobility and pension portability.  With this shift in thinking, he claims, European policy makers "are acknowledging that the smooth operation of the single currency requires flexible markets for goods, services, and labour."

Still, it has been close to a decade (2005) since the Commission published its first proposal for a directive covering supplementary pensions. Little progress has been made in that time. This year, the Commission is supposed to restart work on a pensions portability directive. Although exact figures are hard to come by, it is clear that the number of young and talented Europeans leaving home to find work is exploding - last year 1.7% of the Irish population, mostly in their 20s and 30s, left and between 2001 and 2010, the percentage of Italians with college degrees who were living abroad doubled from 8.3% to 15.9%. 

These trends highlight how critical it is that the Commission move on a new directive and push member states to come to an agreement. 

How Bad is Youth Unemployment in Southern Europe?

Youth unemployment in Europe has captured worldwide headlines during the crisis, with new highs being reported almost weekly.  The current figures paint a daunting picture in the south of Europe: in May, 52.1% of young people in Greece and Spain were out of work, with Portugal (36.4%) and Italy (36.2%) not too far behind.

This week, Steven Hill published a piece in the FT where he argues that these figures are simply not true and that such numbers are inflated because they include everyone not in the workforce, even those who are in training programs or in school (this is traditionally why youth unemployment figures are higher than the overall total.) He prefers to use the ‘youth unemployment ratio’, which is

# of unemployed youth____

total population aged 15-24

Using this measure, the numbers look quite different: Spain’s youth unemployment is 19% compared with 13% for Greece.  These figures are a little older than May so there may have some deterioration recently but the point is, that using the ratio, the situation doesn’t seem as dire.

Does it matter?  To a certain point, yes.  It gives us a better picture of life on the ground in the countries hardest hit by the crisis.  This helps explain in part why there is not the sort of social unrest that one might expect with over half the population out of work.  Southern European unemployment rates for decades have been hard to interpret.  In the 1980s, well before the boom years, Spanish unemployment was in the double digits but no-one really thought 16-18% represented reality because of the thriving underground economy.  In the last few months, a number of Spanish politicians have remarked to me that if total unemployment were really around 25%, there would be social chaos.

But from another perspective, it seems more of an academic debate.  Hill notes that the German youth unemployment ratio is 4.5%.  So, Spain’s level is still more than four times higher than Germany’s.  Plus, surely some young people in the South are in training programs and universities because there simply are no jobs – the classroom rather than the café as the refuge for the discouraged worker.

While much of the current debate centers on getting through the short term manifestations of the crisis – the bond yield roller coaster, for example, an important question is what the long-term implications of the crisis are for Europe’s struggling countries.  Young qualified workers are leaving. In the first half of 2012, Catalonia saw net out migration for the first time ever and was the Spanish region that lost the largest population – over 37,000 inhabitants.  The International Federation of Catalan Organizations estimates that the majority of those leaving are young, college educated people who in many cases are going abroad. Reducing unemployment by having young workers flee the country is not something many politicians would see as a win.

There are likely to be long-term demographic implications as well. Italy, Greece and Spain already have some of the lowest birthrates in the world.  Recessions typically have the effect of lowering the birthrate as couples delay childbearing until their economic situation improves.  Historically, this has not usually altered total fertility, just postponed it. But there is some reason to think that the protracted economic crisis may have far more serious consequences for the crisis of fertility in Southern Europe.

That is because these are also countries where the age at first birth is exceedingly high.  Spain, for example, has the highest age in the world at 29, with Italy close behind at 28.  Postponing childbearing under such circumstances is likely to reduce it further as women begin to push up against their biological clocks, in spite of advances in fertility treatment.

Lower birthrates  will mean rapidly aging populations and a higher dependency ratio.  Without large numbers of new immigrants, there will be fewer people of working age to pay for the elderly, which will in turn put greater pressures on the state and lower benefits.

So, while the common measure of unemployment may overstate the actual numbers of young people who are out of work, the job situation in Southern Europe is likely to have long-term consequences that lock the region into a vicious cycle.