Thursday, 2 August 2012

Euro Area: the lower educated unemployment timebomb

I would like to take a look at unemployment and to be more specific, at unemployment among people of a relatively lower education level, mostly during the 00s. The reason is simple. The Euro Area’s economy seems to be getting more and more geared towards activities that require workers to have acquired a higher education level and there is the distinct risk that people of lower education will get excluded.

There are a number of secular trends at work here that make up the current picture of employment/unemployment in the Euro Area.

One of them is deindustrialization. Some people claim this is due to outsourcing or delocalization of activities in lower-cost countries. I think that this is indeed happening but to a much smaller degree than conventional wisdom wants it to be and that most of the deindustrialization we are witnessing is due to the closing down of firms in the sector (for a number of reasons) or the increased automation/mechanization of production processes at the plant level. What’s more, in the remaining activities, at least in some Euro Area countries (not in my native Greece), there is a shift towards high or medium-high technology manufacturing. Finally, due to the new technologies, production processes is possible to be dissected with certain parts of them, mostly those that require less skilled labour, being moved to lower-cost settings. Of course this being a world under constant change, more and more parts of processes that require more skilled or better schooled labour are possible to be delocalized.

Here’s the chart showing unemployment in the Euro Area by educational level.

source: Eurostat

Of course, as with all aggregate figures this is disguising some considerable disparities among EA countries.

I would like to approach the issue not from a regulatory angle but from a sectoral angle, i.e. which sectors absorbed unemployed workers with lower education and which ones shed workers during the current depression. My working hypothesis is that lower education workers are mostly employed in manufacturing, construction and wholesale and retail trade, transport, accommodation and food service activities. To make things easier, from now on, I will call the last sector as retail trade. Here we go.

There may be some considerable differences among EA countries labour markets but they share some common characteristics. The first one is deindustrialization that translates into the manufacturing sector shedding workers and the second one is that the sectors that absorbed unemployed workers of a lower education were construction and retail trade. I would like to try and group EA countries into some distinct classes.

The first one includes those that underwent a credit boom which morphed into a construction boom (I won’t characterize those booms as bubbles or not), hence saw a considerable spike in construction employment. Another common feature members of this group share is that after their respective property crush occurred, unemployment went through the roof.

One of them is Ireland. 

source: Eurostat

As we can see in the chart when, manufacturing employment was stable and employment in retail trade (etc.) and construction was growing, unemployment was falling. When manufacturing employment started to fall, despite the strong growth in retail trade and construction, unemployment among workers of lower education remained broadly stable. One explanation I can think of is that many ex-workers that had dropped off the labour force came back and tried to get a job or that new jobs required more skills. When the crisis hit Ireland like a ton of bricks and all sectors pictured laid-off workers, the unemployment rate increased almost four-fold. 

Another one belonging in this class is Spain.

source: Eurostat

The story here is pretty much the same with Ireland except that manufacturing employment decreased only marginally as the 00s progressed, hence, unemployment eased a little bit further. Maybe after a while jobs created by the retail trade and the construction sector are not as suitable for workers with a lower education background (or maybe unregistered employment and a possible inflow of immigrant workers played a role here). Unfortunately I do not have such detailed data on the subject to delve deeper here.

source: Eurostat

Finally, here’s Estonia, that also went through a building boom. The unemployment rate here decreased significantly during the 00s, as it seems that a bigger number of lower education workers were absorbed by construction and retail trade. An explanation could be that the relevant sectors in Estonia were less sophisticated (than their counterparts in Ireland and Spain) so workers were more suitable for alternate employment here.

The second class is made up from countries that didn’t experience a construction boom, hence the unemployment rate there remained mostly unchanged.

One of them is Belgium.

source: Eurostat

Just before the 00s rolled in there was a substantial drop in unemployment among workers with a lower education background. During the 00s though, manufacturing employment decreased steadily bringing the relevant unemployment rate at the level it stood at the beginning of the decade.

The next one is Austria.

source: Eurostat

During the decade, employment in all sectors featured in the chart was broadly unchanged and unemployment among workers with lower education, remained in a 6%-8% range without any significant moves.

I will include Netherland here too, that like Belgium experienced a sharp drop in unemployment right before the 00s, and then moved in a range during the decade. The crucial difference among the two cases is that the level of unemployment in the Dutch case is half that of Belgium.

source: Eurostat

A third class would have to include countries where the relevant unemployment rate increased after the crisis broke out but I’m skeptical whether the rate will indeed remain lower than the level it stood before the 00s.

The first one here is France.

source: Eurostat
As we can see in the chart employment in construction and retail trade hasn’t budged since the crisis erupted and the spike in unemployment can be attributed solely to the decrease in manufacturing employment without growth in some other segment this time to square things off. With growth this low I somehow doubt it that employment will remain unchanged in construction and retail trade.

The next stop is Italy. Unemployment in Italy is lower than France, mostly due to the fact that the pace of deindustrialization is slower here (at least employment-wise). Again, construction and retail trade haven’t shed any workers and I find it hard to believe that his will continue to be the case in an environment of recession or stagnation if one is very optimistic.

source: Eurostat

We’re done with the countries that can be classified in distinct categories, so here come the “special” cases.

The first one is Portugal.

source: Eurostat

In Portugal, during the 00s the construction sector was in constant retreat and with the manufacturing sector shedding jobs all through the decade, the unemployment rate steadily increased.

Now let’s take a look at Finland.

source: Eurostat

After a fierce crisis in the early 90s, unemployment in Finland went vertical. But Finland is one of the few countries that managed to turn the tide and reindustrialize in the 90s. As a result, along with robust increases in construction and retail trade employment, the relevant unemployment rate fell from above 23% in 1995 to 12,8% in 2008. After the crisis broke out though, unemployment increased on across the board lay-offs. The relevant unemployment rate at almost 17% is rather high even for Euro-Area standards.

Finally, here’s Germany. 

source: Eurostat

Germany is the only country in the Euro Area that the relevant unemployment rate is in a downward path since 2006. It still is rather high, standing at about 15%. Workers with a lower education background were not absorbed by construction or retail trade in this case. Unfortunately, more detailed data are needed here to produce an explanation, something that I don’t possess.

The post is already too long, especially for summer reading material (although admittedly there’s nothing normal about this particular summer), so let me wrap this up. If one conclusion can be reached, it is that despite differences in local employment markets one common theme can be discerned: unemployment among workers with a lower education attainment is rather high in the Euro-Area. The reasons that brought unemployment down during the 00s are not in place anymore (in most cases) and no one should have thought them to be sustainable. This can only mean one thing, the Euro-Area needs a new growth model since this one’s definitely broken. What's more, in a time that the welfare state European model might come under pressure this will only serve to put more pressure on it. When a whole category of people are excluded from the labour market, this can spell trouble in a whole set of different levels and can have spill-overs in a whole lot of others. Construction and consumption booms were maybe Euro-area’s last chance to defer finding solutions to this rather serious problem. Let us be assured, the fact that these past years an enviable social calm loomed over the Euro Area, it doesn’t mean that we can take it for granted. Problems like this one, undermine exactly this. By all these I don’t mean that solutions to such problems are easy and it sure is way easier to tap your keyboard than solve such deep rooted problems owed to secular shifts, the thing is that the problem remains though…

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