Youth Labour Markets in Spain and UK

Youth Labour Markets in Spain and UK

Different systems: different outcomes?

María A. Davia (Universidad de Castilla-La Mancha and Universidad de Alcalá)

Mark Smith (Manchester School of Management, UMIST, UK)[1]

February 2001 (draft paper)

To be presented in the IV Encuentro de Economía Aplicada

María A. Davia:

Mark Smith:

Abstract

In this paper we contrast the different labour models in Spain and the UK and examine the particular impact on the young people and the transition into employment. In Spain we would expect the existence of a highly segmented labour market, resulting from the internal labour market structure, to lead to low rewards to experience in the secondary labour market for young people. Furthermore segmentation of the labour markets may mean that formal qualifications do not assure success in the early years on the labour market. In the UK, an occupational labour market structure might produce greater rewards to labour market experience for the young people and jobs tenure may be less important. We examine the institution structures in these countries and use data from the European Community Household Panel Survey (ECHP) for both countries to test these hypotheses. We use these data to compare the returns to different elements of human capital among Spanish and British young people. An initial descriptive analysis of both youth labour markets is augmented with a non-parametric analysis of entry into employment and stability in employment. We also use information on job match quality, a self-definition of overqualification, to examine the outcome of investment in formal education as well as a more objective measure of success and reward to human capital, net wages. We find that not all of our initial expectations were met and the youth labour markets fall in the middles to the two extreme situations.

INTRODUCTION

Across many countries in Europe the problem of integrating young people into the labour market persists and youth unemployment rates remain above those for other groups. At the same time all countries have experienced an increase in the importance of atypical work particularly affecting groups that are marginal to the labour market, such as women and young people. There are considerable similarities in the way that different countries have approached the problems of the youth labour market, for example by developing active policies aimed at unemployed young people and expanding capacity in the education system. Furthermore there are also similarities in the way that young people have adjusted to the decline in available employment opportunities, for example by remaining in formal education for longer and gaining higher level qualifications. However, differences remain between the experiences of young people and these are determined by the variety of institutions that impact upon the school to work transition and the youth labour market in general.

In Spain many of the problems in the youth labour market stem from the integration of first time job seekers and the high level of temporary work. In the UK there are particular problems for those with the lowest levels of education and the poor range of jobs on offer to them. Youth unemployment rates are higher in Spain than in the UK but in both countries a high level of precariousness among the available jobs is also a problem. In the UK weaker labour market regulation has provided less of an incentive to create temporary positions than in Spain, where temporary employment has become the most common way of hiring youngsters.

In analysing the youth labour market, institutions have received considerable attention and much of this has been based on the education system, minimum wages and employment protection systems. However, the structure in the demand for labour is also an important source of segmentation. Segmentation of labour markets is not only the result of the existence of particular employment contracts and other institutional structures but also due to the demand for different workers for different tasks. Young workers may play a crucial role in this division of the labour force as many new job opportunities, concentrated in low-skilled and low-paid jobs, tend to be taken up by young people. In many cases new entrants do not have a wide range of choices and may enter jobs with a higher level of education attainment than required. This implies a queuing dynamic at the entry points to employment (Thurow, 1975) and may also save training and other labour costs for employers.

In this paper we develop these ideas that differences in youth labour markets will persist as long as institutions and the structure of the demand for labour are quite different. The education system and the employment protection system remain important institutions affecting the entry patterns of young people. In particular the ability of the education system to assist the screening of school-leavers. Furthermore the relative opening-up or closing of the labour market to new entrants and the structure of demand has a strong influence over youth integration patterns. This paper is divided into five parts. Firstly we discuss the nature of the youth labour market in Spain and the UK and explore the different institutional structures. Secondly we describe the European Community Households Panel Survey (ECHP) data set and its use in investigating youth transitions. We then use a linked sample of young people from three waves of the ECHP to examine the main youth labour market indicators in both countries. Fourthly, we present the econometric estimations used to explore the different labour market outcomes for young people and test our initial hypotheses. Finally we draw some conclusions from our results.

1. YOUTH LABOUR MARKET AND INSTITUTIONS

In both Spain and the UK changes to labour market institutions over the 1980s and 1990s were clearly targeted towards increased flexibility at the margin of the labour market. Nevertheless young people in both countries have experienced a decline in labour market opportunities and have increased their participation in education as a result of high unemployment and falling demand in less skilled occupations.

The core of the Spanish labour market has been characterised as being very rigid, with strong protection and high dismissal costs. However, since the reforms of 1984 the conditions for using temporary employment contracts were relaxed and temporary employment contracts are heavily used by employers and dominate job growth. The proportion of temporary workers rose quickly between the mid-1980s and 1992 when the rate of around 30% the highest rate in the EU. This rapid expansion of temporary work affected those who did not already have a place in one of the secure positions on the labour market, mainly young people (Toharia and Malo, 1999). Recent regulatory changes have attempted to reduce to duality between temporary and permanent workers and to promote permanent employment growth. Since 1997 there have been some limited developments that have slightly increased protection of workers along with the implementation of directives to provide some protection to atypical workers. The particularly strong protection of tenure through permanent employment contracts and high severance costs has had a significant impact on young people. On the one hand, the improvement in the living conditions of families and their children permitting protection from unemployment and increased participation in education. However, on the other hand the high level of protection in the internal labour market has worsened the working conditions for the young people trying to enter work.

In the UK the neo-liberal policies in the 1980s were implemented to increase “labour market flexibility” but from a quite different starting point than that in Spain. Protection afforded to permanent workers is among the lowest in the European Union and the low level of employment protection was further weakened through increasing the qualification periods for employment protection, abolition of wages councils and reducing trade union power. Although these changes affected all labour market groups the most vulnerable suffered greatly - the low paid, young people, older workers and women. Although permanent and temporary employment expanded at the aggregate level between 1993 and 1997, for young people there was a decline in permanent work as temporary work increased (OECD 1999; table 4.1). Sly and Stillwell (1997) claim that at least one third of all new engagements between 1984 and the mid-1990s were temporary jobs (see Booth et al. 1999). By 1998 the share of temporary employees in the UK was 7.1% compared a European average of 12.7% and around a third of employees in Spain.

The characteristics of the education system has also help shape employment opportunities for young people. In Spain there has been a large expansion of the education system and supply of young people to education. However, the education system in Spain is characterised by a strong degree of standardisation and a relatively low level of stratification so that the scope for programmes to differentiate among graduates is quite low. School-leavers must therefore show their real skills once they are in the labour market on the job but as the labour market is relatively “closed” initial years on the labour market have become harder for recent graduates. The reaction of young people has been to further delay the age of entry in the labour market and acquire more academic qualifications. The education system in the UK is not so different to that in Spain but impact on youth labour market has been different. Tertiary education has also experienced a strong expansion but the level of stratification is higher than in the Spanish education system. Furthermore the proportion of a cohort at University is lower than it is in Spain (table 1). Stratification refers to the proportion of students in the highest levels of the education system and the degree of access to these levels. The higher the proportion of a cohort that enters tertiary education, the harder the screening process among recent graduate job candidates will be. In the case of Spain, the wide and increasing access to tertiary education has reduced the value of certain qualifications (Carabaña 1995) and had a “crowding out” effect on low qualified workers as higher qualified labour enter jobs further down the labour market (Dolado et al 1999). In Spain university graduates tend to get jobs that do not require a degree and that were formerly occupied by less qualified workers. In the UK these trends are less evident but the use of part-time jobs by students in higher education may also have an impact on other labour supply groups (Hutson and Cheung 1992).

Some of the problems in Spain and the UK result from a poorly developed and largely uncoordinated system of training, which has led to the over-emphasis on academic qualifications. In the UK this reflects an industrial relations history based around voluntarism and weak corporatist institutions that were easily dismantled in the 1980s. This poor provision of training in the UK is both a cause and a reinforcement of its relatively low skill production system (Finegold and Soskice 1989; Almond and Rubery 2000). In Spain, as in the UK, academic qualifications have a higher status than vocational qualifications. The low status accorded to vocational training in Spain means that it has been associated with poorly qualified students (Toharia at al 1997;181-2). In Spain there are higher shares of young people in education and not in the labour market for each age group and for both women and men (table 1). Furthermore, there are still large numbers of young people at work and not in education or training in spite of the increase in staying-on rates. However, the oversupply of young Spaniards with academic qualifications entering the labour market has meant that higher levels of education no longer act as protection against unemployment at the beginning of the professional career (table 2) as they do in other countries (Rubery et al. 1999). In both Spain and the UK there have been attempts to incorporate vocational training into school and college curricula although the approaches have been different. Spain has attempted to involve the social partners and maintain a level of independence in accreditation. The main training initiatives in the UK have been based on providing what the employer needs more than skills for the employees long-term development. Many youngsters hired under training or apprenticeship contracts in Spain are not really trained and very often link one cheap contract with another, collecting different and unrelated “training” experiences that do not provide them with a coherent career (Garrido and Requena 1997). Similarities also exist in the strategies adopted to tackle youth (un)employment problems. Both countries have experienced an increase in the share of young people in education but at the same time there have been attempts to developed temporary subsidised placements to reduce measured unemployment. Furthermore these initiatives have had a poor reputation among young people and the choice of full-time educational courses has been more popular (Roberts 1997; Cachón 1999, Dolado et al. 1999).

These institutional features lead to a youth labour market in Spain characterised by high unemployment, where young people take a long time to get a job and when they do get a job it will probably be temporary and not match their qualifications. In such a system the definitive feature that makes the difference is the achievement of a permanent position. Access to the employment is easier in the UK with the greater ease of job creation and destruction. The degree of job mobility may be high because of the job turnover due to temporary jobs, but it does not always imply the accumulation of experience and relevant human capital. Therefore we find a higher reward to tenure than to labour market experience and a lower reward to increased educational levels. This leads to crowding-out of young unskilled workers because of high levels of over-qualification. In the UK returns to education are higher and education provides protection against unemployment but a high proportion of young people also leave the education system with no qualifications at all.

1. DATA - THE ECHP

The European Community Household Panel (ECHP) is a standardised survey conducted in the Member States of the European Union and co-ordinated by the Statistical Office of the European Communities (EUROSTAT). The survey involves annual interviewing of a representative sample of households and the individuals within them, covering a wide range of topics including employment and non-employment conditions, wages, social welfare, health, satisfaction, job search, education and past labour market experience. The first survey was carried out at the end of 1994. Although at least six waves are being prepared for use by researchers, only data for the first three waves have been released at the time of writing. The use of this data set has several advantages (comparability being one of them) but also has significant drawbacks. The most important drawback is sample size and attrition during the period of observation (table 3). Barailler et al (1997) confirm that the sample size of the ECHP allows us to work with the sample of young people but it does not allow for the examination of flows of school leavers in sufficient detail. Furthermore, given that only three waves were available for our research, the amount of information on actual transitions, work experience and transitions is limited. The lack of a large sample size and the rate of attrition from the survey may have a strong effect on the significance and quality of some of the estimations and models developed throughout this piece of work. However, the ECHP remains the only comparable panel data source for the EU and these two countries.

Here we have used the panel element of the ECHP data in two ways. Firstly, to provide information on the current (end of 1994, 1995 and 1996) labour market status and job characteristics to describe the returns for general and specific human capital among Spanish and British youngsters. Secondly, information on the monthly labour market situation of the previous year is also analysed to elicit information on the labour market situation in detail over the period of a year. This is used to describe the transition patterns from unemployment to employment and from employment to unemployment. The sample used in these analyses includes those individuals that were under 30 in 1994. This definition of youth in solely based on age and not any other social, economic or national-specific factors that can determine "youth" such as time since leaving school or labour market (in)experience.

1. YOUTH LABOUR MARKET INTEGRATION IN SPAIN AND THE UK

We can see the impact of atypical employment (temporary and part-time) on the integration of young people in employment in figures 1a and 1b. Employment rates rise relatively steeply in the UK compared to Spain for both genders. In the UK the high youth employment rate is based on permanent work for the majority of young people and after the age of 19 most of this is full-time. However, in Spain the more gradual rise in employment rates reflects the higher staying-on rates in full-time education and the higher unemployment rate. The UK has one of the lowest proportions of 18-year-olds enrolled in full-time education (OECD 1998). Furthermore we see that young Spanish women never reach the employment levels of men in Spain or either women and men in the UK. Full-time temporary employees account for the majority of employed Spanish young people until the late twenties for both women and men. However, in Spain part-time employment, either temporary or permanent, plays only a minor role in the employment rates of women and men; In the UK it plays a strong role for men in their teens and for young women there is a consistently sized band throughout the 15-29 age group. In both countries non-employees, self employed and family workers, account for more men than women.