Overview of Youth Employment Segmentation in the EU: Special Focus on Flexicurity

Overview of youth employment segmentation in the EU: special focus on flexicurity

By Gabriella Pappadà[1]

Abstract

This paper is part of the European project YOUTH, a Study, financed by the EC, DG Employment in 2006, on "Pathways to Work: Current practices and future needs for the labour market integration of young people".

In recent years there has been a resurge of interest in young people’s employment problems, the focus of labour economists and sociologists during the Seventies and Eighties, also covering countries with apparently good employment situations (such as Sweden, Germany and United Kingdom). This interest is timely and Europewide, prompted by escalating youth unemployment, difficulties in the transition from school to the labour market and the precariousness of short-term employment alternating with unemployment. Even countries with a good adult level of employment and some of the best labour-market performances have encountered problems in recent years.

The unfavourable position of young people in the labour market is evident Europewide. Hence the problem of youth unemployment is present and growing throughout Europe. The most unfavourable positions of the young compared to adults are to be found, besides Sweden, in the United Kingdom, Italy, Romania, Malta, Greece and Finland with a youth to adult unemployment ratio of over 3.

It is clear that the integration of young people in the labour market is becoming increasingly difficult, subject to long entry periods in which unemployment alternates with atypical contracts.

This paper will explore the reasons for this insufficient labour-market integration on the basis on youth labour-market outcomes and on the four policy areas identified by the European Commission as flexicurity components, taking into account how labour-market institutions and differences in employment protection legislation are responsible for differences in the size of youth employment.

Key words: youth employment, labour economics policies, flexicurity.

Jel classification: J08, J21, J24.

Introduction

The unfavourable position of young people in the labour market is evident Europewide. Figure 1 shows the youth to adult unemployment ratio (15-24 versus 25-54) in the 27 member countries, where Germany boasts the best performance and Sweden the worst. The same figure shows the deterioration in this ratio between 2000 and 2006, the most striking example being Sweden, whose youth to adult unemployment ratio rose from 2 in 2000 to over 4 in 2006. The only, slight improvements are to be found in Romania, Luxembourg, Greece, Slovenia, Portugal and the Netherlands. Even Germany had a youth (15-24) unemployment ratio double that of adults in 2006.

Hence the problem of youth unemployment is present and growing throughout Europe. The most unfavourable positions of the young compared to adults are to be found, besides Sweden, in the United Kingdom, Italy, Romania, Malta, Greece and Finland with a youth to adult unemployment ratio of over 3.

It is clear that the integration of young people in the labour market is becoming increasingly difficult, subject to long entry periods in which unemployment alternates with atypical contracts. The more or less stable level of the youth to total employment ratio from 2000 to 2005 (except for Luxembourg, rising from 4 in 2000 to almost 6 in 2005, Romania dropping from 4 in 2000 to under 3 in 2005 and Cyprus with the lowest value in 2005, around 1.5, slightly less than in 2000) shows that temporary employment is becoming widespread among the young. The share of under 12-month contracts ranges from 28-29% in Greece and the Netherlands to 55% in Spain, 59% in Sweden and 66% in Finland.

Figure 1. Youth to adult unemployment ratio, (15-24 versus 25-54), 2000 – 2006

Source: Eurostat, Labour Force Survey

The theoretical framework to explain such a phenomenon

The increasing demands of globalisation and competition triggered by technological and organisational changes mean that firms require more flexibility when renegotiating labour contracts developed in the 1970s and 1980s. But flexibility is also being demanded by workers to achieve better personal well-being. In addition, most experts and policy makers suggest this as a good way to combat the high rate of unemployment.

During the 1980s, an important debate developed by the OECD (1986) stressed the importance of labour flexibility to increase employment rates together with economic growth in a context of continuous and rapid technological development. The discussion on the significance and limits of labour flexibility highlighted the importance of education and training, not only for economic growth and fairer income distribution but also for increasing young workers’ employment. UNESCO (2000) considered not only the impact on economic growth since the first world conference on education but also focused on the different purposes of education and learning. To guarantee human development and to promote social progress and better living standards, people need to acquire knowledge and competencies and to have access to the resources that allow a decent and healthy lifestyle.

A significant step toward flexibility was taken in European countries with the introduction of atypical labour contracts, aimed at reducing employment protection legislation and labour costs. For a discussion of the different forms of subordinate-work not regulated by full-time and permanent contracts see Frey and Croce, eds., 2002, and the very rich bibliography.

The softening of labour legislation encouraged the use of temporary labour contracts in an uncertain economic and social environment because firms can use them to adjust their workforce to economic fluctuations (Booth, Doledo, Frank, 2002). Although these temporary contracts are considered less expensive, with positive effects on employment and output production (Bentolila, Bertola, 1990; Bentolila, Saint Paul, 1994), some critics have underlined their drawbacks in terms of productivity, motivation and career opportunities (Farber, 1999; Arulampalon, Booth, 1998).

As Standing, 1999 reports, atypical contracts have triggered a lively debate on precariousness among workers and sensitive groups like the young. Economists agree that flexibility, if accompanied by good jobs or represents temporary periods of transition from school to work, from inactivity to employment or from unemployment to employment, is positive because it favours integration into the labour market. But if flexibility does not lead towards good jobs, it could create a stacked labour market in which atypical and young workers are caught in the “precariousness trap”.

This is particularly true for many European countries where young people (especially if they are unskilled and women) suffer problems of segregation in certain jobs with low levels of working conditions. A theoretical approach to this segmentation was launched in the 1960s/1970s with the Dual Labour Market theory (DLM). The DLM theory aimed to explain why some groups of workers (such as women, young people and immigrants) experienced higher rates of unemployment, lower rates of wages and worse working conditions in general, and why such inequalities were rapidly increasing in many OECD countries.

The classical approach to this theory is associated with Doeringer and Piore (1971), who asserted that the labour market is not perfectly competitive, but that there are market failures which create a dual labour market structure composed of primary and secondary sectors. Doeringer and Piore identified a core and a periphery, where workers employed in the latter are queuing to be employed in the primary sector (queuingtheory). Workers employed in the primary sector usually have a permanent job, are skilled and receive on-the-job training more than employees in the second sector.

The simultaneous use of strong employment protection legislation and temporary jobs observed in many European countries seems contradictory since the former aims at limiting job destruction while the latter intensifies it. Having said this, the efficiency of the Danish flexicurity model seems to prove that the two can be reconciled. European countries with high unemployment benefits and a weak job protection ratio are also those in which participation rates are high.Moreover, studies based on individual subjective data suggest that individuals feel better protected by unemployment benefits than by employment protection (Clark and Postel-Vinay, 2005).

In the 1990s, many experts realized that the labour flexibility requested by employers, employees and also by new institutional systems was creating categories of disadvantaged people and in the worse case, social exclusion (see Lindley, 2003). The debate thus focused on the trade-off between dynamic efficiency (necessary to meet changes) and social cohesion (the active participation in society of all). It emerged that lifelong learning contributes both to performance and productivity (increasing a country’s growth rate) and to social cohesion and personal development in general.

A number of authors go beyond the analysis of Danish specificity and use flexicurity as a policy concept for ranking countries. Wilthagen and Van Velzen (2004) place different welfare regimes along the flexibility-security axes, while Tangian (2004) develops a ‘flexicurity index’. Some authors trace the role of flexicurity for only a part of the labour force. Thus, Tros (2004) looks specifically at older workers.

Wilthagen and Van Velzen (2004) use measures based on three criteria: (i) the number of transitions between non-employment and employment and within employment by type of contract during one year; (ii) diversity of contractual and working arrangements which include a measure for employees in part-time and fixed term contracts and self-employed as a share of total employment and (iii) transitions by type of contract. More recently, another attempt at quantifying flexicurity was made by Madsen (2006), who identified the following measures: (i) legal strictness of employment protection from the OECD Employment Outlook; (ii) average tenure by sex, age, sector and education; (iii) net replacement rates from OECD Benefits and Wages; (iv) Active Labour Market Policies from OECD Employment Outlook; and (v) public expenditure on labour market policies from OECD Employment Outlook. Starting from these studies, the project will try, in the second phase, to define a future scenario of young people’s labour market integration in terms of flexicurity, presenting an overview of different parameters that also include labour market features and demographic trends (fertility rate, dependency-ratio, age and educational level of women when they have their first child).

A further suggestion from the literature concerns the difficulty to export the flexicurity Danish model to countries with different socio-institutional backgrounds. J. Zhou (2007) has also claimed that it is difficult to pursue the security objectives in the new, enlarged European Union because of the dilution of the European model of Social Dialogue following the entry of post-socialist countries.

Table 1 - Literature analysis

Theories
Major references / Basic concepts/assumptions
Dual Labour Market :
Doeringer and Piore, 1971.
Wilkinson, 1981.
Piore and Sabel, 1984.
Dickens and Lang, 1985.
Rosenberg, 1989.
Guell, 1999 / The classical approach of this theory is related to Doeringer and Piore who assert the coexistence of a dual labour market structure composed of primary and secondary sectors.
The assumptions are that in the primary sector there is:
Rationing
Queuing
Human Capital:
Becker, 1962, 1964.
Mincer, 1962.
Schultz, 1961.
Ashton and Green, 1996.
Acemoglu and Pischke, 1998, 1999. / The classical approach of this theory is given by Becker, Mincer and Schultz, who analyse how the accumulation of human capital through education, training and learning by doing has positive effects on labour productivity with consequent higher wages
SIGNALING THEORY:
Spence, 1973; Arrow, 1973; Stiglitz, 1975; Shapiro and Stiglitz, 1984; Bowles, 1985 / This theory asserts that employers tend to hire individuals in accordance with their educational and training qualifications because the real stock of skills possessed by jobseekers is unobserved
QUALITY OF JOBS
Rodgers & R., 1988.
Standing, 1999.
OECD, European foundation and European Commission. / This approach places analysis indicators under different variables, generally related to formal working conditions, established by labour contracts and informal working conditions, which depend on the work environment, kind of work and lifelong learning opportunities
FLEXICURITY
Madsen, 2002, 2006.
Wilthagen and Van Velzen (2004).
Tangian (2004).
Tros (2004), Boyer (2006), Seifert and Tangian (2007). / Flexicurity involves a complex set of indicators that analyse institutional, economical and social aspects, including labour market measures, lifelong learning strategies and social policies to enhance labour market participation through a work-family balance. The term flexicurity has become the symbol of a welfare production mix that enables more labour flexibility with more labour security.

Taking into account the above mentioned literature analysis, the research theoretical framework tries to explain youth employment features in Europe in a context of flexicurity and good jobs, focusing on how to read the unsatisfactory youth labour-market performance through the lifecycle capabilities approach.

The project concentrates on the main theory that an increase incapabilities through flexicurity strategies from a lifecycle approach would enable a better integration of young people in the labour market. This integration, fostered by higher human capital levels, would mean that young people could acquire faster and longer-lasting economic and familial autonomy. A greater ability to learn and adapt skills to labour demand would reduce the probability of leaving the labour market later on because of redundancy or professional obsolescence and would enable young workers to become insiders for their entire working lifecycle. The process of integration in the labour market, if not accompanied by job opportunities, even temporary but significant, and if not relatively rapid, risks increasing the job precariousness to which young people, as a vulnerable group, are already subject. The flexible job placement pathway is acceptable for the more educated young people because they know they will anyway manage to obtain good working conditions in a not too distant future. On the other hand, a slow placement process, alternating periods of precarious occupation with periods of unemployment, risks becoming a trap for the weaker groups. This risk can be overcome by implementing flexicurity strategies in the various countries that help young people to transform their tangible and intangible resources into functionings, according to Sen’s capabilities approach. Flexicurity tools adapted to the context, to the needs and to the age of young citizens and their tangible and intangible resources would enable a career pathway to be constructed in the labour market that fosters employability and access to quality jobs. The next sections will study the four theoretical components of the project, attempting to illustrate how they intersect and depend on each other.

The results coming from YOUTH project[2]

The flexicurity clusterisaton is the result of a normalised principle component analysis, using indicators inside the four policy areas identified by the European Commission as flexicurity components[3]:

flexible and reliable contractual arrangements
comprehensive lifelong learning strategies
effective active labour market policies
modern social security systems.

The added value of the Youth flexicurity clusterization concerns the insertion of four indicators of capability in the Principal component analysis:

• Human Development indicator;

• PISA average score;

• percentage of young people at risk of poverty;

• percentage of 20-29 years old who have at least a secondary school qualification.

In brief, the 27 EU members analysis[4] shows that the participation of young people in the labour market can be summed up by making four groups of countries, each with common characteristics and challenges with regards to their flexicurity performance in the labour market[5].

The first cluster - countries with the best labour market performance among the 27 EU member states:

Austria, Denmark, Netherlands, Sweden, Finland, United Kingdom and Ireland have the best labour-market performance in terms of youth employment rates. The labour market has a good degree of different forms of external and working-hour flexibility. For example, in the Netherlands, part-time work is more frequent, whereas in other countries fixed-term contracts are more popular.
Except for the United Kingdom, that has a fair level of public expenditure on active policies, and Ireland, which has a good one, these countries generally have a high level of public expenditure on labour policies as a percentage of GDP.

Capability levels are good:

There are quite low percentages of young people from low-income families except in Ireland and, in part, in the United Kingdom.
OECD-PISA AVERAGE SCORES above the European average for all these countries.
The human development indicator has the highest values in Europe for all these countries.
There is a good percentage of 20-29 year olds who have at least a secondary school qualification.

Some challenges

One of the challenges is to remedy the stalemate situation in youth unemployment. Another challenge involves the integration of the weaker young groups (migrants, low-skilled) and some disadvantaged areas in the larger countries.
Ireland, United Kingdom and Sweden must lower their percentage of NEETs (not in education, employment or training).
Another challenge is therefore to actuate targeted policies for young people on the basis of the new challenges from the local labour markets of these countries.
There are groups of young people in vulnerable categories who have serious problems in completing their education in the traditional school systems. Alternative forms of learning are needed to help them develop their potential as well as more flexible school pathways to facilitate the return to education after dropping out.

The second cluster - countries with low participation of 15-24 year-olds in the labour market but with good indicators of capabilities and good share of GDP in labour- market policies: