Yves Mersch: Tackling unemployment in Europe - increasing mobility,
enhancing flexibility, optimising education
Keynote speech by Mr Yves Mersch, Member of the Executive Board of the European
Central Bank, at the University of Luxembourg, Luxembourg, 26 September 2014.
* * *
Ladies and gentlemen,
First of all: congratulations to all doctoral students, whose graduation we are celebrating
today!
I am confident that you have a bright future ahead of you, as you stand well prepared to
enter the labour market and to find jobs that match your skills - be it in academia, in the
private or public sectors, here in Luxembourg or elsewhere.
Holding the relevant qualification is a precondition for receiving a suitable job offer. However,
it might not always be enough to secure a job. In several European countries, prospects are
rather dismal, especially for young people.
I am aware that unemployment may not be the most obvious challenge to talk to you about
on such a celebratory occasion. It is, however, a major concern for the euro area. And I am
convinced that well-educated people like you can really make a difference.
High unemployment in the euro area - merely a temporary phenomenon?
Temporary rises in unemployment rates are typical of cyclical downswings.
Such cyclical increases in unemployment are distressing for those affected and can have
dire consequences, but they tend to reflect a transitory downturn in labour demand and do
not necessarily have a strong structural component.
Firms that are uncertain about the strength of the recovery are unlikely to invest or to rehire
workers. At low interest rate levels and high labour market rigidities, firms tend to favour
capital intensive investments over hiring.
Yet, developments during the second recessionary episode in Europe differ from those
observed at the beginning of the crisis. During the Great Recession, unemployment rose, as
there was a shortage of vacancies. However, during the second recessionary dip,
unemployment increased, although aggregate vacancy rates remained close to long-term
averages.
In addition, the second recessionary period led not only to extensive, but also to very
persistent job losses in some euro area economies. The proportion of people in long-term
unemployment rose substantially. This is particularly worrisome, as it reduces the chances
that they will be rehired: if workers are unemployed for a long period of time, their skills might
simply erode. Long spells of unemployment may thus easily turn into structural
unemployment.
Indeed, the mere fact that firms are willing to hire, but people willing to work are unable to
find a job is already indicative of structural factors playing a role. Estimates suggest that
structural unemployment in the euro area, which was already high prior to the crisis, rose by
about 17% from 2008 to 2013.1 Structural unemployment is not only distressing for those
affected, but can have a substantial impact on potential output in the longer term. It is
essential, therefore, to avoid hysteresis effects from rises in spells of long-term
unemployment.
Particularly in countries that were hard hit, a large part of the decline in employment can be
attributed to certain sectors. For instance, in Estonia, Ireland and Spain, the previously
oversized construction sectors had to downsize substantially. The Spanish construction
sector alone has accounted for around half of all job losses in the country since the start of
the crisis. Moreover, such a collapse in the construction sector has an enormous impact
further down the production chain. So, the number of people affected - for instance those
providing building materials or real estate services - is estimated to be much greater than the
1.8 million who lost jobs in the construction sector.
The resulting mismatch between the skills offered by unemployed workers and those that
employers require explains why vacancies are not filled, despite people being willing to work.
In fact, skills mismatch has increased noticeably in the euro area and seems to be becoming
more entrenched.2
Potential solutions to increase high qualified employment
If labour market developments are so heterogeneous across countries, why don't the
unemployed simply move to places where the demand for labour is higher?
Indeed, labour mobility is a powerful tool for tackling high localised unemployment levels and
alleviating emerging bottlenecks in faster-growing euro area economies. That is why labour
mobility is a core element of a successful currency union. It leads to a better match between
workers' skills and employers' demands. In economic jargon, it aids factor re-allocation by
moving labour to where it is needed, which in turn contributes to overall growth in a monetary
union and acts as an effective adjustment mechanism.
So, how does Europe fare in terms of labour mobility? The free movement of workers is a
fundamental right enshrined in the Treaty on the Functioning of the European Union. But how
much use do citizens make of this right in practice?
Since the enlargement of the European Union (EU) in 2004, labour market mobility has
certainly risen, albeit from very low levels.3 [The number of EU workers residing in another
EU country rose from 4.7 million in 2005 to 8 million in 2013, representing an increase from
2.1% to 3.3% of the total labour force.] The crisis boosted intra-EU mobility. Some studies
suggest that the migration response to the crisis might have been even stronger in the EU
than in the United States.4 This is quite remarkable given that the United States is often
taken as a benchmark for mobility.
Moreover, it has sizeable macroeconomic effects: estimates suggest that post-enlargement
mobility flows over the period 2004-09 increased the GDP of the EU15 by around 1%. The
impact on the GDP of major destination countries for migration, such as Ireland, Spain, Italy
and the United Kingdom was even higher.
Increased labour mobility is certainly good news - both for originating and destination
countries. Another piece of potentially good news is that the level of education that migrants
bring to their destination countries has improved. With highly-skilled people willing to move
for work, skills shortages in destination countries could be compensated for by workers
emigrating from other countries. At least, this is how it should work ideally. What is worrying,
however, is that many intra-EU migrant workers are employed below their skills level. The
resulting underutilisation of human capital shows that reforms are needed to improve the
efficiency of cross-border mobility in order to fully reap the benefits of workers' migration.
One issue is that recognition of qualifications remains uneven across EU Member States.
According to a recent survey5, current procedures that tend to be cumbersome could easily
be replaced by more automatic ones: more than 90% of requests submitted result in the
qualifications being recognised.
But even if their qualifications have been recognised, migrants might simply not be able to
take up a position matching their level of education owing to lack of language skills. More
training in this area would certainly be welcome.
Beyond efforts at Member State level, the reformed European Social Fund could be
instrumental in this respect. Among other things, its objectives include investment "in
education, skills and lifelong learning", as well as measures for "promoting employment and
supporting labour mobility". It is up to the European Commission and the Member States to
make the most out of the opportunity for mobility through operational programmes, such as
language courses or exchange programmes.
Another barrier to workers moving from one country to another is that they are uncertain as
to what will happen if they cannot find employment immediately. Unemployment benefits are
transferable only to a limited extent. EU law has been adjusted accordingly and now needs to
be implemented rigorously. The same applies for the transferability of pension rights.
To summarise, adjustment through mobility is not merely a theoretical concept, but a
European reality. However, there is scope for both more inter-regional and more
intercountry labour mobility.
Mobility is not the sole answer, though. After all, employment will rise once firms are willing to
hire. And they will do so if conditions are favourable. While policy-makers cannot interfere
with employers' decisions, they can certainly provide the right setting and eliminate barriers
to more efficient labour markets. Euro area countries simply need to achieve the labour
market flexibility that is compatible with membership of a monetary union.
Traditionally, policy-makers have focused on passive labour market policies, such as
unemployment benefits that are de-linked from incentives to find a job. In my view, such
policies should be complemented by more active policies, such as job-search assistance and
targeted productivity-enhancing training measures to foster employability.
To ensure sustainable economic development, reforms are necessary and beneficial for
countries that are currently facing high unemployment rates. Countries with more rapidly
ageing populations also need to prepare, as they might soon face bottlenecks in labour
supply. Some of these countries are already confronted with skills shortages. Just to give you
an example of the implications: according to an OECD survey, potential GDP growth in
Germany could decline to below 1% soon after 2020 as a result of an ageing population and
skills shortages.6
Once I met a boy who said that his professional ambition was to become a pensioner like his
grandfather. When I explained that this was related to age, he said that alternatively he
would accept to be an unemployment beneficiary like his father. Sadly, today he is in and out
of prison.
You see how wrong mind sets on fundamental values like work lead to social disruption. The
same applies to the belief that you must only make an effort once and then live off your
diploma for the rest of your life. Technological and demographic changes affect skill renewal
and knowledge transmission.
More frequent skill upgrades in life cycles and better social usage of the swelling so-called
non-productive age cohorts are challenges to intergenerational knowledge transmission.
The fraction of the elderly in the population will increase tremendously, while the fraction of
those who produce resources is going to decline. This overall loss in productivity will also
affect capital, rates of return on capital will go down at a moment when pension funds are
already stretched. This is known under the catch phrase "asset market meltdown". Even in
Luxembourg, the annual growth rate of GDP per capita, or better per employee, has strongly
decreased.
The question is, can you mitigate the effects of ageing societies by a rise in human capital?
Research at Goethe University has shown that "the projected fall in the rate of return on
capital of 0.8 p.p. would be just 0.5 p.p. in the case of adjustments in human capital through
better education."
Life-long learning, therefore also includes making better social use of the old. A University in
an environment of finite financial resources has to address the challenge of including
vocational training in its strategic spanning, in order to reap organisational and logistic gains
in efficiency. A better use of facilities, resources and synergies increase financial efficiency
and extend the sense of ownership of the University in the population at large. Of course, we
must not forget the priority task of a University and the principle that quantity cannot replace
quality.
Striving for excellence must remain the guiding principle, especially in a country where the
risks of complacency rise by the day.
Conclusion
On that note, I shall draw to a close.
Unemployment in the euro area remains at unacceptably high levels. In order to tackle it
effectively, we need to embark on a triad of measures: increased mobility, enhanced
flexibility and optimal education.
And this is why, at the beginning of my remarks today, I said that well-educated,
highlyskilled people like you can make a difference.
So, let me conclude by wishing all of you a very successful 2014/2015 academic year! Thank
you to the departing President Rolf Tarrach, and all the best to the incoming President
Rainer Klump.