erkki liikanen : the great recession and its long shadow – youth unemployment speech by mr erkki liikanen, governor of the bank of finland, at the university of tartu, tartu, 30 may 2012. * * * unemployment to center of policy debate the financial crisis has brought unemployment back to center of the policy debate in europe and elsewhere. almost 4 million jobs were lost in the euro area since the start of the crisis in 2008, and employment still remains about 3 million workers below the pre - crisis level. differences in unemployment experiences and youth unemployment reflect shocks and institutions the impressive aggregate figures mask large differences across countries and across worker groups. while some euro area countries have experienced dramatic increases in unemployment, in others the labour market adjustment has been milder than expected. one the one hand these differences reflect the different nature of shocks affecting individual countries. on the other hand, they reflect labour market institutions and policies in place in these countries. the shocks and institutions are also behind the perhaps most worrisome manifestation of the crisis on the labour market, the rise of youth unemployment to record levels. it has risen to a half of the youth labour force ( aged 15 – 24 ) in spain and greece and a third of the youth labour force in ireland. in estonia the youth unemployment rate stands at the current 25 % ( although peaking at 40 % in 2010 ). however, at the same time some countries have experienced only moderate increases in the youth unemployment rate, and in germany it has actually fallen to the current 8 %. earlier debate on shocks and institutions relevant again looking at these recent developments, the debate on the interaction of shocks and institutions behind the rise and persistence of european unemployment seems highly relevant again. the chief economist of the imf, then a professor at mit, olivier blanchard claimed in 2000 in his harry johnson lecture and his article with justin wolfers ( blanchard & wolfers 2000 ), that to explain both the rise and cross country heterogeneity in european unemployment since the 1960s, the interaction between shocks and institutions is crucial. lars ljungqvist and thomas sargent ( 1998 ) blamed the high european unemployment since the 1980s to welfare states ’ diminished ability to cope with more turbulent economic times, such as the ongoing restructuring from manufacturing to the service industry, adoption of new information technologies, and a rapidly changing international economy. assar lindbeck and dennis snower ( 2001 ), in their insider - outsider theory, examine why labor markets are segmented into “

that labour costs must fall, to bring employment back to its pre - crisis level. the productivity of a worker and the cost of labour determine its demand in the longer term the key factors for labour demand are the productivity of a worker and the price of labour, namely, the costs that accrue to the employer from a worker. the wage is, of course, an essential part of the costs, but the employer also bears other wage related costs, possible training, search and firing costs. wage formation that leads to a wage distribution that is more compressed than the productivity distribution, tends to weaken young workers employment. the price of a labour is the wage. the productivity of young workers is often lower than that of older ones, but wages do not always fully reflect this productivity difference. if personnel reductions are focused on those for whom the productivity - wage difference ( profitability ) is the lowest, the reductions will primarily be on the young workers. overall, wage formation that leads to a wage distribution that is more compressed than the productivity distribution, tends to weaken young workers employment. a wage distribution that is narrower than the productivity distribution may be caused by a number of factors. these include aiming at wage inequality, wage bargaining institutions that represent the median worker or insider workers or minimum wages. a rapid rise in unit labour costs ( wages that rise faster than productivity ) may also endanger especially the jobs of the youth. many countries have reduced minimum wages for young workers minimum wages often concern the least educated and least productive workers, and often young people often fall into this category. thus, the level of minimum wages is potentially important for the employment of young workers. in fact, many countries have reduced minimum wages for young workers, for example, 80 % of the minimum wage. a reduced minimum wage is, however, meaningful only in countries where there is a significant share of workers working at the minimum wage ( for example in france ). one wage related measure is to reduce the employers ’ social contributions to targeted groups, such as low - productivity workers ( often young ), to promote employment of young persons. this is on the other hand has to take into account the losses to public finances caused by the reduction and substitute them from other sources. apprenticeship places that pay a sub - minimum wage, and where the contracts include a training commitment from the employer, have been successful ( e. g. in france ). bis central bankers ’ speeches dual employment protection legislation weaken the position of the youth firing cost should be gradually