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FINANCE

Drivers of employment generation and social inclusion in the EU

social inclusion in the EU

EU development strategies are aimed at producing growth with “a strong emphasis on job creation and poverty reduction”. But it is unclear whether the economic conditions in EU regions are ideal for the generation of employment and labour market inclusion.

This column argues that the quality of public institutions and the endowment of human capital – two key factors behind EU growth strategies – are essential for the reduction of labour market exclusion and the promotion of inclusive employment across Europe.

The EU is undertaking an effort to counterbalance the effect of the Global Crisis on unemployment by trying to get people back into work. The Juncker Commission has set up a plan of investments – estimated at €315 billion for the period 2015-2017 – aimed at supporting the areas of Europe with the highest job losses. Employment generation is further targeted by other strategies, such as Europe 2020, which pursues inclusive economic growth with “a strong emphasis on job creation and poverty reduction” (European Commission 2010). However, concerns remain about the ‘inclusiveness’ of these measures. It is uncertain what types of jobs will be generated, what are the optimal conditions for creating more jobs, and who will benefit or lose out from any potential job creation.

Employment, unemployment, and social exclusion: Recent trends

The challenge for the promotion of ‘inclusive’ or ‘equitable’ growth and cohesion in EU labour markets is two-fold – in the form of (a) competition from emerging markets, and (b) skilled-biased technological development. These challenges, it is claimed, raise the demand for skilled workers, while threatening the wages and jobs of the unskilled (Atkinson 2009) and posing a serious risk for the establishment of a more inclusive society.

Indeed, one of the most striking changes in the composition of EU employment over the past 15 years has been in the share of employed people with high versus low skills. As shown in the top panel of Figure 1, while the rise of high-skilled employment has been a constant in recent years, low-skilled employment has followed an opposing trend. Overall, employment in the EU has been characterised by a strong upskilling process.

Recent adjustments in the composition of employment have been driven by a variation in unemployment by skills type. Unemployment for the medium-skilled and high-skilled has changed only marginally since 1999. Jobs for the low-skilled, by contrast, have declined, causing unemployment rates for this group to shoot up from 12% (in 2001) to 18% (in 2012) (bottom panel in Figure 1).

Figure 1. Employed people and unemployment rate by level of qualification in the EU

Figure 2 illustrates the geographical distribution of long-term unemployment in EU regions. The highest long-term unemployment is found in Southern Italy, Eastern Germany, and Eastern Europe (particularly in Slovakia). The share of the long-term unemployed has risen in Northern Italy, Northeastern France, Ireland, Central and Eastern Spain, and the UK.

Figure 2. Long term-unemployment level and change in EU regions (1999-2012 average)

Source: own elaboration with Eurostat data.

The long-term and low-skilled unemployed are those at higher risk of marginalisation and persistent exclusion. Low-skilled workers are more likely to become long-term unemployed when losing their jobs, and long periods of inactivity lead to skill loss (Pissarides 1992). Therefore, the recent growth in long-term unemployment is related to the increase in low-skilled unemployment. Especially since the beginning of the crisis, the share of people at risk of poverty and social exclusion has continued to rise, making European targets on poverty and social exclusion difficult to meet.

The challenge for the EU thus goes beyond bringing unemployment back to pre-crisis levels and includes unwinding the cumulative social effects determined by the rise in long-term unemployment. In order to identify what policies are needed to reverse these trends and to recognise which European territories are more vulnerable, it is necessary to understand what are the factors behind changes in social exclusion in Europe.

A descriptive picture is derived from plotting the regional data on people at risk of poverty or social exclusion from Eurostat Regio. The relationship between changes in low-skilled employment and in social exclusion is negative and significant, suggesting that employment conditions for the poorest have improved in regions witnessing the lowest reduction in low-skilled employment (Figure 3, top panel). Rises in high-skilled employment, instead, are not associated with a reduction in people at risk of poverty or social exclusion (Figure 3, bottom panel).

Figure 3. Scatterplot correlations – employment by skill level and social exclusion in EU regions (2005-2012)

Development strategies such as the Juncker Plan and Europe 2020 have been designed to counter these trends and promote employment, by focusing in particular on those in greatest need. Are the key factors behind these strategies really contributing to addressing the issues of labour market marginalisation in Europe?

Drivers of employment generation by skill level and of labour market exclusion

In a recent paper, we investigate the relationship between structural economic factors and regional labour market outcomes by assessing how the elements on which the EU has invested – and plans to invest – the most affect employment generation and social inclusion in European regions (Di Cataldo and Rodríguez-Pose 2017). We focus on the four different axes regarded as essential for both economic growth and employment: the stock of human capital, research and innovation, infrastructure endowment, and the quality of public institutions.

Each of these axes represents a basic component of the framework in which labour investments take place. A growing body of literature has studied their potential impact on labour market outcomes, yet much less research has concentrated on their contribution to employment generation by skill type and to social inclusion in the EU regional context.

We test the extent to which each development axis has been associated to employment generation and social inclusion in EU regions between 1999 and 2010. The empirical models estimated are based on dynamic responses of labour market variables to static economic conditions. By employing fixed effects and dynamic panel techniques, we assess the employment/unemployment long-term performance of different EU regions on the basis of their specific structural characteristics. Our models control for the economic cycle, the regional industrial structure, key labour market characteristics, region-specific time-invariant factors, and annual shocks.

The analysis distinguishes employment by skill level, sub-dividing regions by level of economic development. The aim is to identify the conditions that exacerbate or reduce labour market disparities in different economic contexts. Additional light is shed on the dynamics of social exclusion by using long-term unemployment as a proxy for labour market marginalisation.

Our findings suggest that the economic factors behind employment growth are not always the same as those conditioning the evolution of social exclusion.

More specifically, the empirical estimates assessing the determinants of employment growth unveil two things:

  • First, the generation of employment in Europe has been favoured by the presence of a larger share of a highly-educated population, a result that can be explained by the upskilling process in the composition of employment.
  • Second, in richer EU regions, employment has grown the most in more technologically advanced and innovative areas.

When total employment is sub-divided into high-skilled and low-skilled employment, the analysis gives three results:

  • First, high-skilled employment increased more in regions with a highly-educated population. This provides evidence that EU regions feature self-reinforcing spatial concentrations of human capital, i.e. high-skilled jobs increase where skills are already clustered.
  • Second, regions experiencing more significant increases in the employment of less-qualified workers are those where the quality of government is higher. Therefore, regions with good and efficient governments have reduced labour market marginalisation and stemmed the loss of low-skilled jobs.
  • Third, regional government quality makes a difference for the promotion of low-skilled employment – and hence of labour market inclusion – particularly in the poorer areas of Europe.

Finally, investigating the dynamics of social exclusion reveals the following:

  • First, EU regions with a more qualified workforce and better public institutions have significantly reduced the share of people marginalised from the labour market.
  • Second, the endowment of transport infrastructure is, at best, insignificant for generating regional employment and reducing labour market disparities.

Policy implications

Our study demonstrates that not all areas of regional intervention affect labour market conditions in the same way. The generation of employment and the process of labour upskilling depend on different economic factors than the dynamics of long-term unemployment and social inclusion.

In particular, the results of the analysis indicate that the regional endowment of human capital is a positive element for growth, employment promotion, and social inclusion in EU regions. But it is unlikely that education investments alone will suffice to fulfil the inclusion objectives of the Europe 2020 strategy. Especially in disadvantaged regions, characterised by weak governments and higher corruption, education policies should be coupled with institutional reforms, as good governance is essential to put the socially excluded back in the employment track. The presence of adequate government institutions is a prerequisite for the success of any labour market policy. Other things equal, a more favourable institutional environment can make the difference in ensuring that public policies facilitate the job-market re-entry of marginalised individuals.

-Marco Di Cataldo, Andrés Rodríguez-Pose

http://voxeu.org

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