What Color Is Southern Europe’s Parachute?

Re-Blogged From Stratfor

Uneven Recoveries

In Spain and Portugal, unemployment figures decreased more quickly last year than anywhere else in Europe. In February, the year-to-year unemployment rate fell from 20.5 percent to 18 percent in Spain, while Portugal’s rate decreased from 12.2 percent to 10 percent. A drop in official unemployment rates can be misleading: people who have given up looking for work are not included in certain joblessness calculations. But in Spain and Portugal, the drop in unemployment was accompanied by an actual increase in the number of people working. In Spain, 16.9 million people had jobs in 2014; by 2016 that number had increased to 18.5 million. In Portugal, job numbers rose from 4.4 million to 4.6 million between 2013 and 2016.

Eurozone Unemployment Chart

Nonetheless, the improvement in both countries largely reflects an increase in non-permanent jobs. Around 90 percent of new contracts in Spain and 80 percent in Portugal are for temporary jobs. Among EU states, according to Eurostat, only Poland has more workers under temporary contracts than Spain and Portugal. In addition, the demographic profile of workers in those countries under temporary contracts is anomalous: More than half of temporary workers in countries like Germany or Sweden are younger than 29. In Spain and Portugal, on the contrary, around a third of temporary workers are 30–39 years old. According to a report by the European Parliament, only one in five workers under temporary contracts in Spain and Portugal actually transition to permanent contracts.

EU Part-Time Employment Chart

To some extent, the way Spanish and Portuguese employment markets operate account for the labor precariousness. Despite recent reforms, labor laws in both countries are still relatively rigid, and the cost of dismissing workers remains high. This makes many companies opt for temporary contracts when hiring staff. Sometimes employers offer temporary contracts to reduce costs, but the practice also gives them flexibility to downsize during times of economic uncertainty.

Economic structures also play a significant role in the type of jobs created. For example, the services and agriculture sectors rely more heavily on temporary jobs than does industry. In services and agriculture, jobs tend to be more seasonal, with particularly high rates of temporary and off-the-books positions. In Southern European countries, tourism (and associated service industries like hotels and restaurants) provides a bigger source of employment than in most of their northern peers. Tourism accounts for roughly 12 percent of all employment in Spain, the second highest proportion in the European Union after Malta. Spain and Portugal have experienced a recent tourism boom, driven partially by rising political and security concerns in competing destinations in the Mediterranean. A significant agricultural sector in both countries also adds to their temporary job totals. Agriculture represents around 7 percent of employment in Portugal and 4 percent in Spain, compared with around 2 percent in countries like Germany or Sweden. These economic structures mean that job precariousness is not an entirely new phenomenon in Spain or Portugal.

Meanwhile, the effects of the European economic crisis have led to shrinking salaries. In Spain, the average wage fell by about 3.5 percent between 2011 and 2014. (It has recovered slightly since then.) In Portugal, the average wage has been stagnant since 2012. Recent reforms in labor legislation, which had the goal of making these economies more competitive, account for a portion of the earnings decrease. As members of the eurozone, Spain and Portugal cannot use currency devaluation to regain competitiveness during crises. As a result, they chose to take measures to reduce labor costs (a process commonly known as “internal devaluation”), including reducing the role of collective bargaining in salary negotiations and making it easier and cheaper for employers to dismiss workers. In Spain, hourly labor costs increased by 28 percent between 2004 and 2011 but remained flat between 2011 and 2015. In Portugal, labor costs per hour had increased by almost 18 percent between 2004 and 2012, but dropped by 0.7 percent between 2012 and 2015.

Both countries are grappling with high rates of youth unemployment, which during the peak of the crisis in Spain exceeded 50 percent of the active young population (people under 24 who are looking for a job, excluding students) and reached about 40 percent in Portugal. To a certain extent, emigration and financial support from family members mitigated the effect of high unemployment rates among young workers.

Long-term joblessness presents perhaps a greater problem. Roughly half of those unemployed in Spain and Portugal have been out of work for more than a year. In general, the longer that people are out of the workforce, the harder it is for them to find a job. Motivation to keep looking for work also drops off. This suggests that even if the economic recovery consolidates in these countries, the pace of the decline in unemployment rates could slow in coming years.

Misleading Improvements

In another southern economy, Greece, structural factors and the economic crisis have likewise fueled high unemployment. But even before the crisis, the highest share of employment came from sectors with more temporary positions: tourism, retail and agriculture. Meanwhile, labor productivity rates in the portion of the Greek industrial sector with labor- and resource-intensive activities were often below the EU average.

EU Temporary Employment Chart

Greece’s unemployment rate has shrunk over the past five years, but so has the labor force (that is, the number of people either employed or looking for a job) — a result of multiple factors, including retirement, emigration and the fact that unemployed people who quit looking for a job are not considered part of the workforce. In the fourth quarter of 2016, according to the Hellenic Statistics Office, 3.64 million people had jobs in Greece, virtually the same as a year earlier. As in Portugal and Spain, unemployment in Greece fluctuates seasonally: employment rates rise in summer and decrease in winter. While the total number of people with jobs in Greece rose from 2015 to 2016, the figure is still below what it was in 2012. Moreover, official statistics tend to hide the fact that hundreds of thousands of Greek workers have accepted jobs that offer either low pay or only part-time or temporary status. According to Eurostat, the percentage of involuntary part-time jobs — those held by workers who would rather have full-time employment — in Greece rose from 45 percent to 72 percent over the past decade.

As in Spain and Portugal, the Greek government sought to limit wage growth during the height of the economic crisis with policies such as those replacing collective bargaining with company-based collective agreements. According to data compiled by the Organization for Economic Co-operation and Development, the average wage in Greece fell by 20 percent between 2009 and 2015. Meanwhile, labor costs per hour have dropped by 15 percent since 2008. Greece is the only eurozone country where the minimum wage is lower today than it was a decade ago. But broader and deeper reforms to make the Greek economy more competitive, including modernizing the country’s education system, moving toward deregulation in some areas, and accelerating the privatization process, have been only partially introduced. Tax hikes and spending cuts introduced during Greece’s three bailout programs have cut domestic consumption and turned a recession into a depression.

Slow Rebounds

Italy offers another interesting case: unemployment never reached the levels it did in Greece, Spain or Portugal, but joblessness has resisted the efforts by several governments to decrease it. Since 2012, the unemployment rate has consistently hovered above 11 percent. (It was 6 percent a decade ago.) Unlike Spain or Portugal, Italy did not respond to the crisis with a unified package of comprehensive labor reforms, but instead implemented a series of smaller reforms, most notably during the governments led by Mario Monti in 2012 and Matteo Renzi in 2014. These reforms sought to weaken protections against dismissal for permanent workers and to increase protection for the unemployed.

In spite of the reforms, the pace of job creation has not fulfilled government promises. According to Italy’s statistics office, 22.8 million Italians had a job in the fourth quarter of 2016 — a modest increase from the 22.4 million registered four years earlier. At the same time, the proportion of the country’s working-age population with jobs grew from 56.3 percent to 57.4 percent. However, many people have been unable to find the kind of job they want. According to Eurostat, the number of Italians working part-time grew by almost 10 percent between 2002 and 2015, while the average increase for the European Union during that period was 4 percent. Of Italians working part-time, six in 10 would rather have a full-time position. That ratio in 2007 was less than 4 in 10.

Political issues certainly play a role in the trend, as Italian governments tend to be fragile and subject to pressure from multiple sources, including from trade unions and local and regional economic and political interests, making reforms difficult to introduce. Italy also remains beset with pronounced geographic contrasts, as employment rates remain considerably higher in its relatively less-developed and largely agricultural south than in its industry-heavy and more prosperous north. Italy’s weak economic growth does not support robust job creation, another factor keeping unemployment numbers high. Since Italy’s economy emerged from recession in 2014, it has not exceeded 1 percent annual growth.

A Potential Threat to Long-Term Growth

Job insecurity is not exclusive to the southern members of the eurozone: Countries in Central and Eastern Europe like Poland and Bulgaria also have high rates of temporary employment or jobs with low salaries. And a high number of jobs in wealthier countries like the United Kingdom and Austria include employment conditions that labor rights, such as “zero hour contracts” that offer no guaranteed minimum hours of work.

But unemployment rates rose faster in Southern Europe, where the crisis hit harder. High unemployment and insufficient economic growth in that region exposed the fragility of the banking sectors in several countries, raised questions about the sustainability of their public and private debts, and created a fertile ground for the emergence of anti-system political parties that could threaten the survival of the eurozone.

The creation of temporary and precarious forms of employment is a normal phenomenon during the early stages of an economic recovery. Over time, however, they could drag down an economy by limiting the room for growth in domestic demand, for example. In addition, rising income inequality feeds growing social and political tensions. While unemployment rates are dropping across the board, issues such as job insecurity, low pay, long-term unemployment, and few opportunities for training or career advancement could weigh down Southern Europe’s incipient economic recovery.

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