Last week’s contribution centred on the 2016 spring forecast published by the European Commission. The essence of what I wrote last week was that it is likely that within the eurozone, low inflation and low economic growth rates are likely to persist because of the continued increase in the positive balance of the current account of international transactions between the eurozone and the rest of the world.
This week, I would like to maintain focus on this document, which is a very useful one, but zero in on aspects of the labour market. It is significant to note that, whereas unemployment started to go down in the US, immediately after the Federal Reserve started its quantitative easing programme, unemployment in most EU member states remains stubbornly high, more than a year after the European Central Bank started its own quantitative easing programme.
Analysts speak of a lost generation, as there is in effect a significant proportion of persons aged under 30 in a number of member states who have never worked or, at best, have been in temporary jobs. Unemployment in the eurozone has remained above the 10 per cent mark and is expected to go down to 9.9 per in 2017. In the whole of the EU it stands at 8.9 per cent, certainly influenced by the five per cent unemployment level in the UK, which had its own QE programme.
The European Commission report does highlight that while employment has been increasing – around one per cent per annum – the share of temporary employment to total employment has been increasing in the euro area in recent years. The rise in temporary employment is greater among young people. At the same time, low-skilled employment in the eurozone continued to decrease while high-skilled employment increased.
Studies are showing that the distribution of personal incomes has become more unequal and will remain so
This gives an idea of the new jobs that are being created – temporary but requiring a higher platform of skills. A pertinent question would be whether this is the trend for the future. If so, then it is a complete reversal of what many EU countries have sought to achieve: to make employment contracts more permanent.
The temporary nature of the new jobs being created will lead to other issues such as more geographical mobility, a lower propensity for home ownership and a more diversified labour force. From a social perspective, there are bound to be other implications, some more positive than others.
An important element of the labour market is incomes. In eurozone member states, the income share of labour ranges between 40 and 60 per cent of the gross domestic product.
Recently, labour’s share of the GDP decreased and is likely to remain stable in the short term. However, in the longer term, labour’s share of the GDP is likely to go lower. This can be due to various reasons such as technological developments, the changing nature of employment contracts, increased reliance on part-time work and increased competition from outside the eurozone.
This reflects itself in the distribution of income. Studies are showing that the distribution of personal incomes has become more unequal and will remain so. Maybe it is significant to note that Germany, recognised by all as by far the strongest economy in the EU, has one of the most unequal distributions of income in the eurozone. It then tends to address this through its welfare and pension system.
In this context, it is worth looking at the bigger picture, dictated by an ageing population in the eurozone. This will push down the growth in the working age population and at face value may deliver a positive result as the employment rate would be seen to be rising. However, in the medium term, this would mean that there could be less people working.
Less people working coupled with an ageing population is likely to mean a higher tax burden to finance welfare, health and education (and now given the terrorist threat in a number of EU countries, even law and order). If there is a higher tax burden, will this serve as a disincentive to work?
I have claimed in the past that the EU needs new approaches to the economic challenges it is facing. The dynamics of the labour market are such that we can no longer approach them as we used to do in the past. When labour market reforms and welfare reforms are mentioned, many seem to shudder at the thought. We need these reforms if we wish to have a labour market that sustains itself.