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Economics & Finance

Boosting business confidence key to driving EU job creation

Nicholas Bray, European Correspondent |

While unemployment is falling in some OECD countries, notably the United States, it remains stubbornly high in much of Europe. The challenge facing governments is to boost business confidence in order to stimulate a return to growth.

“At least it’s a job.”

Nearly 83,000 employees of McDonald’s in Britain, or 90 percent of the fast food chain’s U.K. workforce, are on so-called “zero hours contracts” that give them access to work when the company needs them but no guarantee of specific hours of work.

So are several hundred thousand home-care workers, many of them employed by local municipal authorities.  So, too, are thousands of people working in stores, offices, restaurants and entertainment.

The figures came to light following a recent survey by the Chartered Institute of Personnel and Development. Overall, according to the CIPD, as many as one million people, equivalent to just over three  percent of the U.K. workforce, may be employed under such contracts -- four to five times more than had previously been estimated by Britain’s Office for National Statistics.

Straitened times

Zero hours contracts help employers by allowing them to plan their work roster around demand from clients. But they can be harsh for employees, who often earn less and work fewer hours than people on contracts with fixed work obligations.

Though they are perfectly legal, news of how widespread they are came as a shock to many people.

Still, in these straitened times, a common reaction was that it is better for people to work at least part-time than to be without any job at all.

“It's a difficult situation to be in, but so is being unemployed,” Len Shackleton, an economics fellow with the Institute of Economic Affairs and a professor at the University of Buckingham, told German news organisation Deutsche Welle. “And that's the situation they would be in if you ban this kind of contract."

The risk of two Europes

Across Europe, governments are struggling with weak growth and high unemployment, particularly among young people. In Britain, overall unemployment stood at 7.8 percent in the three months to end-April 2013, but unemployment among people under 25 was 20.5 percent. In the 17 countries that use the euro as their currency, things are even worse.

According to the European Union’s statistics service, Eurostat, overall unemployment in the euro area averaged 12.1 percent in June, with unemployment among under-25s averaging 23.9 percent.

The situation is particularly acute in Southern Europe. Unemployment among under-25s exceeds 50 percent in Greece and Spain and hovers around 40 percent in Portugal and Italy. Many of these countries’ young people emigrate in search of work or give up looking for a job to pursue further studies in the hope of raising their attractiveness to employers. Those that can’t take either of those tracks often find themselves idle, with no plans and no prospects.

“We are talking about a whole generation not having any kind of opportunity to develop their lives,” says Ricardo Ibarra, president of the Spanish Youth Council which groups more than 80 regional and local youth organisations. “It’s a dramatic and incredible situation,” he laments, and it’s one that calls for action at a European level.

“We have a common monetary union, and we have to have a common solution for this type of problem,” Ibarra told INSEAD Knowledge in an interview. “Otherwise, we will have two Europes, the North and the South.”

Maximising flexibility

Governments are well aware of the dangers for European cohesion. German Finance Minister Wolfgang Schäuble has warned that failure to win the battle against youth unemployment could tear Europe apart.

But the still unresolved challenge is to find the policies that will help to reduce youth unemployment – and to be able to pay for them.

Flexible labour markets can help -- up to a point. In Spain, the government is hailing recent reductions in the numbers of people registered for unemployment benefits as being the result of measures taken last year to reduce severance pay entitlements and make it easier for firms in difficulties to cut their workforce.

In Britain, says John Cridland, director general of the Confederation of British Industry, zero hours contracts “play a vital role as a way of keeping people in employment” because they allow employers to maximise the flexibility of their workforce in adjusting to variations in demand.  They can also be convenient for students or older people who want to reduce their work hours as they head towards retirement.

But there are limits to the effectiveness of such measures, particularly if they mean lower pay and thus lower consumption, which in turn puts a brake on growth.  

What’s more, in the U.K., people on zero hours contracts are considered to be employed even if they don’t work at all during a given month and so don’t show up in official unemployment statistics, raising doubts as to how effective they really are in raising overall employment levels.

“The vast majority of workers are only on these contracts because they have no choice,” concurs Dave Prentis, the general secretary of Unison, a public sector workers union that wants to ban zero hours contracts. “They may give flexibility to a few, but the balance of power favours the employers and makes it hard for workers to complain.”

A tradition of apprenticeships 

So what should European governments do to tackle youth unemployment? One idea is to draw inspiration from Germany, which has a long-standing tradition of apprenticeships as the follow-on from secondary school.

Though Germany has more rigid employment conditions than both Britain and Spain, it has lower unemployment. At 5.4 percent in June, its unemployment rate was the second-lowest in the European Union after Austria. Its youth unemployment rate was the EU’s lowest, at 7.5 percent.

In July, urged on by Germany, EU leaders approved a plan to spend eight billion euros over the next two years to help unemployed young people in the worst-hit countries get training in the hope of finding a job. The initiative was touted as part of a proposed “youth guarantee” under which every young European would be assured of a job, apprenticeship or place in higher education within four months of becoming unemployed or leaving formal education.

Such proposals, says Italy’s Labour and Social Policy Minister, Enrico Giovannini, are “a good way to approach” the problem of youth unemployment. The difficulty is that they require money – an area in which “Italy is quite constrained because our situation of fiscal policy is still very tight,” Giovannini pointed out in an interview with INSEAD Knowledge.

In any case, he and others acknowledge, training on its own is not a sufficient solution. Germany has had high unemployment in the past, in spite of its apprenticeship tradition. In today’s environment, economists say, Germany is benefiting principally from the competitive quality of its products and from the pricing effects of years of wage moderation that other countries haven’t matched.

Looking forward, Giovannini and others say, the key to reducing unemployment will lie in the success or failure of government policies to revive business confidence, which in turn will lead to growth.

“Without a certain level of growth in the economy there will not be the equivalent level of job creation needed to accommodate the unemployed youth of the Eurozone,’’ commented U.K.-based think-tank Civitas. “The problem is not lack of education or training, the problem is a lack of jobs.”

That’s why Italy, in addition to trying to beef up the effectiveness of its network of state-backed job search agencies, is offering cuts in payroll taxes to firms that hire people aged between 18 and 29 on permanent contracts. “We have to remember that only the private sector creates employment,” Giovannini observes.

At present, he maintains, many companies are holding back on planned investments because of the uncertain economic environment, and they need to be encouraged to take a more positive view.  “If (Italy’s) government and Europe as a whole are able to provide positive signs of growth, I am sure companies will go back to their original plans and this will stimulate employment,” he predicts.

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