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Mr. Luc Everaert and Céline Allard
To live up to its growth potential and secure its inclusive social model, the euro area must make better use of its available labor. In the aftermath of the crisis, boosting growth is essential to prevent unemployment from becoming a long-term problem and to facilitate the return to fiscal sustainability. Labor utilization in the euro area has been lagging considerably behind its best performing peers. While fewer hours worked may, to some extent, reflect a social choice, higher unemployment rates and lower participation rates, on the other hand, cannot easily be attributed to individual preferences. Here, policies and institutions matter more. And there is little excuse for relatively low labor productivity, a particular bane in southern Europe and an increasing challenge everywhere. Kick-starting growth requires a comprehensive approach to labor and service market reforms. Different circumstances call for different approaches across countries. Countries in southern Europe need to focus on regaining competitiveness, while some in the core should promote higher labor force participation or more open service sector markets. Improving access to the labor market should be high on the priority list everywhere—including through some harmonization of key features of the labor market, which will help deal with intra-euro area imbalances. Differences in labor taxation, unemployment benefit systems, and employment protection will need to be reduced. Improving regulation and reforming taxes and social benefits will be essential to make inroads. For the longer term, focus should be on innovation, education, and on continuing financial sector reforms.
International Monetary Fund. European Dept.
This Selected Issues paper assesses the youth unemployment problem in advanced European economies, especially the euro area. Youth unemployment rates increased sharply in the euro area after the crisis. Much of these increases can be explained by output dynamics and the greater sensitivity of youth unemployment to economic activity compared with adult unemployment. Labor market institutions also play an important role, especially the tax wedge, minimum wages, and spending on active labor market policies. The paper highlights that policies to address youth unemployment should be comprehensive and country specific, focusing on reviving growth and implementing structural reforms.
Angana Banerji, Ms. Huidan Huidan Lin, and Mr. Sergejs Saksonovs
The crisis has intensified what was previously a chronic unemployment problem in Europe; youth unemployment is now at unprecedented highs in some European countries. This paper assesses the main drivers of youth unemployment in Europe. It finds that much of the increase in youth unemployment rates during the crisis can be explained by output dynamics and the greater sensitivity of youth unemployment to economic activity than adult unemployment. Labor market institutions also play a significant role in explaining the persistently high levels of youth unemployment, especially the tax wedge, minimum wages relative to the median wage, spending on active labor market policies, the opportunity cost of working (measured by the unemployment benefits), vocational training, and labor market duality. This suggests that policies to address youth unemployment should be comprehensive and country-specific, focused on reviving growth and advancing labor market reforms.
Angana Banerji, Huidan Lin, Sergejs Saksonovs, and Rodolphe Blavy

adults. Youth may be more sensitive to net replacement rates because unemployment benefits allow them time to find a more desirable job. However, an aggregate indicator may mask country-specific differences in eligibility for unemployment benefits; for example, in some countries, people who have never had a job may not be eligible for unemployment benefits. Dual Labor Markets, Shifting Composition of Unemployment Dual labor markets feature a high share of temporary employment contracts with lower employment protection ( Figure 12.11 ). Studies show that the

International Monetary Fund. European Dept.

had a job may not be eligible for unemployment benefits. Dual Labor Markets, Shifting Composition of Unemployment 28. Theory . Dual labor markets feature a high share of temporary employment contracts with lower employment protection. Studies show that the impact of employment protection legislation (EPLs)—legislation governing the hiring and firing of employees—on labor market outcomes is small and ambiguous. 10 It can lower job separation rates by increasing the cost of firing, but also the job finding rate by increasing the reluctance to hire workers in

Angana Banerji, Ms. Huidan Huidan Lin, and Mr. Sergejs Saksonovs

motivates our second univariate approach. This approach also considers the impact of one labor market feature at a time but allows its impact to vary across countries via its interaction with the business cycle. We consider the following specification, with the same notations as in (2) : u i , t = β 0 + β 1 , i c i + β 2 χ i , t + Σ i = 1 22 β 3 , i c i ( y i , t

Mr. Eugenio M Cerutti and Yiliang Li

, therefore incentivizing agricultural workers to move away from their land and search for non-agricultural jobs instead. Figure 5: The influence of higher non-agricultural productivity on job separation and finding Notes: (1) JS’ represents the shifted job separation curve following an exogenous increase in the non-agricultural productivity; (2) the intersection between the JS’ and JC curves represents the new (partial) equilibrium in the agricultural labor market, featuring ( x Agri,1 , θ Agri,1 ) . Similar dynamics can arise from an exogenous increase in

International Monetary Fund

the long-term unemployed ( Table 7 ). At the same time, incentives to search for a job may be relatively low for Spanish workers who have been dismissed after a long tenure because they collect not only unemployment benefits, but also very generous dismissal compensation. Third, minimum wages are relatively low in Spain by international standards. In sum, it seems that high dismissal costs are the labor market feature with respect to which Spain is furthest from industrial country averages. Not surprisingly, their reduction has been the main focus of the May 1997

Mr. Eugenio M Cerutti and Yiliang Li
Lagging labor reallocations outside agriculture amid sustained low agricultural productivity have been a key feature in the Philippines over the past 15 years. An analysis of the labor adjustments in and out of agriculture shows that a variety of factors have influenced this process. We find that the widening of wage differentials with non-agricultural sectors, improvements in labor market efficiency, and better transport infrastructure are largely associated with growing outflows of labor from agriculture, whilst the lack of post-primary education and the presence of agricultural clusters hinder such outflows. In contrast to the traditional view that agricultural employment outflows are largely driven by productivity differences and wage differentials, our results emphasize the roles of education as well as transport infrastructure in facilitating labor reallocations from agriculture to non-agriculture.
International Monetary Fund. European Dept.
This Selected Issues paper focuses on long-term impact of Brexit on the European Union (EU). This paper examines consequences of Brexit on the EU27 under various post-Brexit scenarios by using two different complementary approaches. Our results, which are broadly in line with recent findings in the literature, are twofold. First, Brexit would have negative effects on the EU27 as well, given the depth and the complexity of the EU-U.K. integration. Similar to various empirical studies, it has been observed that the estimated long-term output and employment losses (in percent) for the EU27 in the study are on average lower than the corresponding losses for the UK estimated in the literature. The level of output and employment are estimated to fall at most by up to 1.5 percent and 0.7 percent in the long run in the event of a ‘hard’ Brexit scenario, respectively. A “soft” Brexit outcome would lead to much lower losses.