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Mrs. Nujin Suphaphiphat and Hiroaki Miyamoto
While unemployment rates in Europe declined after the global financial crisis until 2018/19, the incidence of long-term unemployment, the share of people who have been unemployed for more than one year to the total unemployed, remained high. Moreover, the COVID-19 pandemic could aggravate the long-term unemployment. This paper explores factors associated with long-term unemployment in European countries, using panel of 25 European countries over the period 2000–18. We find that skill mismatches, labor market matching efficiency, and labor market policies are associated with the incidence of long-term unemployment. Among different types of active labor market policies, training and start-up incentives are found to be effective in reducing long-term unemployment.
Mrs. Nujin Suphaphiphat and Hiroaki Miyamoto

group of individuals and that it will be a potent cause of income inequality, given that a lack of work is the most important cause of poverty among working-age households in most European countries. 4. Using the panel data for 25 European countries over the period 2000 – 18, this paper finds that skill mismatches and labor market matching efficiency are associated with the incidence of LTU . When skills of the unemployed no longer meet labor demand, it contributes to protracted unemployment. The erosion of skills during unemployment would worsen the situation. In

Mrs. Nujin Suphaphiphat and Hiroaki Miyamoto

Front Matter Page European Department Contents ABSTRACT SECTION I: INTRODUCTION SECTION II: LONG-TERM UNEMPLOYMENT IN EUROPE Long-term Unemployment Rate Incidence of Long-term Unemployment Impact of long-term unemployment SECTION III: EMPIRICAL ANALYSIS Methodology and Data Main Findings Robustness SECTION IV: UNDERSTANDING THE POTENTIAL DRIVERS OF LTU Labor market policy interventions: what, how, and which ones? Skill mismatches: closing the digital skills gap Labor market matching efficiency: the role of public

International Monetary Fund

structural rate of unemployment . We have found that long-term unemployed are significantly less likely to find a job now than before the crisis, and that the loss in labor market matching efficiency observed since the recession is entirely due to a worsening of the labor matching of the long-term unemployed. Together, these results point to a risk that the structural rate of unemployment might be greater now than before the crisis. 13. Hence, forceful measures should be introduced that reduce long-term unemployment and address the risks associated with long spells of

International Monetary Fund. European Dept.

percent the year after job loss and by 10–15 percent over the following 20 years. After the GFC, long-term unemployment became a main challenge in Europe, where the share of long-term unemployed rose from about 30 percent to 50 percent during 2008–13. The rise in LTU was associated with declining labor market matching efficiency and widening skill mismatch. In Austria, the share of LTU rose almost 10 percentage points during 2008–17 before reverting to the pre-crisis level in 2019 amid declining labor market matching efficiency and widening skills and regional

International Monetary Fund. European Dept.

model results should be interpreted as wage inequality before transfers. 9 Empirical studies looking more broadly at Europe (e.g., Suphaphiphat and Miyamoto, 2020 ) similarly find that rising (long-term) unemployment is associated with rising skill mismatches and declining labor market matching efficiency. 10 This should not necessarily be interpreted as retirement benefits becoming less generous as other indirect factors (e.g., rising housing prices or life-expectancy) may lead workers to remain in the labor market for longer than in the past

International Monetary Fund. European Dept.

reforms. In addition, policies should have measurable output-based targets, helping re-calibrate policies. Further collaboration with businesses, including in designing university curricula, could promote better match for labor market needs. Box 5. Tackling Long-term Unemployment in Bulgaria 1/ • Despite the strong labor market before the pandemic, the incidence of LTU in Bulgaria remained high. The incidence of LTU could be reduced by putting more resources into effective ALMPs, addressing skill mismatches, and promoting labor market matching efficiency, all of

International Monetary Fund. European Dept.

empirical relationship between the unemployment rate and the job vacancy rate, known as the “Beveridge curve”. An inward shift in the Beveridge curve suggests an improvement in the labor market matching efficiency. However, such an improvement only recouped part of the deterioration in the structural unemployment during the crisis, as today’s labor market matching efficiency is still far below its pre-crisis level. Spain: Beveridge Curve, 2001–2016 Source: Eurostat. 27. The high structural unemployment is linked to rigidities in the labor market, including a