COVID-19 Crisis: How to Avoid a ‘Lost Generation’

Coronavirus Crisis DOI: 10.1007/s10272-020-0908-y Dennis Tamesberger and Johann Bacher* COVID-19 Crisis: How to Avoid a ‘Lost Generation’ The spread of the coronavirus has made economic conditions difficult in many economic areas and has led to skyrocketing youth unemployment in most European countries. On the basis of simple model calculations, we estimate the consequences of the COVID-19 shutdown on youth unemployment in the European Union for the year 2020. According to our estimations, youth unemployment will increase from 2.8 to 4.8 million. The youth unemployment rate will increase to 26%, and the number of young people not in education, employment and training (NEET) will increase from 4.7 to 6.7 million. Policymakers at the national and international level should react as quickly as possible and make great efforts to avoid these negative scenarios. We suggest the introduction of a new European Youth Guarantee to ensure fiscal relief for those countries that suffer the most economically. It should be financed jointly by the EU and the respective member states. We suggest a new formula-based co-financing model in order to guarantee solidarity between the member states. The shutdown of major parts of the economy to avoid the rapid spread of the coronavirus has led to skyrocketing unemployment rates in most countries. However, the labour market situation for young people has been especially difficult and this has rarely been recognised in public debates. The latest proposal from the European Commission (EC) has the promising title “Europe’s Moment: Repair and Prepare for the Next Generation” and youth employment support is explicitly mentioned. The recovery plan has an impressive budget of €750 billion (EC, 2020a), which should leave room for the necessary focus on young people (EESC Workers’ Group, 2020). On 1 July the EC presented the proposal “Youth Employment Support: a bridge to jobs for the next generation”, with a suggested budget of €22 billion (EC, 2020c). © The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. * Thanks are offered to Georg Feigl, Silvia Hofbauer, Nikolai Soukoup and Judith Vorbach for their helpful comments. For her academic assistance we are in debt to Denisa Husic. Dennis Tamesberger, Chamber of Labour, Linz, Austria. Johann Bacher, Johannes Kepler University, Linz, Austria. 232 To give an idea of the extent of the problem, this paper estimates on the basis of simple model calculations the consequences of the current recession on youth unemployment and on the number of young people who are not in employment, education or training (NEET) in the European Union for the year 2020. Economic downturn and youth unemployment Youth unemployment and general economic developments are highly correlated (Clark and Summers, 1982; Dietrich, 2013). Given a recessive economic situation, companies make employees redundant or hire fewer people due to a decline in orders. This affects young people disproportionately. On the basis of OECD data for the time period from 1970 to 2009, Bell and Blanchflower (2011) show that a 1% increase in the adult unemployment rate leads to a 1.79% increase in the youth unemployment rate. O’Higgins (1997) explains the high business cycle sensitivity of youth unemployment from a supply-side and demand-side perspective. From a supply-side point of view, young people tend to have a lower threshold when it comes to resigning or changing jobs as they have fewer firm-specific qualifications and fewer economic responsibilities. Even though these arguments seem plausible, the demand-side explanation has more weight: firms have lower opportunity costs if they make young employees redundant instead of older ones because they have invested less in their training, and young employees often have less protection against dismissal (last in, first out). Besides the aggregated demand with its major role in youth labour market outcomes, demo- Intereconomics 2020 | 4 Coronavirus Crisis Table 1 Forecast 2020 scenarios for the youth labour market in the European Union Change 2008-2009 Youth 15-24 years, EU27 2008 2009 Absolute Relative (%) Real GDP growth rate, percentage change on previous year 2019 2020 forecast scenarios Optimistic Middle Pessimistic IMF spring forcast EC spring forecast Assumption -6.60 -7.40 -10.00 -4.30 Youth population in millions 52.70 52.04 -0.66 -1.25 46.38 46.38 46.38 46.38 Active labour force in millionsa 21.96 21.40 -0.56 -2.55 18.25 18.25 18.25 18.25 Employed youth in millions 18.44 17.04 -1.40 -7.59 15.49 13.69 13.47 12.76 Unemployed youth in millions 3.52 4.37 0.85 24.15 2.76 4.56 4.78 5.49 b 5.64 6.40 0.76 13.51 4.68 6.49 6.71 7.06 Youth unemployment rate in % of labour force 16.00 20.04 4.04 25.25 15.00 25.01 26.21 30.11 Share of young people who are NEET (NEET rate in %) 10.70 12.30 1.60 14.95 10.10 13.99 14.46 15.23 Number of NEET individuals in millions Notes: a Active labour force comprises unemployed (seeking employment) and employed. b Estimated via NEET rate in percent multiplied by youth population in million/100. Source: Eurostat, lfsa_pganws, lfsa_pgaied, une_rt_a, edat_lfse_20, own calculations. graphic developments and institutional factors play a part, such as employment protection legislation (e.g. Bassanini and Duval, 2006; Boeri et al., 2015), the vocational system (e.g. Breen, 2005; Cahuc and Hervelin, 2020; Quintini et al., 2007) and labour market policy (Tamesberger, 2015). Boeri et al. (2016) even point out that the rise in youth unemployment in Southern Europe during the Great Recession was in part an unintended consequence of pension reforms which increased the retirement age. respectively in order to calculate the corresponding impact of the economic downturn on the youth labour market. Due to the considerable uncertainties in current forecasts, we add a third assessment, a pessimistic scenario, of -10% of real GDP for the EU27. The youth unemployment rate for each member state was calculated as follows.1 In the first step, the 2019 youth unemployment rate YR was computed as Background of the forecast scenarios During the Great Recession, specifically between 2008 and 2009, GDP in the EU27 countries decreased by 4.3% and the number of young people in employment decreased by 7.59%. The youth unemployment rate increased by four percentage points within one year to 20.04% in 2009. In relative terms, the increase amounted to 25% (see Table 1). On the basis of this experience, we derive our assumption that a decrease in GDP by 1% leads ceteris paribus to a decrease in youth employment of 1.77%, and the unemployment rate as well as the number of young people who are NEET will increase accordingly. In (...truncated)