Ten Messages About Youth Employment In South East Europe

Today, nearly half of youth in the six South East European countries (SEE6) are not in the labor market, and one quarter is inactive—not in employment, education, or training. These poor outcomes partly reflect a difficult recovery in SEE6 from the 2008 global financial crisis, which sent already high youth unemployment soaring to new heights. This paper presents 10 evidence-based messages on the youth employment challenges in SEE6. The 10 messages demonstrate that many factors disproportionately affect jobless youth. Often young people bear the brunt of the structural and cyclical vulnerabilities that are embedded in the functioning of labor markets in the region. But the challenges faced by cyclically unemployed and structurally jobless young people in SEE6 differ, and so do the policy responses to address them. For the former, it is vital to keep youth engaged in the labor market during recessions and build their human capital while the labor market recovers. For the latter, the policy agenda is deeper; it is necessary to address the disincentives to work and hire youth embedded in exclusionary labor regulations and labor taxation; equip new labor entrants with the skills the market needs; and improve their access to productive inputs, such as land, finance, and professional connections. Policy measures to combat joblessness could often have much more importance for youth than other age groups. But the SEE6 policy agenda to address youth unemployment and inactivity is not an isolated agenda; it is an agenda for higher overall employment with specific elements for youth. Therefore, measures promoting overall job creation should be complemented, not replaced, by measures focused on youth.


list of Figures
Today, nearly half of youth1 in the six South East European countries (SEE6)2 are not in the labor market, and one quarter is inactive-not in employment, education, or training.These poor outcomes partly reflect a difficult recovery in SEE6 from the 2008 global financial crisis, which sent already high youth unemployment soaring to new heights.This paper presents 10 evidence-based messages on the youth employment challenges in SEE6.
Message 1 confronts the stubbornly high youth unemployment.In the SEE6, the average unemployment rate has risen above its precrisis level by about 5 percentage points, and at the end of 2013 youth unemployment had hit historic highs of more than 60 percent in Bosnia and Herzegovina, 52 percent in FYR Macedonia, 49 percent in Serbia, and 41 percent in Montenegro.As a result, with the sluggish economic recovery in the SEE6, today youth in the region face unique difficulties in making the school-to-work transition.As a result, many young people are inactive or in the informal sector or choose to emigrate, as pointed out in Message 2.
But these poor labor outcomes also embody deeper structural problems in the SEE6, where not only is unemployment high across the board, but also labor force participation is low, especially for young women and minorities.The essence of Message 3 is that young women in particular have limited attachment to the labor market.
The economic growth rate affects employment opportunities for youth more than for adults, as evidenced in Message 4. For youth seeking employment, the growth rate explains half of the changes in the youth unemployment rate across countries and over time.In SEE6, it takes less economic growth to create jobs for youth than for adults in periods of expansion, and Message 5 explores these dynamics.Because in SEE6 economic upturns tend to be characterized by steeper reductions in both youth and adult unemployment than those in the rest of Europe, SEE6 have to work hard to ensure sustained economic expansions to reduce unemployment.
The other half of changes in the youth unemployment rate is explained by education and labor policy as well as a considerable residual that hints at the need of deeper reform for policies to be effective in addressing structural constraints.Message 6 points out that in the SEE6 rigid labor regulation constrains youth employment, and Message 7 presents evidence that labor taxation is relatively higher for low-wage and part-time workers-groups that are disproportionately young.Moreover, as discussed in Message 8, new SEE6 labor market entrants are not equipped with the skills employers demand.Message 9 makes the additional point that lack of access to productive inputs and professional connections worsens the prospects of young people for entrepreneurship and employment.
Finally, certain cultural norms may narrow employment opportunities for youth, particularly women and members of ethnic minorities; increased access to quality and SOUTH EAST EUROPE RegUlAR economic RePoRt no.9s SPECIAL TOPIC affordable child care and long-term efforts to shift norms to make opportunities more equal are important countervailing policies.Message 10 discusses these barriers that keep youth from entering the labor market.
The 10 messages demonstrate that many factors disproportionately affect jobless youth.Often young people bear the brunt of the structural and cyclical vulnerabilities that are embedded in the functioning of labor markets in the region.But the challenges faced by cyclically unemployed and structurally jobless young people in SEE6 differ, and so do the policy responses to address them.For the former, it is vital to keep youth engaged in the labor market during recessions and build their human capital while the labor market recovers.For the latter, the policy agenda is deeper; it is necessary to address the disincentives to work and hire youth embedded in exclusionary labor regulations and labor taxation; equip new labor entrants with the skills the market needs; and improve their access to productive inputs, such as land, finance, and professional connections.
Policy measures to combat joblessness could often have much more importance for youth than other age groups.But the SEE6 policy agenda to address youth unemployment and inactivity is not an isolated agenda; it is an agenda for higher overall employment with specific elements for youth.Therefore, measures promoting overall job creation should be complemented, not replaced, by measures focused on youth.
"It is not easy to be young in the labor market today" opines the Global Employment Trends for Youth 2013 report. 1 It is arguably even more difficult to be young in the SEE6 labor market.Ridden by overall high levels of unemployment and low labor force participation, along with a shrinking and aging work force, the labor market in SEE6 is not creating the job opportunities needed to boost living standards and growth prospects for the region.For youth, their job aspirations as newcomers to the labor market meet the reality of even fewer opportunities available to them to start their productive lives in good standing.Double the average unemployment rate and difficulties to participate in the labor market, particularly among young women, result in a large share of idle youth in SEE6.These disparities in labor market outcomes are closely linked to some of the characteristics of unemployed youth in SEE6 which we explore below.
Understanding and tackling the obstacles to youth access and retention of jobs is critical for reducing poverty, promoting shared prosperity, and accelerating economic growth in SEE6.Because jobs are the main pathway to upward economic mobility,2 ensuring that youth have access to economic opportunities takes center stage in any agenda to raise living standards in the region.Moreover, high and sustained youth inactivity and unemployment imply a reduction in future potential output through human capital depletion and thus have long-run implications for economic growth.In addition, accelerating economic growth in all SEE6 countries will depend on institutions and markets that promote and facilitate formal employment and higher productivity for both youths and adults.Finally, jobs-especially jobs for youth-are important for social cohesion.

Why Focus on Youth Joblessness in SEE6?
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Message 1: Unemployment is particularly high for youth
Unemployment is more than twice as high for youth as for adults.Average unemployment for the adult population in SEE6 is about 21 percent, compared to an average of 9 percent in the European Union (EU).In 2013 the average EU youth unemployment rate was about 26.4 percent, but it was 48 percent in SEE6.Across the continent, rates ranged from 8 percent in Germany to 60 percent in Bosnia and Herzegovina, with the highest rates concentrated in peripheral Europe, particularly among the SEE6 (Figure 1); in only a quarter of European countries was youth unemployment below 20 percent.This cohort is crucial in shaping the dynamics of general unemployment and the labor market, especially in SEE6 economies where the young constitute a higher share of total unemployment than in the rest of the continent (Figure 2).

Poor Labor Market Outcomes for SEE6 Youth
J Youth unemployment rate (% of total labor force ages 15-24) Q Adult unemployment rate (% of total labor force ages 25 years or over) Source: Eurostat and International Labour Organization, Key Indicators of the Labor Market database.
Source: Eurostat and labor force surveys.

Unemployment gap
Source: ILO data.
Not only is the level of youth unemployment high in SEE6, the gap between adult and youth unemployment rates is also very large.Adult-youth unemployment gaps in most SEE6 economies are considerably larger than in most EU countries.For example, in Bosnia and Herzegovina, Montenegro, and Serbia, but also in Croatia, Greece, and Spain in the EU, the gap between the youth and the adult unemployment rates is especially pronounced (Figure 4).Notably, these are exactly the same countries that had the steepest increases in overall unemployment, without signs of recovering labor markets for over five

Message 2: Many young people are inactive, "idle", in the informal sector or choose to emigrate
Many youth in the SEE6 region are not active in the labor market.Labor force participation averages 53 percent for adults, but about 34 percent for youth aged 15-24.In countries with a younger workforce, like Albania and Kosovo, youth account for a significantly higher share of the labor force, therefore affecting the SEE6 average (Figure 5). 6In the rest of the SEE6 countries, youth are in the range of 6 percent of the total labor force in Serbia and 10 percent in Bosnia and Herzegovina.While some youth remain outside the labor force because they face barriers to participating, as explained later, the prospects of long-term unemployment can also push many discouraged young people to abandon the labor market and education altogether.For youth, it takes around 2 years after finishing their studies to find a first job that is deemed stable or satisfactory.6).Put differently, almost every third young person in SEE6 is idle, compared to every sixth in the EU.
Such high NEET rates erode both the quantity and quality of labor supply both currently and in the future.Youth who are detached from jobs or education for prolonged periods-especially early in their work lives-are likely to face greater difficulties in re-integrating into the workforce later and are likely to earn less when they do, due to the depreciation of human capital and jobrelated skills and the negative signal associated with long periods out of work.The earnings penalty can be as high as 20 percent compared with those who find employment early, and the earnings deficit can persist for as long as 20 years.8Prolonged unemployment early in one's career can also delay or prevent the accumulation of valuable on-the-job skills.
In addition, returns from further education are forgone.To the extent that these scarring effects from unemployment and periods of inactivity translate into lower productivity and less accumulation of human capital later in life, they can substantially impair a worker's prospects of upward economic mobility-and the country's potential for economic growth.
Moreover, young workers in SEE6 seem to constitute a larger share of informal employment than of formal employment (Figure 7).Since most labor market surveys (e.g.labor force surveys) capture large parts of the informal workforce, high rates of youth J Youth labor force share Q Adult labor force share, rhs Source: Eurostat and labor force surveys.
Figure 6 15-24-year-olds not in employment, education, or training, 2014 The evidence of "brain drain" among youth in SEE6 is mixed, so that the negative effects of emigration of skilled individuals may be more relevant for some countries than for others.For instance, young Albanians who emigrate are more educated on average than fellow citizens who stay home, but Serbian and FYR Macedonian emigrants are less so (Figure 8).Similarly, Kosovo returnees in 2011 10 tended to be more educated than the resident population.When it comes to attracting these return migrants, much depends on the absorption capabilities of the domestic labor market, so revival of the labor market in SEE6 should help to encourage skilled emigrants to return home.A 2011 survey of the intentions of emigrant students from Albania, Kosovo, and FYR Macedonia found that a large proportion of them were willing to return (UNDP 2014).
9 United Nations 2015. 10 Census data 2011.Note: Formal: employee with a contract; informal: employee without a contract.

Difference between emigrant and source country population
Source: Eurostat data.
Note: Positive values mean that those who emigrated had higher educational attainment.

Message 3: Young women, in particular, have a tenuous labor market attachment
Gender gaps in employment among youth exist, mostly driven by gaps in participation.
While gender gaps in youth unemployment rates are not large in SEE6 (Figure 9), substantial differences remain in the labor market activity rates of young men and young women.On average, a difference of about 20 percentage points separates the activity rates of young men and women, but the difference is as high as 40 percentage points in Kosovo.Differences are even larger when taking into account ethnicity.For example, in Serbia, young Roma women have a 67 percent unemployment rate, compared to 37 percent for non-Roma women. 11 Addressing gender gaps among youth is critical as these gaps persist and widen with age.Gender differences in participation start in adolescence and widen steadily as other barriers, mainly household and family responsibilities, start to affect young women (Figure 10).Since gender gaps start early on, most of these gaps need to be closed early in people's working lives, during youth.They are also associated with notable economic costs (Box 1).Disentangling the cyclical from structural factors driving the level and changes in youth unemployment in SEE6 is important in setting the policy agenda for creating job opportunities for youth.Standard decomposition exercises on unemployment change in a sample of European countries found that half of the variation in the youth unemployment rate observed across countries and over time can be explained by differences in output growth (Figure 11).These cyclical factors are related to the business cycle and employment creation and destruction.The other half of the changes

Box 1 economic cost of gender gaps in see6
Gender gaps in the labor market at any age mean that an important pool of potential workers is underutilized, limiting growth potential.Cuberes and Teignier 2015 estimate that "lost" income per capita due to gender differences in SEE6 averages about 18 percent, with the loss highest in Kosovo at over 28 percent (Figure B1.1).Poor labor market outcomes for groups aged 15-24 account, on average, for 11 percent of the total potential income loss, reaching 33 percent when the next cohort (25-35) is included (Figure B1.2).About a third of the estimated lost income is due to distortions in the occupational choices for women and men, the rest to costs associated with gender inequalities in labor force participation.Put differently, in SEE6 income per capita could rise both from eliminating gender gaps among youth in labor force participation and in entrepreneurship, as well as from more equal participation in traditionally male-dominated occupations, which pay more.

Drivers of Youth Joblessness in SEE6
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TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE
in youth unemployment is attributed to structural forces.Among the structural factors, changes in labor and education policies play a role. 12For instance, young workers entering the labor market generally do not have experience, connections, or an understanding of the skills required for job success or entrepreneurship.
As a result, they usually find it harder to find jobs than older and more experienced workers, especially when there is little demand for labor and few vacancies, as in SEE6 countries.For changes in youth unemployment, there is also an unexplained large residual associated with 12 The calculations are based on regression analysis using data on youth employment policies in EU countries (European Commission, 2011).In terms of labor market policies, the categories correspond to (a) active labor market programs aimed at the young, (b) conditions on social benefits linked to willingness to participate in the labor market, (c) hiring subsidies, (d) promotion of self-employment, and (e) promotion of mobility among the young.Concerning education policy, the following policies are considered: (a) early school leaving prevention, (b) measures aimed at improving the efficiency of the vocational training system, (c) measures related to acknowledging non-formal learning, (d) special training aimed at the insertion of young workers in the labor market, (e) measures for linking education and experience, (f ) reforms to accommodate labor demand, (g) measures directed to at tertiary education and life-long learning, and (h) youth guarantees.Alternatively, data on real minimum wages were also collected and used as extra regressors, but did not appear to add significant explanatory power to the regression model.
forces beyond cyclical economic growth and labor and education policies.The unexplained residual is arguably related to structural factors, including institutions and norms.Each is discussed in turn.

Message 4: Economic growth affects employment opportunities for youth more than for adults
For both youth and adults, unemployment declines as the economy grows.Solid evidence, as presented in Figure 12, shows that rising youth unemployment is closely associated with economic contractions, and employment with expansions.
Two key statistically significant findings stem from Figure 12 for Europe.First, estimates of the average elasticity of youth and adult unemployment rates to GDP growth suggest that youth unemployment is "super-cyclical" in both the EU and the SEE6 countries (that is, it reacts more strongly than adult unemployment to changes in GDP growth).Second, for both youth and adult unemployment the reaction is particularly large in SEE6 as compared to other European regions.In that region, a 1 percentage point increase in GDP growth is associated on average with a decrease in the youth unemployment rate of 0.85 of a percentage point and in the adult rate by 0.29 of a percentage point.These quantitative relationships are well estimated and significantly different from each other.In contrast, in the EU, an extra percentage point of GDP growth is found to reduce youth unemployment by an average of 0.65 of a percentage point and adult rates by 0.26 of a point.Youth are thus disproportionately affected by economic cycles.On average, the change in youth unemployment in response to GDP growth is systematically larger than the change in adult unemployment.This simple negative association between economic growth and youth unemployment reveals the importance of sustained growth to youth unemployment dynamics (Figure 12). 13

Message 5: While youth lose significantly more jobs in economic downturns than adults do, it takes less economic growth to create jobs for youth than for adults in SEE6
Ample evidence exists that unemployment reacts more strongly to negative economic shocks than to positive ones.This has been documented in the literature and several 13 Such a difference in correlation does not appear to be related to different lags in the reaction of adult versus youth unemployment, and still exists if changes in unemployment are regressed on GDP growth lagged one year.
theories have been put forward to explain this phenomenon (Ryan 2001).For example, Verick (2009) presented evidence that the young segment of the workforce is disproportionately affected by large recession shocks both immediately and throughout the recovery.
In the EU youth and adult unemployment rates tend to increase more during recessions than they are reduced during expansions.
Recovering the jobs that have been lost in a recession therefore requires relatively long and substantial expansionary phases (see for e.g.Crespo Cuaresma, J. 2003).In differentiating unemployment elasticities between periods of positive and negative GDP growth, we find that for the EU, a decrease of 1 percentage point in GDP growth tends to raise the youth unemployment rate by 0.83 of a percentage point, but a positive growth shock of 1 percentage point decreases youth unemployment by only 0.54 of a percentage point; in contrast, adult unemployment goes up in a recession by just 0.34 of a percentage point, and goes down in an expansion by 0.21 of a percentage point.GDP growth GDP growth dRiveRs oF yoUth JoBlessness in see6 | 11

TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE
Unlike in EU economies, in the SEE6 region economic upturns tend to be characterized by more dramatic reductions in both youth and adult unemployment than those observed in the EU, with an elasticity that is on average notably larger than in the rest of the continent (Figure 13).In periods of expansion for every 1 percentage point increase in GDP, average SEE6 youth unemployment tends to decline by nearly 1 percentage point.
The corresponding effect for recessions, however, can only be estimated at a very low level of precision, hinting at large differences between SEE6 countries.Put differently, in SEE6, it takes less economic growth to create jobs for youth than for adults in periods of expansion, notwithstanding large variance in the estimated results.But significantly higher share of young people tend to lose their jobs during contractions of the economy compared to the jobs lost by adults in SEE6.
The difference in the persistence of youth and adult unemployment rates can be partly traced to the fact that youth unemployment reacts differently to cyclical demand shocks than to supply shocks that affect an economy's potential GDP. 14 Youth unemployment dynamics are affected by both factors related to social and institutional arrangements (assumed to have an effect on the growth rate of potential GDP) and cyclical output dynamics (related to job creation and job destruction over the economic cycle).In particular, as in the rest of the continent, in the SEE6 the reaction of youth unemployment to cyclical shocks is much larger than the reaction to changes in potential output growth, as can be inferred from Okun's law estimations based on a decomposition of GDP into trend and cyclical components using Hodrick-Prescott filtering.The differences in youth unemployment that persist across groups of European economies and within the SEE6 can thus be at least partly traced to the fact that throughout the last decades countries have been affected by different types of shocks (and of different size) than the rest of the continent.In addition, structural factors such as labor market institutions are partly responsible for the difference in the reaction of youth unemployment to cyclical shocks as compared to adult unemployment, as has been In past decades, reform of employment protection legislation (EPL) in Europe was mostly partial or two-tier.In the mid-1980s, several European countries with considerable EPL, introduced temporary contracts to increase labor market flexibility; many countries deregulated the use of temporary contracts substantially but maintained strict protection for permanent ones.Spain is a good example of this labor market dualism, having the highest incidence of temporary contracts.
After 1984, when a two-tier EPL reform liberalized the use of temporary contracts, temporary jobs more than tripled, from 11 percent of total employment in 1983 to about 35 percent in 1995 (Guell and Petrongolo 2007).
The duality of the Spanish labor market has often been held responsible for Spain's persistently high unemployment.A large share of the workforce had precarious fixed-term labor contracts, unlike workers who had open-ended, usually full-time, contracts.Among those with fixed-term contracts, young workers were exorbitantly overrepresented: In 2010, 56 percent of contracts for workers aged 15-24 were temporary, and it was they who disproportionately suffered job losses when the crisis hit Spain.The differences in employment protection between the two types of workers give rise to insider-outsider dynamics in wage formation mechanisms, with temporary workers as the outsiders (see Bentolila, Dolado, and Jimeno 2011).The minimal moderation of wages in Spain at the outset of the crisis has also been attributed to the asymmetry of employment protection and bargaining power.
Temporary contracts have both good and bad effects.Because they can help firms to evaluate worker suitability for jobs, temporary jobs could act as a stepping-stone to more stable jobs.Temporary contracts might also function as a shock absorber, protecting firms from temporary demand fluctuations by avoiding costly adjustments to their core labor force.Boeri andGaribaldi 2007 andBoeri 2011 show that the "flexibility at the margin" provided by temporary contracts increases both hiring and firing rates for newly created jobs as firms try to restrict firing costs through reduced conversion.Despite helping to create labor market dynamism and employment, however, temporary contracts can also adversely affect investment in skills, and higher turnover and low conversion rates can reduce incentives to invest in firm-specific human capital (Dolado, Garcia-Serrano, and Jimeno 2002;Bentolila et al. 2008).Guell and Petrongolo (2007) argue that the negative impact of temporary work on vocational training depends on whether temporary contracts are used mainly to lower wage costs or to screen for entry-level jobs.
In short, by reducing the commitment employers must make, fixed-term contracts can help lowskilled youth find a first job.However, the long-term impact of such contracts on these workers' careers may be negative.Spain's inability to tackle the dual characteristics in past labor market reforms, in fact, partly explains the poor labor market outcomes of young people during the crisis years.
Using Spanish social security data, Garcia Perez, Marinescu, and Vall-Castello (2016) have rigorously analyzed the impact of the 1984 liberalization of fixed-term contracts in Spain.They found that the reform raised the likelihood of male high-school dropouts working before age 19 by 9 percent, but in the longer run it reduced the number of days worked by 4.5 percent and earnings by 9 percent.
The difficulties Spain has had over the past years in reducing youth unemployment exemplifies the long-lasting effect that incomplete labor market reforms can have in response to large output shocks.The sensitivity of youth unemployment to both cyclical and potential GDP growth throughout the continent has also gone up over the last decade.In Europe, the absolute value of the Okun's coefficientwhich quantifies the effect of GDP growth on the unemployment rate changes-more than doubled (-0.3 to -0.7) in the period corresponding to the global financial crisis compared to the years before.This suggests that the GDP shock caused by the crisis pushed up youth unemployment disproportionately compared to previous recessions.There exists evidence that labor market matching deteriorated significantly during the recent global crisis in Europe (Arpaia, Kiss and Turrini, 2014), a development which can explain such a change in the economic growth elasticity of youth unemployment.
Because youth unemployment reacts to both permanent GDP changes and cyclical ones, reducing youth unemployment in SEE6 by relying solely on economic growth may be a very long process.Assuming constant growth in trend GDP of 2 percent annually (the average for 2007-14) for the full sample of European economies and abstracting from cyclical dynamics, it is estimated that in the SEE6 it would take on average four years to reduce youth unemployment by 2 percentage points-twice as long as it would take in the EU.Under a different set of assumptions, where trend GDP in SEE6 countries grow at their pre-2008 average annual rate of 6 percent and the EU grows at 2 percent annually, the youth unemployment rate between the two regions will converge in 3 decades.
Because achieving systematic decreases in youth unemployment is expected to require more than just sustainable GDP growth in the region, the next messages explore policies that could help tackle structural youth joblessness and as such exert longer-term impact on unemployment.those types of contracts can vary considerably.For example, very few SEE6 countries have differentiated minimum wages for youth or apprentices, and minimum wages are relatively high overall (Figure 14).Only FYR Macedonia has a minimum wage for youth that is markedly below that of an adult worker.Thus, beyond flexible work arrangements, labor legislation influences the costs and benefits of hiring youth, including through apprenticeships and internships, which are critical to building work experience for those entering the labor market.

Message 6: Labor regulation constrains youth employment
Finally, the design of family leave provisions, especially maternity leave, could increase the disincentives of hiring young workers, particularly women.Paid maternity leave, the main family leave available in SEE6, is long compared to other countries in the region.This is particularly the case in Albania, Bosnia and Herzegovina, FYR Macedonia and Kosovo, and even when adjusting by the wage replacement rate (or full rate equivalent, FRE). 17Costs for employers can be direct-in cases in which the employer finances leave directly as in Kosovoor indirect, thus reducing the incentives to hire, especially young women, in the first place.

Message 7: Labor taxation is high for low-wage and part-time workers, groups where youth is overrepresented
Labor taxation is high in SEE6, especially for low-wage and part-time workers-groups where youth are usually overrepresented.On average, in SEE6 countries income taxes and social security contributions constitute 36.5 percent of labor costs, significantly more than in non-European OECD countries, which 17 World Bank (2015).
average 24.1 percent.18High labor taxation (Figure 15), by increasing costs for firms and reducing net income for individuals, can lead to less hiring, lower labor force participation, and higher informality.Lowering rates of labor taxes will have the strongest effect on employment of worker groups for whom labor demand is most elastic.19Such groups usually include low-skilled workers, youth, older workers, and women.Note: The tax wedge measures personal income tax and social security contributions paid by workers and employers as a share of total labor costs.The figure shows the progressivity of labor taxation, as the tax wedge difference between average and low wage earners for a single person with no children at 100 percent or 33 percent of average wage, respectively.Progressivity refers to the increase of the tax wedge in percentage points.More recent data for SEE6 countries is consistent with this graph, but the post 2008 data is not fully comparable to calculate progressivity across a large sample of countries.
Beyond the level of labor taxation, its progressivity also matters because work disincentives are actually different depending on the level of earnings.On average, labor taxation in SEE6 countries is less progressive than in the rest of Europe (Figure 15), which means that the tax wedge does not increase as sharply in these countries because individuals earn more.Therefore, beyond being a general disincentive to work if labor taxation is high, the structure of taxation can penalize youth in particular.This is the case because youth tend to be overrepresented in low wage jobs given the fact that they are starting their careers and often work fewer hours.Progressivity is particularly low in Bosnia and Herzegovina, Montenegro, and Serbia (Figure 15).Montenegro in particular applies the same tax rate regardless of labor income.20Higher tax wedge is often associated with lower labor force participation rates and lower employment-to-population ratios.For the Europe and Central Asia region, a 1 percentage point increase in the tax wedge is estimated to result in a 0.3-0.6 percentage point drop in both the labor force participation rate and the employment to-population ratio in ECA.While empirics on the effect of changes in the tax wedge for particular age groups are not available, lowering the tax wedge and improving progressivity would likely mostly affect low wage-earners, where youth are most represented.

Moreover,
higher labor taxationespecially among low-wage, lowproductivity workers-together with rigid labor regulations, create incentives for informality. 21Therefore, incentives for formal employment in SEE6 can be strengthened, especially for youth.Arguably, disincentives to formalize employment may at least partly explain informality among young workers in SEE6 (see Message 2).

Message 8: New labor market entrants are not equipped with the skills employers need
Despite increases in formal educational attainment, average returns to an additional year of higher education remain high.Enrollment in tertiary education, for the countries where data over time are available, has risen significantly since the 1990s. 22Despite these increases in enrollment, returns to an additional year of higher education remain high, on average, just below 10 percent.This is close to the average for the overall Europe and Central Asia region, although below the average for most other regions. 23Returns are also significantly higher for women than for men. 24 The returns to job-relevant education for youth, including in SEE6, are potentially large because labor demand has shifted to more complex, new-economy skills, which tend to command higher wages.The production and occupational structures of most economies are moving significantly to highvalue-added and knowledge-intensive activities and services where "new economy" skills are particularly relevant.These skills encompass nonroutine cognitive, socioemotional, and technical skills, that cannot be easily automated and that make workers more adaptable. 25In fact, Levy and Murnane (2003), Acemoglu andAutor (2011), andHandel (2012) have shown that the use of high-order analytical skills and socioemotional skills has soared over the last 40 years in higher-income countries, and occupations that are repetitive-task-intensive are increasingly being automated.Arias et al. (2014) and World Bank (2016) found similar patterns in developing countries, as can be seen in the SEE6 region, especially among youth (Figure 16).In SEE6, this reflects the very rapid economic transformation that accompanied the move from centrally planned to market economies.Youth are well-positioned to benefit from this structural change since many are still in or can return to education, and arguably  general, beyond their lack of work experience, young workers are perceived to lack the skills they need to be productive.This is evident from employer surveys focused on young recruits that have been carried out in FYR Macedonia and Montenegro (Figure 17).Often these gaps go beyond technical and language skills to include such socioemotional skills as responsibility, motivation, leadership and critical thinking, which is consistent with the changes in skills demand expected in modernizing economies.
Even among current students, many youth in SEE6 do not acquire the foundational skills that can help them succeed in a modern and dynamic labor market.Consistently in SEE6 countries, those in the bottom 40 percent of the welfare distribution have less education (Bussolo and Lopez-Calva 2014).For those enrolled in the formal education system, quality continues to be a concern.Deficiencies throughout the education system mean that many children lack basic skills.A high share of 15-year-olds in the region are functionally illiterate and scored below level 2 in the most recent OECD PISA reading test (Figure 18).Ongoing efforts in Bosnia and Herzegovina, Kosovo and Serbia and completed efforts in FYR Macedonia are exploring the skills of adult men and women using the World Bank Skills Toward Employment and Productivity STEP tool.The wide variation in education quality within countries further limits opportunities for certain groups.There are, for example, large gaps between sociodemographic groups in performance in international reading and math tests (Figure 19).Similarly, average returns to tertiary education mask significant disparities in payoffs to education between and within Source: OECD data.Note: Data for Serbia is for 2012.

SOUTH EAST EUROPE
RegUlAR economic RePoRt no.9s SPECIAL TOPIC fields of study.These disparities are caused by a variety of factors, such as differences in the quality of educational institutions, differentials in parental education, and low coverage of preschool and early child development programs among the ethnic minorities, and in the readiness of individuals to enter into tertiary education.In Serbia, for example, significantly fewer Roma men and women aged 16-29 are enrolled in education than non-Roma youth. 29

Message 9: Lack of access to productive inputs-finance, land, and personal and professional connections-worsen the entrepreneurship and employment prospects of young people
Youth in SEE6 have an interest in entrepreneurship and many of them believe that starting their own business is feasible.
In fact, youth tend to be more entrepreneurial than the rest of the population.In SEE6 as well as in the EU, entrepreneurship drops with age.For example, in Serbia 61 percent surveyed 18-29 year olds believe they have the necessary characteristics to start a business, and the positive responses drop by over a half for people over 60 (Figure 20).While youths appear to have more positive attitudes toward entrepreneurship than older generations 32 , only a small fraction in fact do start a business.The same (Ipsos) survey from Serbia shows that only 8 percent of all respondents are "working on" starting their own business, and nearly all of these find it "very risky" to become an entrepreneur.While self-employment data for SEE6 youth does not exist, self-employment for youth is likely very low. 33This may in part be driven by preferences for more stable jobs (Figure 21), especially in the public sector. 34Moreover, options for outmigration, which are higher for youth, may also be pushing reservation earnings up, including for self-employment.
For young people lack of access to finance and land accentuate their poor 32 See Dávalos et al (2016) for a discussion on youth and older workers attitudes towards entrepreneurship and wage employment in Europe and Central Asia, including in SEE6 countries.33 For reference, self-employment rates for youth (aged 15-24) in the EU and Canada is 4 percent, and 2 percent in the US for youth aged (16-24).Data for 2009.34 Dávalos et al (2016).
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TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE
employment prospects by depressing their entrepreneurship potential.Such barriers, while prevalent for all entrepreneurs, are often particular to youth or more severe for youth than for adults.Youth tend to have lower savings, shorter credit history, and usually lack business performance history and collateral.These factors make it more difficult for youth than adults to obtain financing.For example, in most SEE6 countries, youth have less access to financial services measured by ownership of an account at a formal financial institution (Figure 22).In Serbia, for example, 37 percent of youth respondents quote the lack of finance as a primary reason for not starting their own business. 35Similarly, around 31 percent of youth in Montenegro and 37 percent in Serbia cite insufficient financial resources as the most significant challenge to doing business. 36

Youth in SEE6 have fewer employment prospects, including as entrepreneurs, if they have limited access to information
35 Based on results quoted Ipsos (2015).36 Djuric (2016) and Marjanovic (2016).
Figure 21 shares of men and women aged 18-29 years old who prefer a secure and averagepaying job over a less secure but better paying one Figure 22 individuals with an Account at a Formal Financial institution, by Age and networks.It can be particularly difficult for new labor market entrants to get accurate information about, e.g., job openings, wages, and training opportunities, making job searches less efficient and heightening the risk of mismatches (Pallais 2013, Wang 2012).
The lack of information is most successfully addressed in the school system when students are just beginning to make decisions about careers and educational and professional paths.Some SEE6 countries are beginning to address these information gaps; for example, FYR Macedonia has introduced a high school counseling program.Experience from other countries can be relevant to SEE6 in this regard.Poland and other countries have functional "employment observatories" that provide information on job availability, wages, and career prospects.In Colombia, the creation of a national registry of workers and vacancies not only increased the efficiency in the process of matching workers and firms, but also fed the training agency with information about skill demand and training needs in each region.
Critically, for entrants into the labor market there is asymmetry of information on the side of employers with respect to the productivity of youth, since new workers usually have few or no references and little work experience.This incomplete information may cause employers to hesitate to hire young workers.In Germany, a randomized study of labor market discrimination found that an initial 14 percent gap in callback probabilities between the two groups of interest, ethnic Germans and ethnic Turks, disappeared once the study was restricted to applications that had positive reference letters that provided favorable information about the candidate's personality (Kaas and Manger 2010).
The influence of personal and professional connections accentuates youth's poor employment prospects.On average, about four out of five youth in SEE6 countries report that connections matter to get a public or private job; the figure is particularly high in Serbia (Figure 23).Although across countries adults also attach high importance to having connections to get a job, given their relatively lower access to networks youth are likely  women, who are often confronted by resistance stemming from social norms about traditional roles (Box 3). 38 These attitudes, which in the extreme, result in discrimination, may partly explain the gender wage gaps that remain even after accounting for women's lower labor force participation and such worker characteristics as age, education, and location.After accounting for differences in the characteristics of male and female workers, labor force survey data for 2008-11 reveal gender wage gaps of 17.9 percent in FYR Macedonia, 16.1 percent in Montenegro, and 11 percent in Serbia (Vladisavljević Avlijaš, and Vujić, 2015).These gaps may make it less attractive for women to join the labor force in the first place.Social attitudes can thus be a deterrent for work through their effect on the expectations of young women.This could be particularly a problem for young women from disadvantaged or conservative backgrounds (Jensen, et al. 2012, Vezza et al. 2013).

Work incentives, labor regulation and flexible work arrangements
Labor regulations could further promote youth employment.Facilitating flexible work arrangements, such as part-time work, that allow youth to combine studies with work, can be highly beneficial not only for young workers but also for employers.Furthermore, in addition to assessing the general design of minimum wage legislation, governments could consider setting a lower minimum wage for younger workers, which could be simply defined by age or by a combination of age and years in the formal labor market.For example, the minimum wage for workers under 30 might be lower than for the rest of the workforce.This would reduce the cost of hiring younger workers, among whom the incidence of unemployment is particularly high and for whom long periods of unemployment could erode human capital and lead to persistently high long-term unemployment.In most EU15 countries, minimum wages are differentiated, and in 40 countries the law sets a youth minimum wage (Kuddo 2014).This is not the case in SEE6.Moreover, reassessing the design of family leave provisions and its impact on incentives to hire or work could be considered; reforms may seek to better balance family leave between mothers and fathers.
The gains to reducing labor taxation for youth, especially young women, can be especially large.Youth are likely to be the most responsive to changes in labor taxation (Arias et al. 2014, Spotlight 4.1).In addition, given the relatively large pool of potential workers in this group, a reduction in labor taxation is likely to encourage youth hiring because it reduces labor costs rather than increasing net wages.
Addressing tax disincentives for youth would therefore increase the payoff for employment of labor tax reforms. 50Work incentives for youth can be improved through revenue-neutral targeted reductions in labor taxation.Reducing labor taxation specifically for low wage and part-time earners can increase the payoffs for youth from holding a formal job.This could be done through either social contribution subsidies or in-work benefits, as is done with labor income tax credits in the United States and the United Kingdom.

Access to productive inputs and networks
Policies improving access to productive inputs can have direct positive impact on jobs for youth and entrepreneurship.Reforms in the financial sector that improve access to credit, particularly among usually underserved groups, 50 For most socioeconomic groups, it is usually important to identify work disincentives that may be associated with social transfers, unemployment insurance, and pensions (Arias et al. 2014).However, since youth are not often direct recipients of benefits, indirect effects may be the main concern, particularly the income effects of such programs that act on the whole household, affecting the labor supply decisions of its members.For example, in Albania, Bulgaria, Hungary, Kosovo, and Poland, a larger share of youth is likely to be out of the labor force and out of school in households that receive pensions than in households that do not.Given the limited evidence on the impact of these policies in the region, efforts to rigorously evaluate them would be very valuable.

Attitudes and social norms
With a medium and long term perspective, some policies should be directed to improving the attitudes and influencing the social norms that shape agency and employment decisions.The agenda for influencing social norms needs to go beyond establishing and enforcing legal frameworks; it should take a holistic approach that encompasses at minimum the education and legal systems, media outreach, public debate, and political commitment.Interventions that have already been shown to have important effects for changing social norms are role model interventions, job shadowing, and mentoring (see, for example OECD 2011, Eby et al. 2008, andDávalos et al, 2016).In addition, adaptation of human resources management, particularly in the private sector, has been identified as a good practice to promote female employment (World Bank 2011).

Policy complementarities
As illustrated in messages 6 to 10, most of the barriers to jobs for youth, although not exclusive to youth, affect them disproportionately.Moreover, these disincentives and barriers reinforce each other, especially among specific youth groups.Young women and youth of both genders from ethnic minorities or with poor skills are likely to face far more severe barriers to productive employment.
Removing barriers and disincentives so as to close gender gaps for youth, particularly in labor force participation rates (message 3), will certainly help to close these gaps later in life since there is a lot of inertia in labor market participation.
Therefore, the policy agenda to remove barriers to youth employment, especially among vulnerable groups, would include complementary interventions in different areas.Youth employment programs in many countries try to better match young workers and jobs and improve access to on-the-job training and thus provide not only a first job experience but also critical production inputs necessary to foster youth entrepreneurship.There is evidence that, to be effective, these interventions need to be carefully designed and targeted to the needs and problems of the beneficiaries.

Figure 1 Figure 5 Figure 9
Figure 1 Youth and Adult Unemployment in European Economies, 2013 Figure 2 Unemployed Youth as Percent of Total Unemployed, 2014 Figure 3 Youth and Adult Unemployment, 2008-14 Figure 4 Youth-Adult Unemployment Gap and Change in Youth Unemployment, Mean, 2007-14 Figure 5 Youth as a Percent of the Total Labor Force, 2014 Figure 6 15-24-year-olds Not in Employment, Education, or Training, 2014 Figure 7 Age profile of people in formal and informal employment in SEE6 Figure 8 Comparison: Secondary or Higher Educational Attainment, Emigrants and Source Country Population Figure 9 Youth Unemployment Rates by Gender in SEE6, 2014 Figure 10 The Gender Gap in Labor Force Participation by Age Group Figure 11 Factors Affecting Youth Unemployment Rates, EU28, 2007-12 Figure 12 GDP Growth and Change in Youth and Adult Unemployment, 1980-2014 Figure 13 Change in GDP Growth and Unemployment Figure 14 Average Minimum Wages, normalized by GDP per capita, 2013 Figure 15 Labor Taxes, Levels and Progressivity in SEE6 and Select Countries, 2008 Figure 16 Evolution of Job Skills Intensity, FYR Macedonia, circa 2000-10 Figure 17 Firms Reporting Shortages Skills among Young Workers Figure 18 Students Scoring Below Level 2 on the PISA Reading Section, 2015 Figure 19 Average PISA Scores by Sociodemographic Group, Serbia and Montenegro, 2012 Figure 20 Serbia Entrepreneurship Survey Results, by Age Group Figure 21 Shares of men and women aged 18-29 years old who prefer a secure and average-paying job over a less secure but better paying one Figure 22 Individuals with an Account at a Formal Financial Institution, by Age Figure 23 Perceptions of Those Aged 18-29 that Connections Matter in Getting a Job, Private or Public to productive inputs -finance, land, and personal and professional connections-worsen the entrepreneurship and employment prospects of young people New labor market entrants are not equipped with the skills employers need Attitudes, social norms, and lack of access to child care services are serious barriers to youth, particularly women, entering the labor market Source: World Bank (2016) "South East Europe Regular Economic Report No.9S Special Topic".Washington, DC.

7
Labor taxation is high for low-wage and part-time workers, groups where youth youth lose significantly more jobs in economic downturns than adults do, it takes less economic growth to create jobs for youth than for adults in SEE6 9 8 10 Lack of access to productive inputs -finance, land, and personal and professional connections-worsen the entrepreneurship and employment prospects of young people New labor market entrants are not equipped with the skills employers need Attitudes, social norms, and lack of access to child care services are serious barriers to youth, particularly women, entering the labor market Source: World Bank (2016) "South East Europe Regular Economic Report No.9S Special Topic".Washington, DC.

Figure 1
Figure 1 youth and Adult Unemployment in european economies, 2013Percent

Figure 2
Figure 2 Unemployed youth as Percent of total Unemployed, 2014

Figure 5
Figure 5 youth as a Percent of the total labor Force, 2014

Figure 7 Formal
Figure 7 Age profile of people in formal and informal employment in SEE6 Formal workers, percent Informal workers, percent Figure the gender gap in labor Force Participation by Age group Albania Bosnia and Herzegovina 2015 Percent Percent

Figure
Figure 11 Factors Affecting youth Unemployment Rates, eU28, 2007-12 Percentage of variation explained

Figure 12
Figure 12 gdP growth and change in youth and Adult Unemployment, 1980-2014 a. EU b.SEE6 Change in unemployment rate, percent Change in unemployment rate, percent

Figure 13 J
Figure 13 change in gdP growth and Unemployment EU: Percentage point change in unemployment rate SEE6: Percentage point change in unemployment rate

Figure 14
Figure 14 Average minimum wages, normalized by gdP per capita, 2013

Figure
Figure 15 labor taxes, levels and Progressivity in see6 and select countries, 2008 Progressivity of tax wedge, percentage points

Figure 16 ▬
Figure 16 evolution of Job skills intensity, FyR macedonia, circa 2000-10 a. FYR Macedonia, cohort born after 1974 FYR Macedonia, cohort born before 1955 Skill intenstiy index relative to 2007 Skill intenstiy index relative to 2007

Figure 18
Figure 18 students scoring Below level 2 on the PisA Reading section, 2015 Percent

Figure 20
Figure 20 serbia entrepreneurship survey Results, by Age group Do you think that you have characteristics necessary to start up your own business?
World Bank Findex database.SOUTH EAST EUROPE RegUlAR economic RePoRt no.9s SPECIAL TOPIC

Figure 23
Figure 23 Perceptions of those Aged 18-29 that connections matter in getting a Job, Private or Public Percent

Table 1
Social Norms Affect Whether Women Work, Kosovo, Percent contents | v

3 This paper explores the drivers of youth employment in SEE6, organized around 10 evidence-based messages.
3 World Bank 2012b.

TOPIC In the SEE6 unemployment has risen at a faster pace for youth than for adults since
RegUlAR economic RePoRt no.9s SPECIAL Source: Eurostat, national statistics offices.Youth unemployment on average in SEE6is still above its pre-crisis levels.However, individual countries have seen different

Increased unemployment rates and lack of job opportunities push young people to emigrate. Those
RegUlAR economic RePoRt no.9s SPECIAL TOPIC

As labor regulations partly determine how much it costs to hire and fire new workers, they are central to youth employment outcomes.
They can also affect the decisions of both workers and firms about the type of employment or contract, informal or formal, full-time or part-time, or the hours worked (see Box 2 for lessons learned from the Spanish labor market).

In addition to the costs of hiring and firing workers, four other areas governed by regulations directly affect youth employment-the areas dealing with flexible work arrangements, apprenticeships, the minimum wage, and family leave provisions.
16 See Betcherman 2014 for a recent review of the literature.

17 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE
dRiveRs oF yoUth JoBlessness in see6 |

26 Yet, despite less likely to have obsolete skills than older workers, there is significant room for improving the ability of education and training systems in SEE6 to provide youth with new-economy skills. While
Arias, et al 2014. extraversion, agreeableness, and emotional stability or grit, a narrower trait capturing one's inclination and motivation to achieve long term goals through perseverance of effort and consistency of interest.Finally, technical skills can be defined as abilities associated with specific knowledge to carry out tasksCunningham and Villasenor 2016.they are relatively more prepared to adapt to technological change than other workers.The changes are likely to be intensified as countries become more modern and reform their economies.26Ariasetal.2014shows that the degree to which skills demand has shifted to more complex skills depends on how advanced countries are in their reforms.World Bank 2016a has, moreover, shown that the changes in the skills demanded are likely to continue as digital technologies diffuse and become more central to the world of work.27Arias,et al 2014.

28 While access to secondary education is generally high in SEE6, the TVET system, often the most attended secondary school program, faces challenges related to the Figure 17
Firms Reporting shortages skills among young workers Source: World Bank 2010 and Rutkowski 2010.dRiveRs oF yoUth JoBlessness in see6 | 19 TEN MESSAGES

ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE quality and relevance of training provided.
Figure 19Average PisA scores by sociodemographic group, serbia and montenegro, 2012

37 Message 10: Attitudes, social norms, and lack of access to child care services are serious barriers to youth, particularly women, entering the labor market Norms and values that are upheld by both employers and potential workers may also be
Source: World Bank staff, based on Life in Transition survey 2010.Notes: Responses are codified as 1 if the person reports that connections are moderately important, very important, or essential in getting a good job.

TOPIC For women, the lack of affordable quality child care services and the prevailing unsupportive attitudes and social norms function as mutually reinforcing barriers.
using qualitative data from Bosnia and Herzegovina, FYR Macedonia, Kosovo and Serbia.

Table 1
social norms Affect whether women work, kosovo, Percent why are you not looking for a job?The next paragraphs adapt the analysis of Arias et al. 2014.42 The map was created by aggregating available indicators related to economic growth, skills, work incentives, labor regulations, flexible work arrangements, access to networks and productive inputs, and access to childcare.The Annex describes the indicators.

45 Skills A key item on the SEE6 agenda is to ensure that youth acquire solid basic skills that can help them succeed in a modern and dynamic labor market. Addressing
the see6 Policy AgendA FoR emPloyment oPPoRtUnities FoR yoUth |

One issue that deserves special attention in the SEE6 is the balance between general and vocational education, and the relevance of vocational education to the labor market.
Heckman et Kautz 2014 andurope, there is Villaseñor 2016.D has long-term benefits for disadvantaged groups: Roma children who attend preschool are more likely to complete secondary education than Roma children from the same neighborhoods who did not go to preschool (World Bank 2012).47Fora more detailed discussion, seeHeckman andKautz 2014 and  Cunningham andVillaseñor 2016.secondary at the earliest can help ensure that students acquire a solid skills foundation.

access to and the relevance of practical on-the-job training and making continuous education and training services part of active labor market and second-chance programs is an important aspect of the skills agenda for youth.
This entails (1) addressing market failures that prevent more on-the-job training and incentivizing firms to provide it by, for example, rethinking financing mechanisms and apprenticeship programs; (2) targeting 48 It has been found that in education systems where tracking starts very early, the choice tends to depend on factors not related to innate ability.In particular tracking can be affected by the age difference between pupils, especially girls, thus leading to inefficient allocation of students (Schneeweis and Zweimüller 2014).Poland and other countries have moved to delay tracking into VET in order to move their economies up the value chain (Sondergaard and Murthi 2012).SOUTH EAST EUROPE RegUlAR economic RePoRt no.9s SPECIAL TOPIC technical or job-specific skills gaps of youth through more effective training as part of active labor market policies and programs targeted to disadvantaged groups; (3) improving secondchance programs for youth that have left the education system or that need retooling. 49

29 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE are
important.Technological innovations that allow for crowdsourcing of financial capital for business ideas, or for credit scoring that goes beyond traditional indicators for credit worthiness may also help.Similarly, in the context of underdeveloped land markets in SEE6 countries and given that at a young age people are less likely to acquire and own land, reforms facilitating the use of movable assets as collateral could enhance access to finance for youth, alongside overall policies to improve the functioning of land markets.Along the same lines, programs to foster entrepreneurship, for example, by alleviating capital constraints or by providing business and "soft skills" training, can help youth improve their job prospects.
the see6 Policy AgendA FoR emPloyment oPPoRtUnities FoR yoUth | 51Moreover, these programs need to be rigorously evaluated because the evidence is often mixed, having drawn upon interventions with very different 51 An example is the Dominican Republic's "Youth and Employment" labor market insertion program, which has yielded positive results for youth of disadvantaged backgrounds even several years after the program.SOUTH EAST EUROPE RegUlAR economic RePoRt no.9s SPECIAL TOPIC designs in different contexts, which makes it difficult to draw generalizable inferences.Lessons drawn from European and OECD countries can help inform the agenda for promoting better employment prospects for youth in SEE6.
the see6 Policy AgendA FoR emPloyment oPPoRtUnities FoR yoUth | 31 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE