Ten Messages About Youth Employment In South East Europe REGULAR ECONOMIC REPORT NO.9S | 2016 Report No. 110291-ECA South East Europe Regular Economic Report No.9S Special Topic Ten Messages About Youth Employment in South East Europe 2016 Standard Disclaimer: This volume was produced by staff of the International Bank for Reconstruction and Development/ the World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. Nor does the World Bank guarantee the accuracy of the data herein. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. 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TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Acknowledgments The South East Europe Regular Economic Report (RER) covers economic developments, prospects, and policies in six South East European countries (SEE6): Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. This Special Topic supplements the RER and discusses policy issues relevant to SEE6 countries. The report is produced twice a year by World Bank staff economists working on SEE6 countries. This Special Topic is co-authored by: Gallina A. Vincelette, María E. Dávalos, Indhira V. Santos, and Jesus Crespo Cuaresma. Giselle Gavorskis, Kimberly Blair Bolch, Stefan Humer, and Nikola Kojucharov provided research assistance at different stages of the preparation of this study. The team is grateful to Johannes Koettl, Theo Thomas, Timothy A. Johnston, Lada Strelkova, Sanja Madzarevic-Sujster, Trang Van Nguyen, Tony Verheijen, Barbara Cunha, and Lazar Sestovic for their valuable comments on earlier drafts. The authors are also grateful to Ellen Goldstein, country director, South Eastern Europe; Ivailo Izvorski, practice manager, Macroeconomics and Fiscal Management Global Practice; Carolina Sanchez-Paramo, practice manager, Poverty Global Practice; and the South East Europe Country Management team for their guidance. SEE6 Special Topic supplements and RERs may be found at www.worldbank.org/eca/seerer/. Acknowledgments  |  iii SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Contents Acknowledgmentsiii Overviewvi Why Focus on Youth Joblessness in SEE6? 1 Poor Labor Market Outcomes for SEE6 Youth 2 Message 1: Unemployment is particularly high for youth 2  any young people are inactive, “idle”, in the informal sector or Message 2: M choose to emigrate 4 Message 3: Young women, in particular, have a tenuous labor market attachment 7 Drivers of Youth Joblessness in SEE6 9 Economic growth affects employment opportunities for youth more Message 4:  than for adults 10 While youth lose significantly more jobs in economic downturns Message 5:  than adults do, it takes less economic growth to create jobs for youth than for adults in SEE6 11 Message 6: Labor regulation constrains youth employment 14 Labor taxation is high for low-wage and part-time workers, groups Message 7:  where youth is overrepresented 16 Message 8: New labor market entrants are not equipped with the skills employers need 17 Lack of access to productive inputs—finance, land, and personal Message 9:  and professional connections—worsen the entrepreneurship and employment prospects of young people 21 Attitudes, social norms, and lack of access to child care services are Message 10:  serious barriers to youth, particularly women, entering the labor market 24 The SEE6 Policy Agenda for Employment Opportunities for Youth 26 Sustained economic growth 26 Skills  27 Work incentives, labor regulation and flexible work arrangements 29 Access to productive inputs and networks 29 Attitudes and social norms 30 Policy complementarities 30 References32 iv  | Contents TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE List of Boxes Box 1 Economic Cost of Gender Gaps in SEE6 9 Figure B1.1 Gender Gaps and Estimated Loss in Income per Capita 9 Figure B1.2 Gender Gaps and Estimated Income per Capita Loss by Age 9 Box 2 Youth Unemployment and the Crisis in Spain: A Tale of Two Labor Markets 13 Box 3 Situations that Reinforce Negative Social Norms for Women 24 List of Figures Figure 1 Youth and Adult Unemployment in European Economies, 2013 2 Figure 2 Unemployed Youth as Percent of Total Unemployed, 2014 2 Figure 3 Youth and Adult Unemployment, 2008–14 3 Youth-Adult Unemployment Gap and Change in Youth Unemployment, Figure 4  Mean, 2007–14 3 Figure 5 Youth as a Percent of the Total Labor Force, 2014 5 Figure 6 15–24-year-olds Not in Employment, Education, or Training, 2014 5 Figure 7 Age profile of people in formal and informal employment in SEE6 6  omparison: Secondary or Higher Educational Attainment, Emigrants and Figure 8 C Source Country Population 7 Figure 9 Youth Unemployment Rates by Gender in SEE6, 2014 7 Figure 10 The Gender Gap in Labor Force Participation by Age Group 8 Figure 11 Factors Affecting Youth Unemployment Rates, EU28, 2007–12 10 Figure 12 GDP Growth and Change in Youth and Adult Unemployment, 1980–2014 11 Figure 13 Change in GDP Growth and Unemployment  12 Figure 14 Average Minimum Wages, normalized by GDP per capita, 2013 15 Figure 15 Labor Taxes, Levels and Progressivity in SEE6 and Select Countries, 2008 16 Figure 16 Evolution of Job Skills Intensity, FYR Macedonia, circa 2000–10 18 Figure 17 Firms Reporting Shortages Skills among Young Workers 19 Figure 18 Students Scoring Below Level 2 on the PISA Reading Section, 2015 20 Figure 19 Average PISA Scores by Sociodemographic Group, Serbia and Montenegro, 2012 20 Figure 20 Serbia Entrepreneurship Survey Results, by Age Group 21 Figure 21 S hares 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 22 Figure 22 Individuals with an Account at a Formal Financial Institution, by Age 22 Figure 23 P erceptions of Those Aged 18–29 that Connections Matter in Getting a Job, Private or Public 23 List of Tables Table 1 Social Norms Affect Whether Women Work, Kosovo, Percent  25 Contents  |  v SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Overview in particular have limited attachment to the labor market. The economic growth rate affects employment Today, nearly half of youth1 in the six South opportunities for youth more than for adults, East European countries (SEE6)2 are not in the as evidenced in Message 4. For youth seeking labor market, and one quarter is inactive—not employment, the growth rate explains half of in employment, education, or training. These the changes in the youth unemployment rate poor outcomes partly reflect a difficult recovery across countries and over time. In SEE6, it in SEE6 from the 2008 global financial crisis, takes less economic growth to create jobs for which sent already high youth unemployment youth than for adults in periods of expansion, soaring to new heights. This paper presents and Message 5 explores these dynamics. 10 evidence-based messages on the youth Because in SEE6 economic upturns tend to employment challenges in SEE6. be characterized by steeper reductions in both youth and adult unemployment than those in Message 1 confronts the stubbornly high youth the rest of Europe, SEE6 have to work hard unemployment. In the SEE6, the average to ensure sustained economic expansions to unemployment rate has risen above its pre- reduce unemployment. crisis level by about 5 percentage points, and at the end of 2013 youth unemployment had The other half of changes in the youth hit historic highs of more than 60 percent unemployment rate is explained by education in Bosnia and Herzegovina, 52 percent in and labor policy as well as a considerable FYR Macedonia, 49 percent in Serbia, and residual that hints at the need of deeper 41 percent in Montenegro. As a result, with the reform for policies to be effective in addressing sluggish economic recovery in the SEE6, today structural constraints. Message 6 points out that youth in the region face unique difficulties in in the SEE6 rigid labor regulation constrains making the school-to-work transition. As a youth employment, and Message 7 presents result, many young people are inactive or in evidence that labor taxation is relatively higher the informal sector or choose to emigrate, as for low-wage and part-time workers—groups pointed out in Message 2. that are disproportionately young. Moreover, as discussed in Message 8, new SEE6 labor But these poor labor outcomes also embody market entrants are not equipped with the deeper structural problems in the SEE6, where skills employers demand. Message 9 makes not only is unemployment high across the the additional point that lack of access to board, but also labor force participation is low, productive inputs and professional connections especially for young women and minorities. worsens the prospects of young people for The essence of Message 3 is that young women entrepreneurship and employment. Finally, certain cultural norms may narrow 1 Unless otherwise noted, this paper defines “youth” as those aged employment opportunities for youth, 15–24 years. particularly women and members of ethnic 2 The SEE6 countries are Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. minorities; increased access to quality and vi  | Overview TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE 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. Overview  |  vii TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE 2 1 Unemployment is particularly high for youth Many young people are inactive, “idle”, in the informal sector or choose to emigrate Young women, in particular, have a tenuous labor market attachment 4 Economic growth affects 3 employment opportunities for youth more than for adults While youth lose significantly more jobs in economic downturns than adults do, it takes less economic growth to create jobs for 6 Labor regulation constrains youth employment youth than for adults in SEE6 5 8 New labor market entrants are not equipped with the skills employers need Lack of access to productive inputs 9 —finance, land, and personal and professional connections— worsen the entrepreneurship and employment prospects of young people 7 Labor taxation is high for low-wage and part-time workers, groups where youth is overrepresented 10 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. TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Why Focus on Youth Joblessness in SEE6? “It is not easy to be young in the labor market long-run implications for economic growth. In today“ opines the Global Employment addition, accelerating economic growth in all Trends for Youth 2013 report.1 It is arguably SEE6 countries will depend on institutions even more difficult to be young in the SEE6 and markets that promote and facilitate formal labor market. Ridden by overall high levels employment and higher productivity for both of unemployment and low labor force youths and adults. Finally, jobs—especially jobs participation, along with a shrinking and for youth—are important for social cohesion.3 aging work force, the labor market in SEE6 is not creating the job opportunities needed to This paper explores the drivers of youth boost living standards and growth prospects employment in SEE6, organized around for the region. For youth, their job aspirations 10 evidence-based messages. Its first set as newcomers to the labor market meet the of messages describes how the labor market reality of even fewer opportunities available situation in the region after the global financial to them to start their productive lives in good crisis of 2008 has affected youth outcomes, standing. Double the average unemployment by presenting the key features of youth rate and difficulties to participate in the labor employment in SEE6 in Messages 1 through market, particularly among young women, 3. The core of the paper aims to shed light on result in a large share of idle youth in SEE6. the factors associated with these outcomes, These disparities in labor market outcomes are exploring the roles of economic growth and closely linked to some of the characteristics of particularly of the economic downturns of the unemployed youth in SEE6 which we explore recent past in Messages 4 through 5, and the below. barriers and disincentives that youth face to access jobs that are embedded in markets and Understanding and tackling the obstacles to formal and informal institutions in Messages youth access and retention of jobs is critical 6 through 10. While recognizing that they for reducing poverty, promoting shared are important, drivers on the demand side for prosperity, and accelerating economic growth jobs are not dealt with in this paper, such as in SEE6. Because jobs are the main pathway broader policies that encourage growth and to upward economic mobility,2 ensuring that job creation. It concludes with region-specific youth have access to economic opportunities recommendations for supply-side policies to takes center stage in any agenda to raise living combat youth unemployment and inactivity standards in the region. Moreover, high and in the SEE6 countries, which should be sustained youth inactivity and unemployment accompanied by efforts to increase overall labor imply a reduction in future potential output demand. through human capital depletion and thus have 1 International Labor Organization (2013). 2 Cancho et al (2015). 3 World Bank 2012b. Why Focus on Youth Joblessness in SEE6?  |  1 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Poor Labor Market Outcomes for SEE6 Youth Message 1: Unemployment is from 8 percent in Germany to 60 percent in particularly high for youth Bosnia and Herzegovina, with the highest rates concentrated in peripheral Europe, Unemployment is more than twice as high for particularly among the SEE6 (Figure 1); in youth as for adults. Average unemployment only a quarter of European countries was youth for the adult population in SEE6 is about unemployment below 20 percent. This cohort 21 percent, compared to an average of 9 percent is crucial in shaping the dynamics of general in the European Union (EU). In 2013 the unemployment and the labor market, especially average EU youth unemployment rate was in SEE6 economies where the young constitute about 26.4 percent, but it was 48 percent in a higher share of total unemployment than in SEE6. Across the continent, rates ranged the rest of the continent (Figure 2). Figure 1 Youth and Adult Unemployment in European Economies, 2013 Percent 60 50 40 30 20 10 0 L L IRL A D A ITA D B B R R R R S P P C U FIN U N U EU N BIH E E E E E K X K T T T T V BE PO LV FR KO NL ML CY MK ES AL SR NO GB TU BG GR LU AU ES PR CH CZ SW MN SE HR DE DN LT RO SV SV HU JJ Youth unemployment rate (% of total labor force ages 15–24) QQ 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. Figure 2 Unemployed Youth as Percent of Total Unemployed, 2014 45 40 35 30 25 20 15 10 5 0 EU L X D L U U R E T T N B BIH ISL D E R IRL N R E P A V B C K ITA K FIN A E T P U T E R PO LU ML BE PR SE SW NO MK RO DE SR HR GB MN NL AU SV ES FR CY CZ BG LV CH AL SV DN GR ES HU TU LT Source: Eurostat and labor force surveys. 2  |  Poor Labor Market Outcomes for SEE6 Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE In the SEE6 unemployment has risen at a dynamics in post-crisis youth unemployment. faster pace for youth than for adults since FYR Macedonia and Montenegro have youth 2008  (Figure 3). Between 2000 and the onset unemployment rates slightly below those of the global economic and financial crisis in observed in 2008, while the rest of the region 2008, most countries in Europe saw youth has not yet significantly and sustainably unemployment rate fall as labor markets reduced youth unemployment to lower values benefited from buoyant economic growth than those of 2008.4 in the context of income convergence within the EU. However, the growth model in Figure 4 Youth-Adult Unemployment Gap SEE6—which was consumption-driven and and Change in Youth Unemployment, Mean, supported by capital inflows and remittances— 2007–14 Change in unemployment proved unsustainable post-2000s. The crisis 40 reversed the overall trends in economic growth 35 ESP and employment: the region contracted 30 GRC 25 CYP twice between 2008 and 2014 and overall ITA HRV 20 unemployment increased by 5 percentage 15 IRL PRT ALB points on average. Youth unemployment also 10 SVN LTU LVA BGR IRL DNK CZE LUX shot up between 2008 and 2014 to reach 5 NLD CHE BEL ROU EST FIN ISL GBR HUN SWE SRB BIH 0 NOR TUR FRAPOL staggering levels of over 45 percent on average -5 AUT DEU MLT MNE MKD (Figure 3). While in the SEE6 average youth -10 KOS unemployment increased less than in the EU, -15 0 5 10 15 20 25 30 35 40 its starting levels in 2008 were already almost Unemployment gap three times higher. Source: ILO data. Figure 3 Youth and Adult Unemployment, 2008–14 Not only is the level of youth unemployment Percent high in SEE6, the gap between adult and EU Adult youth unemployment rates is also very large. Adult-youth unemployment gaps in EU Youth 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 SEE6 Adult in the EU, the gap between the youth and SEE6 Youth the adult unemployment rates is especially pronounced (Figure 4). Notably, these are 0 10 20 30 40 50 exactly the same countries that had the steepest JJ 2008 JJ 2014 Source: Eurostat, national statistics offices. increases in overall unemployment, without signs of recovering labor markets for over five Youth unemployment on average in SEE6 is still above its pre-crisis levels. However, 4 Labor market data for Kosovo is not comparable between 2008 individual countries have seen different and 2012 onwards. Poor Labor Market Outcomes for SEE6 Youth  |  3 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC years after the crisis (2008–14).5 While the can also push many discouraged young people change in youth unemployment in SEE6 after to abandon the labor market and education 2008 was relatively small compared to that of altogether. For youth, it takes around 2 years other European economies, the adult-youth after finishing their studies to find a first job unemployment gap has remained large and that is deemed stable or satisfactory.7 Some persistent. It is notable that differences in the youth choose to move abroad in search of better dynamics of youth labor market participation opportunities. Besides its more important between SEE6 and EU economies are not long-run implications, high inactivity has the strong enough to explain such a development. immediate effect of reducing labor supply in the This is an indication that the gap, while sensitive short run, thus negatively affecting the output to cyclical factors, is also driven by structural of the economy and prospects for improving forces related to employability and factors individual and household living standards. Put affecting job creation, as will be discussed in the context of aging in all SEE6 but Kosovo, below. overall declining working age population puts more pressure on increasing labor productivity and keeping workers in the labor force for Message 2: Many young people longer periods. Low rates of labor participation are inactive, “idle”, in the informal and withdrawals from the labor force trigger sector or choose to emigrate even sharper declines in the future labor force. Many youth in the SEE6 region are not active Worryingly, many SEE6 countries have in the labor market. Labor force participation high rates of young people who are not averages 53 percent for adults, but about in employment, education, or training 34 percent for youth aged 15–24. In countries (NEET). The number of idle youths signals with a younger workforce, like Albania and an underutilization of labor and potential Kosovo, youth account for a significantly higher depletion through underinvestment in human share of the labor force, therefore affecting the capital. NEET rates have been rising rapidly SEE6 average (Figure 5).6 In the rest of the SEE6 since 2008, climbing to decade-highs by 2014, countries, youth are in the range of 6 percent of when they averaged 27 percent in SEE6; a level the total labor force in Serbia and 10 percent over twice the one in the EU (Figure 6). Put in Bosnia and Herzegovina. While some youth differently, almost every third young person in remain outside the labor force because they SEE6 is idle, compared to every sixth in the face barriers to participating, as explained later, EU. the prospects of long-term unemployment Such high NEET rates erode both the quantity and quality of labor supply both 5 While the positive relationship between youth unemployment changes and the young-adult unemployment rate difference is currently and in the future. Youth who dominated by the dynamics of the overall unemployment rate, are detached from jobs or education for such a positive correlation (albeit a weaker one) also exists if we use the youth-adult unemployment ratio instead of the difference. prolonged periods—especially early in their 6 On average, workers aged 15-24 constitute 11.6 percent of the labor force in the Western Balkan and 9.5 percent in the EU, work lives—are likely to face greater difficulties although within the region are very large differences; for instance, in Albania youth constitute as much as 23 percent of the total labor force. 7 Djuric (2016) and Marjanovic (2016). 4  |  Poor Labor Market Outcomes for SEE6 Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Figure 5 Youth as a Percent of the Total Labor Force, 2014 25 100 90 20 80 70 15 60 50 10 40 30 5 20 10 0 0 L L IRL ISL ITA A A D D B B R R R R S P P C N U N U EU U BIH FIN E E E E E X K K T T T T V BE PO LV FR KO ES CY MK ML NL SR AL BG TU NO GB GR LU PR ES AU CZ MN SE SW CH HR RO SV LT DE DN SV HU JJ Youth labor force share QQ Adult labor force share, rhs Source: Eurostat and labor force surveys. Figure 6 15–24-year-olds Not in Employment, Education, or Training, 2014 Percent 35 30 25 20 15 10 5 0 FIN A L BIH K T A N E E B D IRL B ITA S E T ISL U N EU L E U P E X K P C R R U D T T V R R PO FR ES SE LV PR CH DN SW KO ML BE AL HU SR NL MN LU CZ AU CY HR SV ES DE RO GR SV BG NO TU GB MK LT Source: Eurostat. in re-integrating into the workforce later and In addition, returns from further education are likely to earn less when they do, due to are forgone. To the extent that these scarring the depreciation of human capital and job- effects from unemployment and periods of related skills and the negative signal associated inactivity translate into lower productivity with long periods out of work. The earnings and less accumulation of human capital later penalty can be as high as 20 percent compared in life, they can substantially impair a worker’s with those who find employment early, and prospects of upward economic mobility—and the earnings deficit can persist for as long as the country’s potential for economic growth. 20 years.8 Prolonged unemployment early in one’s career can also delay or prevent the Moreover, young workers in SEE6 seem accumulation of valuable on-the-job skills. to constitute a larger share of informal employment than of formal employment (Figure 7). Since most labor market surveys  8 See, for example, Heisz, Oreopoulus, and von Wachter 2012, (e.g. labor force surveys) capture large parts Bell and Blanchflower 2011. von Wachter, Song, and Manchester 2009, and Kahn 2010. of the informal workforce, high rates of youth Poor Labor Market Outcomes for SEE6 Youth  |  5 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Figure 7 Age profile of people in formal and informal employment in SEE6 Formal workers, percent Informal workers, percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Albania Kosovo Macedonia, FYR Serbia Albania Kosovo Macedonia, FYR Serbia JJ 15–24 JJ 25–54 JJ 55+ JJ 15–24 JJ 25–54 JJ 55+ Source: ESS Data and Serbian LFS. Note: Formal: employee with a contract; informal: employee without a contract. unemployment may signal the presence of of the SEE6 source country population. The a large informal labor market for youths. global crisis accelerated emigration flow, with Available data from Albania, Kosovo and Serbia cumulative migration accounting for more suggest that on average, every fifth informal than 25 percent of source country population worker is a young worker. Moreover, young in 2013.9 The evidence of “brain drain” among workers constitute a small share of the formally youth in SEE6 is mixed, so that the negative employed in SEE6 with an average of less than effects of emigration of skilled individuals may 5 percent of workers in formal jobs. Informal be more relevant for some countries than for markets provide less employment security, as others. For instance, young Albanians who well as lower social benefits and opportunities emigrate are more educated on average than for formal training. Moreover, case studies fellow citizens who stay home, but Serbian and in the SEE6 and the new EU member states FYR Macedonian emigrants are less so (Figure suggest that those working in the informal 8). Similarly, Kosovo returnees in 201110 sector are more likely to remain informally tended to be more educated than the resident employed for the duration of their careers or population. When it comes to attracting to move between inactivity and informality these return migrants, much depends on the (World Bank, 2013). absorption capabilities of the domestic labor market, so revival of the labor market in SEE6 Increased unemployment rates and lack should help to encourage skilled emigrants to of job opportunities push young people to return home. A 2011 survey of the intentions of emigrate. Those European countries with the emigrant students from Albania, Kosovo, and highest rates of youth unemployment since FYR Macedonia found that a large proportion 2008 also saw the fastest growth in youth of them were willing to return (UNDP 2014). emigration. The SEE6 region is one of the world regions with the highest emigration rates: From 1990 through 2015, every five years emigration 9 United Nations 2015. accounted for an average loss of 3.2 percent 10 Census data 2011. 6  |  Poor Labor Market Outcomes for SEE6 Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Figure 8 Comparison: Secondary or Higher rate, compared to 37 percent for non-Roma Educational Attainment, Emigrants and Source women.11 Country Population Share of population with secondary attainment or higher, percent of total population Addressing gender gaps among youth is POL SVK critical as these gaps persist and widen with GBR HRV age. Gender differences in participation start in BGR FIN adolescence and widen steadily as other barriers, LVA CZE mainly household and family responsibilities, ALB AUT start to affect young women (Figure 10). Since GRC SWE gender gaps start early on, most of these gaps BEL DNK need to be closed early in people’s working ITA DEU lives, during youth. They are also associated ROU ESP with notable economic costs (Box 1). LTU EST FRA IRL Figure 9 Youth Unemployment Rates NLD SRB by Gender in SEE6, 2014 PRT HUN Percent, age 15–24 SVN 80 MKD 70 -20 -10 0 10 20 30 40 50 Difference between emigrant and source country population 60 Source: Eurostat data. 50 Note: Positive values mean that those who emigrated had higher educational attainment. 40 30 20 10 Message 3: Young women, in 0 particular, have a tenuous labor Bosnia and Albania Herzegovina Kosovo Macedonia, FYR Montenegro Serbia market attachment JJ Male JJ Female Source: Labor force and household surveys’. Note: For Albania, the youth group comprises ages 15–29. 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 UN 11 Development Programme/World Bank/European women have a 67 percent unemployment Commission. 2011 (2011). Poor Labor Market Outcomes for SEE6 Youth  |  7 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Figure 10 The Gender Gap in Labor Force Participation by Age Group Albania 2014 Bosnia and Herzegovina 2015 Percent Percent 90 100 80 90 70 80 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 15–29 30–64 65+ 15–24 25–49 50–64 ▬▬ Male ▬▬ Female ▬▬ Male ▬▬ Female Kosovo 2014 FYR Macedonia 2014 Percent Percent 90 100 80 90 70 80 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 15–24 25–49 50–64 15–24 25–49 50–64 ▬▬ Male ▬▬ Female ▬▬ Male ▬▬ Female Montenegro 2015 Serbia 2014 Percent Percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 15–24 25–49 50–64 15–24 25–49 50–64 ▬▬ Male ▬▬ Female ▬▬ Male ▬▬ Female Source: Labor force and households surveys. 8  |  Poor Labor Market Outcomes for SEE6 Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE 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. Figure B1.1 Gender Gaps and Estimated Figure B1.2 Gender Gaps and Estimated Loss in Income per Capita Income per Capita Loss by Age Percent Percent 30 100 90 25 80 20 70 60 15 50 40 10 30 5 20 10 0 2008 2012 2013 2012 2007 2011 2007 2006 2010 0 2008 2012 2013 2012 2007 2011 2007 2006 2010 ALB BIH KOS MKD MNE SRB ALB BIH KOS MKD MNE SRB JJ Due to labor force participation gap JJ Due to occupation choice JJ 15–24 JJ 25–35 JJ 36–50 JJ 51–65 Source: Cuberes and Teignier 2015. Note: A counterfactual set of gender gaps for each age group is calculated. To get the fraction of income loss for each age group, the aggregate gender gap is computed as if all the gender gaps were zero except for that particular age group. Drivers of Youth Joblessness in SEE6 Youth face numerous impediments to on unemployment change in a sample of productive employment, embedded in European countries found that half of the structural factors and affected by shocks. variation in the youth unemployment rate Disentangling the cyclical from structural observed across countries and over time can factors driving the level and changes in youth be explained by differences in output growth unemployment in SEE6 is important in setting (Figure 11). These cyclical factors are related the policy agenda for creating job opportunities to the business cycle and employment creation for youth. Standard decomposition exercises and destruction. The other half of the changes Drivers of Youth Joblessness in SEE6  |  9 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Figure 11 Factors Affecting Youth forces beyond cyclical economic growth and Unemployment Rates, EU28, 2007–12 labor and education policies. The unexplained Percentage of variation explained residual is arguably related to structural factors, 100 90 including institutions and norms. Each is 80 discussed in turn. 70 60 50 Message 4: Economic growth affects 40 employment opportunities for youth 30 20 10 more than for adults 0 Youth unemployment Adult unemployment JJ GDP growth JJ Labor market policies For both youth and adults, unemployment JJ Education policies JJ Residuals declines as the economy grows. Solid evidence, Source: Authors’ calculations. as presented in Figure 12, shows that rising youth unemployment is closely associated with in youth unemployment is attributed to economic contractions, and employment with structural forces. Among the structural factors, expansions. changes in labor and education policies play a role.12 For instance, young workers entering the Two key statistically significant findings stem labor market generally do not have experience, from Figure 12 for Europe. First, estimates connections, or an understanding of the skills of the average elasticity of youth and adult required for job success or entrepreneurship. unemployment rates to GDP growth suggest As a result, they usually find it harder to find that youth unemployment is “super-cyclical” in jobs than older and more experienced workers, both the EU and the SEE6 countries (that is, it especially when there is little demand for labor reacts more strongly than adult unemployment and few vacancies, as in SEE6 countries. For to changes in GDP growth). Second, for both changes in youth unemployment, there is also youth and adult unemployment the reaction an unexplained large residual associated with is particularly large in SEE6 as compared to other European regions. In that region, a 1 percentage point increase in GDP growth 12 The calculations are based on regression analysis using data is associated on average with a decrease in on youth employment policies in EU countries (European Commission, 2011). In terms of labor market policies, the the youth unemployment rate of 0.85 of a categories correspond to (a) active labor market programs aimed at the young, (b) conditions on social benefits linked to willingness to percentage point and in the adult rate by participate in the labor market, (c) hiring subsidies, (d) promotion 0.29 of a percentage point. These quantitative of self-employment, and (e) promotion of mobility among the young. Concerning education policy, the following policies are relationships are well estimated and significantly considered: (a) early school leaving prevention, (b) measures aimed at improving the efficiency of the vocational training system, different from each other. In contrast, in the (c) measures related to acknowledging non-formal learning, EU, an extra percentage point of GDP growth (d) special training aimed at the insertion of young workers in the labor market, (e) measures for linking education and experience, is found to reduce youth unemployment by an (f ) reforms to accommodate labor demand, (g) measures directed to at tertiary education and life-long learning, and (h) youth average of 0.65 of a percentage point and adult guarantees. Alternatively, data on real minimum wages were also rates by 0.26 of a point. collected and used as extra regressors, but did not appear to add significant explanatory power to the regression model. 10  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE 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 25 15 20 10 15 5 10 5 0 0 -5 -5 -10 -10 -15 -15 -20 -20 -20 -15 -10 -5 0 5 10 15 -15 -10 -5 0 5 10 15 GDP growth GDP growth QQ Youth unemployment QQ Adult unemployment QQ Youth unemployment QQ Adult unemployment Source: ILO data. Youth are thus disproportionately affected theories have been put forward to explain this by economic cycles. On average, the change phenomenon (Ryan 2001). For example, Verick in youth unemployment in response to GDP (2009) presented evidence that the young growth is systematically larger than the change segment of the workforce is disproportionately in adult unemployment. This simple negative affected by large recession shocks both association between economic growth and immediately and throughout the recovery. youth unemployment reveals the importance of sustained growth to youth unemployment In the EU youth and adult unemployment dynamics (Figure 12).13 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 Message 5: While youth lose long and substantial expansionary phases significantly more jobs in economic (see for e.g. Crespo Cuaresma, J. 2003). In downturns than adults do, it takes differentiating unemployment elasticities less economic growth to create jobs between periods of positive and negative GDP for youth than for adults in SEE6 growth, we find that for the EU, a decrease of 1 percentage point in GDP growth tends to Ample evidence exists that unemployment raise the youth unemployment rate by 0.83 reacts more strongly to negative economic of a percentage point, but a positive growth shocks than to positive ones. This has been shock of 1 percentage point decreases youth documented in the literature and several unemployment by only 0.54 of a percentage point; in contrast, adult unemployment goes 13 Such a difference in correlation does not appear to be related to up in a recession by just 0.34 of a percentage different lags in the reaction of adult versus youth unemployment, point, and goes down in an expansion by 0.21 and still exists if changes in unemployment are regressed on GDP growth lagged one year. of a percentage point. Drivers of Youth Joblessness in SEE6  |  11 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Figure 13 Change in GDP Growth and Unemployment EU: Percentage point change in unemployment rate SEE6: Percentage point change in unemployment rate 1.0 1.0 0.8 0.8 Unemployment increase Unemployment increase 0.6 0.6 0.4 0.4 0.2 0.2 0 0 Unemployment decrease Unemployment decrease -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 -1.0 -1.0 Positive GDP growth periods Negative GDP growth periods Positive GDP growth periods Negative GDP growth periods JJ Youth unemployment - EU JJ Adult unemployment - EU JJ Youth unemployment - SEE6 JJ Adult unemployment - SEE6 Notes: Piecewise-linear specifications are based on GDP growth being below or above zero. Data cover 1980 to 2014. Unlike in EU economies, in the SEE6 region potential GDP.14 Youth unemployment economic upturns tend to be characterized dynamics are affected by both factors related to by more dramatic reductions in both social and institutional arrangements (assumed youth and adult unemployment than those to have an effect on the growth rate of potential observed in the EU, with an elasticity that GDP) and cyclical output dynamics (related is on average notably larger than in the rest to job creation and job destruction over the of the continent ( Figure 13). In periods of economic cycle). In particular, as in the rest expansion for every 1 percentage point increase of the continent, in the SEE6 the reaction of in GDP, average SEE6 youth unemployment youth unemployment to cyclical shocks is much tends to decline by nearly 1 percentage point. larger than the reaction to changes in potential The corresponding effect for recessions, output growth, as can be inferred from Okun’s however, can only be estimated at a very low law estimations based on a decomposition of level of precision, hinting at large differences GDP into trend and cyclical components using between SEE6 countries. Put differently, in Hodrick-Prescott filtering. The differences SEE6, it takes less economic growth to create in youth unemployment that persist across jobs for youth than for adults in periods of groups of European economies and within expansion, notwithstanding large variance in the SEE6 can thus be at least partly traced the estimated results. But significantly higher to the fact that throughout the last decades share of young people tend to lose their jobs countries have been affected by different types during contractions of the economy compared of shocks (and of different size) than the rest to the jobs lost by adults in SEE6. of the continent. In addition, structural factors such as labor market institutions are partly The difference in the persistence of youth responsible for the difference in the reaction and adult unemployment rates can be partly of youth unemployment to cyclical shocks as traced to the fact that youth unemployment compared to adult unemployment, as has been reacts differently to cyclical demand shocks than to supply shocks that affect an economy’s 14 See, for example, the evidence in Jimeno and Rodriguez Palenzuela 2002. 12  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Box 2 Youth Unemployment and the Crisis in Spain: A Tale of Two Labor Markets 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 and Garibaldi 2007 and Boeri 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 low- skilled 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. Source: Adapted from Gill and Raiser 2012 and Garcia Perez et al. 2016. Drivers of Youth Joblessness in SEE6  |  13 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC documented in several European economies  ecause achieving systematic decreases in youth B (see Box 2 for a brief account of the Spanish unemployment is expected to require more than case). just sustainable GDP growth in the region, the next messages explore policies that could help The sensitivity of youth unemployment to tackle structural youth joblessness and as such both cyclical and potential GDP growth exert longer-term impact on unemployment. throughout the continent has also gone up over the last decade. In Europe, the absolute value of the Okun’s coefficient— Message 6: Labor regulation which quantifies the effect of GDP growth constrains youth employment on the unemployment rate changes—more than doubled (-0.3 to -0.7) in the period As labor regulations partly determine how corresponding to the global financial crisis much it costs to hire and fire new workers, compared to the years before. This suggests they are central to youth employment that the GDP shock caused by the crisis pushed outcomes. They can also affect the decisions up youth unemployment disproportionately of both workers and firms about the type compared to previous recessions. There of employment or contract, informal or exists evidence that labor market matching formal, full-time or part-time, or the hours deteriorated significantly during the recent worked (see Box 2 for lessons learned from global crisis in Europe (Arpaia, Kiss and Turrini, the Spanish labor market). The aggregate 2014), a development which can explain such effects on employment or unemployment are a change in the economic growth elasticity of unlikely to be large within a certain range of youth unemployment. rigidity (“plateau” in the language of the World Development Report 2013 on Jobs). However, Because youth unemployment reacts to both tight labor regulations on minimum wages and permanent GDP changes and cyclical ones, employment protection do have distributional reducing youth unemployment in SEE6 effects, protecting those who have a job to the by relying solely on economic growth may possible detriment of “outsiders”—who are be a very long process. Assuming constant often new entrants to the labor market and thus growth in trend GDP of 2 percent annually disproportionately young.15 (the average for 2007–14) for the full sample of European economies and abstracting from The “insider-outsider” phenomenon likely cyclical dynamics, it is estimated that in the has a bearing on the labor market in SEE6, SEE6 it would take on average four years to affecting youth. While empirical evidence reduce youth unemployment by 2 percentage is not available to establish this, older (in points—twice as long as it would take in the terms of tenure) workers tend enjoy various EU. Under a different set of assumptions, employment–preserving benefits due to where trend GDP in SEE6 countries grow at their seniority in SEE6. Incumbents usually their pre-2008 average annual rate of 6 percent participate in wage negotiations, employment and the EU grows at 2 percent annually, the conditions and other. In SEE6, insiders are youth unemployment rate between the two regions will converge in 3 decades. 15 See Betcherman 2014 for a recent review of this literature. 14  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE often unionized, which gives them further minimum social contribution is not adjusted protection compared to outsiders. Outsiders, for hours worked, which means that social like youth, face higher unemployment risks. contributions are disproportionately high for FYR Macedonia and Montenegro have a part-time workers (Arias et al. 2014). relatively better performance among SEE6 countries in, for instance, hiring and firing Minimum wages, which are relatively practices (World Economic Forum data 2014– high in several SEE6 countries, can also 2015). disproportionately affect youth. Countries in SEE6 either set the minimum wage or it is In addition to the costs of hiring and secured in effect through collective bargaining. firing workers, four other areas governed Minimum wage regulations vary significantly by regulations directly affect youth in terms of level, indexation, rules for revision, employment—the areas dealing with flexible coverage (national or sectoral), how the level is work arrangements, apprenticeships, the set, social partners, sanctions, and mechanisms minimum wage, and family leave provisions. for verifying compliance (Kuddo 2009). Facilitating flexible work arrangements, Although the effects on total employment are including part-time work that allows youths ambiguous and vary by country, minimum to combine studies with work, can be wages could particularly affect youth, particularly beneficial while also paying off for especially the unskilled, because they are employers. In FYR Macedonia, for instance, over-represented among low-wage earners for about 8 percent of workers are employed part- which the minimum wage is more likely to time. In Montenegro, contracts for part-time be binding (since their market wage is more employment cannot be less than one-fourth likely to be below the established minimum (10 hours per week) of the duration of a full- wage).16 Most SEE6 countries have special time contract (Kuddo 2014). Tax and benefit regimes that authorize apprenticeship, trainee, systems may also discourage part-time work: In or intern contracts for young people, but how Serbia, the “reference” wage that determines the attractive their labor market regulations are for Figure 14 Average Minimum Wages, normalized by GDP per capita, 2013 20 18 16 14 12 10 8 6 4 2 0 L IRL L L A A A ITA D D B B R R R ISR S S P C N N N N U FIN U U BIH E E X K X T T T V PO BE NZ LV US FR KO AU ES NL MK SR AL KO GB BG GR ME LU ES AU PR CZ MN HR SV LT RO DE HU SV CA JP JJ Typical worker QQ 19-year-old or apprentice Source: World Bank Employing Workers database and World Development Indicators. 16 See Betcherman 2014 for a recent review of the literature. Drivers of Youth Joblessness in SEE6  |  15 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC those types of contracts can vary considerably. average 24.1 percent.18 High labor taxation For example, very few SEE6 countries have (Figure 15), by increasing costs for firms and differentiated minimum wages for youth or reducing net income for individuals, can lead apprentices, and minimum wages are relatively to less hiring, lower labor force participation, high overall (Figure 14). Only FYR Macedonia and higher informality. Lowering rates of has a minimum wage for youth that is markedly labor taxes will have the strongest effect on below that of an adult worker. Thus, beyond employment of worker groups for whom labor flexible work arrangements, labor legislation demand is most elastic.19 Such groups usually influences the costs and benefits of hiring include low-skilled workers, youth, older youth, including through apprenticeships and workers, and women. internships, which are critical to building work experience for those entering the labor market. Figure 15 Labor Taxes, Levels and Progressivity in SEE6 and Select Countries, Finally, the design of family leave provisions, 2008 Progressivity of tax wedge, percentage points especially maternity leave, could increase 25 the disincentives of hiring young workers, particularly women. Paid maternity leave, the 20 IRL BEL main family leave available in SEE6, is long FRA CHE compared to other countries in the region. This 15 ITA AUT DEU HUN GBR NLD is particularly the case in Albania, Bosnia and SVN 10 NOR ESP Herzegovina, FYR Macedonia and Kosovo, and USA PRT SVK GRC LVA FIN CZE even when adjusting by the wage replacement 5 EST MKD POL LTU ROU Fed. SWE Bosnia, rate (or full rate equivalent, FRE).17 Costs for JPN Bosnia, SRB Rep. Srpska employers can be direct—in cases in which the 0 BGR MNE 0 5 10 15 20 25 30 35 40 45 employer finances leave directly as in Kosovo— Tax wedge for single at 33 percent of average wage or indirect, thus reducing the incentives to hire, Source: Arias et al. 2014 based on OECD Tax and Benefit Model. especially young women, in the first place. 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. Message 7: Labor taxation is 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 high for low-wage and part-time large sample of countries. workers, groups where youth is overrepresented Beyond the level of labor taxation, its Labor taxation is high in SEE6, especially for progressivity also matters because work low-wage and part-time workers—groups disincentives are actually different depending where youth are usually overrepresented. on the level of earnings. On average, labor On average, in SEE6 countries income taxes taxation in SEE6 countries is less progressive and social security contributions constitute than in the rest of Europe (Figure 15), which 36.5 percent of labor costs, significantly more than in non-European OECD countries, which 18 The tax wedge is calculated for a single person, without children, at the average wage. Data for Bosnia and Herzegovina, FYR Macedonia, and Serbia are for 2009; for the rest, data are for 2011. 17 World Bank (2015). 19 See Rutkowski, J. (2007). 16  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE means that the tax wedge does not increase as especially for youth. Arguably, disincentives sharply in these countries because individuals to formalize employment may at least partly earn more. Therefore, beyond being a general explain informality among young workers in disincentive to work if labor taxation is high, SEE6 (see Message 2). 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 Message 8: New labor market fact that they are starting their careers and often entrants are not equipped with the work fewer hours. Progressivity is particularly skills employers need low in Bosnia and Herzegovina, Montenegro, and Serbia (Figure 15). Montenegro in Despite increases in formal educational particular applies the same tax rate regardless of attainment, average returns to an additional labor income.20 year of higher education remain high. Enrollment in tertiary education, for the Higher tax wedge is often associated with countries where data over time are available, has lower labor force participation rates and risen significantly since the 1990s.22 Despite lower employment-to-population ratios. these increases in enrollment, returns to an For the Europe and Central Asia region, a additional year of higher education remain 1 percentage point increase in the tax wedge high, on average, just below 10 percent. This is estimated to result in a 0.3–0.6 percentage is close to the average for the overall Europe point drop in both the labor force participation and Central Asia region, although below the rate and the employment to-population ratio in average for most other regions.23 Returns are ECA. While empirics on the effect of changes also significantly higher for women than for in the tax wedge for particular age groups men.24 are not available, lowering the tax wedge and improving progressivity would likely mostly The returns to job-relevant education for affect low wage-earners, where youth are most youth, including in SEE6, are potentially represented. large because labor demand has shifted to more complex, new-economy skills, Moreover, higher labor taxation— which tend to command higher wages. The especially among low-wage, low- production and occupational structures of most productivity workers—together with rigid economies are moving significantly to high- labor regulations, create incentives for value-added and knowledge-intensive activities informality.21 Therefore, incentives for formal and services where “new economy” skills are employment in SEE6 can be strengthened, particularly relevant. These skills encompass nonroutine cognitive, socioemotional, and 20 Montenegro currently applies two rates on labor income: a crisis technical skills, that cannot be easily automated tax of 13 percent and a standard rate of 9 percent. 21 See, for example, Koettl and Weber (2012), who show, using individual data, that controlling for individual and job characteristics, the higher the marginal tax rate and the “formalization tax rate” (including not only labor taxation but 22 World Development Indicators, http://data.worldbank.org/ also the penalty associated with the withdrawal of social benefits indicator/SE.TER.ENRR. when work is formalized), the more likely individuals are to work 23 Montenegro and Patrinos 2014. informally. 24 Ibid. Drivers of Youth Joblessness in SEE6  |  17 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC 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 70 70 60 60 50 50 40 40 30 30 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 ▬▬ New economy skills ▬▬ Routine cognitive ▬▬ Manual skills ▬▬ New economy skills ▬▬ Routine cognitive ▬▬ Manual skills Source: Arias et al. 2014, based on estimates from labor force surveys. Note: The y-axis plots the percentile of the skill distribution for jobs held by each cohort in any given year, with respect to the corresponding median skills intensity of jobs held by that cohort in the initial year. See Arias et al. 2014 for methodology. and that make workers more adaptable.25 In they are relatively more prepared to adapt to fact, Levy and Murnane (2003), Acemoglu and technological change than other workers. The Autor (2011), and Handel (2012) have shown changes are likely to be intensified as countries that the use of high-order analytical skills become more modern and reform their and socioemotional skills has soared over the economies.26 last 40 years in higher-income countries, and occupations that are repetitive-task-intensive Yet, despite less likely to have obsolete skills are increasingly being automated. Arias et al. than older workers, there is significant (2014) and World Bank (2016) found similar room for improving the ability of education patterns in developing countries, as can be seen and training systems in SEE6 to provide in the SEE6 region, especially among youth youth with new-economy skills. While skills (Figure 16). In SEE6, this reflects the very rapid deficiencies are a structural issue in SEE6 economic transformation that accompanied countries going beyond youth,27 the skills the move from centrally planned to market of new labor market entrants also appear to economies. Youth are well-positioned to benefit lack both quality and relevance. Employers from this structural change since many are still across the region consider the lack of skills to in or can return to education, and arguably be a major or severe obstacle in their business activities. More than 30 percent of firms in Albania, for example, report skills as a major 25 Cognitive skills have been described as abilities to process thoughts, store memory, learn new information, use logic, and or severe obstacle to their business, and in communicate through reasoning speech. Socio-emotional skills are defined as personality traits that enable individuals to better deal with interpersonal and life situations. These have been synthetized into the big five personality factors openness to experience, 26 Arias et al. 2014 shows that the degree to which skills demand has conscientiousness, extraversion, agreeableness, and emotional shifted to more complex skills depends on how advanced countries stability or grit, a narrower trait capturing one’s inclination and are in their reforms. World Bank 2016a has, moreover, shown that motivation to achieve long term goals through perseverance of the changes in the skills demanded are likely to continue as digital effort and consistency of interest. Finally, technical skills can be technologies diffuse and become more central to the world of defined as abilities associated with specific knowledge to carry out work. tasks Cunningham and Villasenor 2016. 27 Arias, et al 2014. 18  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Figure 17 Firms Reporting Shortages Skills among Young Workers Montenegro FYR Macedonia Other language Responsibility & reliability Russian Motivation & Leadership commitment & initiative Communication Advanced technical Customer care Creative & critical Working Literacy independently English Team working Basic vocational/ Work ethics job-speci c Learning Problem solving Analytical & problem solving Use of ICT Teamwork Adv. vocational/ job-speci c Basic technical Planning & organizing Communication Numeracy Computer Numeracy Foreign language Self-management Literacy & entrepreneur. 0 10 20 30 40 50 60 0 10 20 30 40 Percent Percent Source: World Bank 2010 and Rutkowski 2010. general, beyond their lack of work experience, many children lack basic skills. A high share young workers are perceived to lack the skills of 15-year-olds in the region are functionally they need to be productive. This is evident from illiterate and scored below level 2 in the most employer surveys focused on young recruits that recent OECD PISA reading test (Figure 18). have been carried out in FYR Macedonia and Ongoing efforts in Bosnia and Herzegovina, Montenegro (Figure 17). Often these gaps go Kosovo and Serbia and completed efforts in beyond technical and language skills to include FYR Macedonia are exploring the skills of adult such socioemotional skills as responsibility, men and women using the World Bank Skills motivation, leadership and critical thinking, Toward Employment and Productivity STEP which is consistent with the changes in skills tool.28 demand expected in modernizing economies. While access to secondary education is Even among current students, many youth in generally high in SEE6, the TVET system, SEE6 do not acquire the foundational skills often the most attended secondary school that can help them succeed in a modern and program, faces challenges related to the dynamic labor market. Consistently in SEE6 countries, those in the bottom 40 percent of the welfare distribution have less education 28 The STEP household and employer surveys aim to (1) assess the distribution of literacy and noncognitive, and technical skills in (Bussolo and Lopez-Calva 2014). For those the labor force of participating countries and employer demand for these skills; (2) assess the impact of different types of skills on enrolled in the formal education system, labor market outcomes; (3) analyze the extent to which there are quality continues to be a concern. Deficiencies skills mismatches in participating countries; and (4) identify policy interventions that may be useful to step up the supply of skills throughout the education system mean that needed to improve employability and productivity. Drivers of Youth Joblessness in SEE6  |  19 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC Figure 18 Students Scoring Below Level 2 on the PISA Reading Section, 2015 Percent 90 80 70 60 50 40 30 20 10 0 IRL L L ISL D avCED D A ITA A A O B B R R R R S S P C FIN N N U U E O E E E K X K T T T V PO BE LV MD FR RU KO NL MK ES SR AL GE NO GB TU BG GR LU ES PR AU SW CH CZ MN HR e. DN DE SV RO SV HU Source: OECD data. Note: Data for Serbia is for 2012. quality and relevance of training provided. job. In fact, employers have criticized the type For example, in Serbia, 75 percent of secondary and quality of skills students acquire, since enrollment is in three and four-year technical the system tends to emphasize theoretical and vocational institutions. Across SEE6, knowledge over technical and problem-solving TVET is typically under-funded and its skills and business expertise. profiles and curricula are obsolete: they do not correspond to skills demanded for modern jobs. The wide variation in education quality In Serbia, TVET students study economy, law, within countries further limits opportunities and administration (13.24 percent), followed for certain groups. There are, for example, by mechanical engineering (10.46 percent), large gaps between sociodemographic groups in electrical engineering (9.88 percent), trade, performance in international reading and math hospitality and tourism (9.35 percent), and tests (Figure 19). Similarly, average returns to health (8.20 percent; Banović 2013). Students tertiary education mask significant disparities do not have opportunities to practice on the in payoffs to education between and within Figure 19 Average PISA Scores by Sociodemographic Group, Serbia and Montenegro, 2012 Points Points Montenegro Serbia Bottom 20% Bottom 20% income income Math Math Top 20% Top 20% income income Urban Urban Math Math Rural Rural Females Females Math Math Males Males Females Females Reading Reading Males Males 350 390 430 470 390 430 470 510 Source: OECD PISA database. 20  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE fields of study. These disparities are caused by Figure 20 Serbia Entrepreneurship Survey a variety of factors, such as differences in the Results, by Age Group quality of educational institutions, differentials Do you think that you have characteristics necessary to start up your own business? in parental education, and low coverage of preschool and early child development 60+ programs among the ethnic minorities, and in the readiness of individuals to enter into tertiary 45–60 education. In Serbia, for example, significantly fewer Roma men and women aged 16–29 are 30–44 enrolled in education than non-Roma youth.29 18–29 Message 9: Lack of access to productive inputs—finance, land, 0 10 20 30 40 50 60 70 80 90 100 and personal and professional Percent connections—worsen the JJ Positive response JJ Negative response entrepreneurship and employment Source: Ipsos (2015). prospects of young people While youths appear to have more positive Youth in SEE6 have an interest in attitudes toward entrepreneurship than entrepreneurship and many of them believe older generations32, only a small fraction that starting their own business is feasible. in fact do start a business. The same (Ipsos) In fact, youth tend to be more entrepreneurial survey from Serbia shows that only 8 percent of than the rest of the population. In SEE6 as all respondents are “working on” starting their well as in the EU, entrepreneurship drops own business, and nearly all of these find it with age. For example, in Serbia 61 percent “very risky” to become an entrepreneur. While surveyed 18–29 year olds believe they have the self-employment data for SEE6 youth does not necessary characteristics to start a business, and exist, self-employment for youth is likely very the positive responses drop by over a half for low.33 This may in part be driven by preferences people over 60 (Figure 20).30 Notwithstanding for more stable jobs (Figure 21), especially differences in sources and methodology, the in the public sector.34 Moreover, options for notion that entrepreneurship declines with age outmigration, which are higher for youth, generally holds: in the EU 40 percent of youth may also be pushing reservation earnings up, aged 15–24 and 42 percent of one aged 25–39 including for self-employment. respond that it is very or quite feasible to start own business in the next five years, compared For young people lack of access to to 29 and 13 percent of age groups 40–54, and finance and land accentuate their poor 55 and older.31 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. 29 UN Development Programme/World Bank/European 33 For reference, self-employment rates for youth (aged 15–24) in the Commission. 2011 (2011). EU and Canada is 4 percent, and 2 percent in the US for youth 30 Based on results quoted Ipsos (2015). aged (16-24). Data for 2009. 31 European Commission (2009). 34 Dávalos et al (2016). Drivers of Youth Joblessness in SEE6  |  21 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC 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 Percent 90 80 70 60 50 40 30 20 10 0 L A ITA A D B B R R S N U U U BIH N E E K T V PO LV FR KO MK SR AL BG GB ES SW MN HR LT SV RO DE SV HU JJ Male QQ Female Source: World Bank staff, based on LiTs (2010). Figure 22 Individuals with an Account at a Formal Financial Institution, by Age Percent 100 90 80 70 60 50 40 30 20 10 0 L IRL L A ITA A A D D MDB B MN B AR O S S R R R R R P P C M M U U BIH N SWU N FIN E E E E TJK K X K Z Z T GBT T V PO BE LV FR RU KO MK CY ES NL UZ AL SR BL TU UK BG GE GR KG KA LU PR ES AU AZ CZ HR RO LT SV DE DN HU SV TK JJ 15–24 years QQ 15+ years Source: World Bank Findex database. employment prospects by depressing their of youth respondents quote the lack of finance entrepreneurship potential. Such barriers, as a primary reason for not starting their own while prevalent for all entrepreneurs, are often business.35 Similarly, around 31 percent of particular to youth or more severe for youth youth in Montenegro and 37 percent in Serbia than for adults. Youth tend to have lower cite insufficient financial resources as the most savings, shorter credit history, and usually lack significant challenge to doing business.36 business performance history and collateral. These factors make it more difficult for youth Youth in SEE6 have fewer employment than adults to obtain financing. For example, prospects, including as entrepreneurs, if in most SEE6 countries, youth have less access they have limited access to information to financial services measured by ownership of an account at a formal financial institution 35 Based on results quoted Ipsos (2015). (Figure 22). In Serbia, for example, 37 percent 36 Djuric (2016) and Marjanovic (2016). 22  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE and networks. It can be particularly difficult Critically, for entrants into the labor market for new labor market entrants to get accurate there is asymmetry of information on information about, e.g., job openings, wages, the side of employers with respect to the and training opportunities, making job productivity of youth, since new workers searches less efficient and heightening the risk usually have few or no references and little of mismatches (Pallais 2013, Wang 2012). work experience. This incomplete information The lack of information is most successfully may cause employers to hesitate to hire young addressed in the school system when students workers. In Germany, a randomized study of are just beginning to make decisions about labor market discrimination found that an careers and educational and professional initial 14 percent gap in callback probabilities paths. Some SEE6 countries are beginning to between the two groups of interest, ethnic address these information gaps; for example, Germans and ethnic Turks, disappeared once FYR Macedonia has introduced a high the study was restricted to applications that had school counseling program. Experience from positive reference letters that provided favorable other countries can be relevant to SEE6 in information about the candidate’s personality this regard. Poland and other countries have (Kaas and Manger 2010). Figure 23 Perceptions of Those Aged 18–29 that Connections Matter in Getting a Job, Private or Public Percent 100 90 80 70 60 50 40 30 20 10 0 L ITA A A D B B R S R R U U N BIH U N E E E K T V PO LV FR KO MK AL SR GB BL BG ES SW CZ MN HR DE SV RO LT SV HU 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. functional “employment observatories” that The influence of personal and professional provide information on job availability, wages, connections accentuates youth’s poor and career prospects. In Colombia, the creation employment prospects. On average, about of a national registry of workers and vacancies four out of five youth in SEE6 countries report not only increased the efficiency in the process that connections matter to get a public or of matching workers and firms, but also fed the private job; the figure is particularly high in training agency with information about skill Serbia (Figure 23). Although across countries demand and training needs in each region. adults also attach high importance to having connections to get a job, given their relatively lower access to networks youth are likely Drivers of Youth Joblessness in SEE6  |  23 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC at a disadvantage in being able to count on women, who are often confronted by resistance connections for increasing opportunities.37 stemming from social norms about traditional roles (Box 3).38 Message 10: Attitudes, social These attitudes, which in the extreme, result norms, and lack of access to child in discrimination, may partly explain the care services are serious barriers to gender wage gaps that remain even after youth, particularly women, entering accounting for women’s lower labor force the labor market participation and such worker characteristics Norms and values that are upheld by both as age, education, and location. After employers and potential workers may also accounting for differences in the characteristics be narrowing employment opportunities of male and female workers, labor force survey for youth. Attitudes and social norms have data for 2008–11 reveal gender wage gaps of a major impact on markets and institutions: 17.9 percent in FYR Macedonia, 16.1 percent they shape individual and family decisions in Montenegro, and 11 percent in Serbia that directly and indirectly relate to the labor (Vladisavljević Avlijaš, and Vujić, 2015). These market. A survey of EU countries (European gaps may make it less attractive for women to Commission, 2012) found that significant join the labor force in the first place. Social shares of the population—up to 18 percent attitudes can thus be a deterrent for work in Lithuania, for example—considers youth through their effect on the expectations of to be at a disadvantage for labor market young women. This could be particularly a entrants, even among candidates with the same problem for young women from disadvantaged qualifications. These attitudes and social norms or conservative backgrounds (Jensen, et al. in SEE6 tend to be most detrimental for young 2012, Vezza et al. 2013). Box 3 Situations that Reinforce Negative Social Norms for Women “  My latest CV, as recommended by the director, contains the following: ‘I am a single parent with two underage children, I am not planning to get married again, I am not planning to have any more children’– I had to write this in capital letters, underlined. I am in very good health and my children have someone to take care of them when they get sick.” Unemployed single mother in Serbia  “  Women are more active in the labor market, but gender discrimination is the worst for them. When a woman gets pregnant, she is fired. She is laid off! Every private employer does this. We all know it; it is not a secret at all! When she gets fired because of the pregnancy, she registers with the agency and receives about 300 BAM for three months. There is no one to look after the baby and there is no place in day-care centers even for women who still work.” Employment agency officer in a Bosnia and Herzegovina community  Source: Dávalos et al (2016). 38 See Dávalos et al (2016) using qualitative data from Bosnia and 37 See Ioannides and Loury 2004 for a review of this literature. Herzegovina, FYR Macedonia, Kosovo and Serbia. 24  | Drivers of Youth Joblessness in SEE6 TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE Table 1 Social Norms Affect Whether Women Work, Kosovo, Percent Why are you not looking for a job? Looking after Children or Other Personal or Incapacitated Adults Family Responsibilities Females 7.8 42.0 Males 0.1 5.7 Females 15–24 2.8 12.7 25–39 16.8 46.6 40–54 5.4 61.8 55–65 1.1 55.1 Source: Winkler 2013. For women, the lack of affordable quality for women’s increased labor force participation. child care services and the prevailing Del Boca and Locatelli (2006) used data from unsupportive attitudes and social norms the European Community Household Panel function as mutually reinforcing barriers. to show that female labor force participation The lack of affordable child and elder care is affected by the availability, and even more services can make it difficult for young women importantly the affordability, of childcare. to combine work with studies and family Similarly, Fong and Lokshin (2000), studying responsibilities. In Kosovo, for example, many data from Romania for 1989–95, found that of the women who are not presently looking both female labor force participation and the for a job cite family responsibilities as the main decision to use paid childcare were sensitive to reason (Table 1). Similarly, in Montenegro and the cost of this service.40 in Serbia, family responsibilities keep many inactive young women from seeking work (23 percent and 18 percent, respectively).39 In Serbia, only 8.6 percent of children aged 26–59 months in the poorest quintile and 6 percent of Roma children participate in early childhood programs, compared to 82 percent in the wealthiest quintile. Expanding good quality and affordable child care can be a ‘triple win’ for youth employment, in that it contributes to core socioemotional skills and facilitates employment of mothers as well as promotes inclusion of marginalized groups into the labor market. A vast literature highlights the global importance of access to child care 40 See also Keck and Saraceno 2013, van der Lippe et al. 2010, 39 This compared to 7 percent for men in both countries. Djuric Attanasio and Vera-Hernández 2004, Calderon 2012, or Berlinkski (2016) and Marjanovic (2016). and Galiani 2005. Drivers of Youth Joblessness in SEE6  |  25 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC The SEE6 Policy Agenda for Employment Opportunities for Youth The policy agenda to address youth Sustained economic growth unemployment and inactivity is an agenda for higher employment in SEE6 with Economic growth is, without doubt, specific elements for youth. As demonstrated a requirement for combatting youth in this study, many factors to lower overall joblessness in the SEE6. Given the importance unemployment and to boost participation of GDP growth as the means for job creation rates affect disproportionately the jobless and as a factor driving youth unemployment, youth. Therefore, policy measures to combat both within and across SEE6 economies (as joblessness could often have a higher highlighted in messages 4 and 5), measures to importance for youth than other age groups. ensure sustained, broad-based GDP growth Such measures promoting overall job creation and promote an enabling environment for should be complemented, and not replaced, firms to thrive are essential to tackle the by measures focused on youth. It is through problem of low engagement of youth in the this lens the policy discussion for employment labor market. Recent economic developments opportunities for youth is framed below. are encouraging: all SEE6 countries have been growing positively since 2015. In addition, Priority areas for tackling the youth SEE6 economies that have pursued structural unemployment and inactivity challenge reforms are seeing early signs of a shift from in SEE6 vary by country.41 As this study unsustainable consumption-fueled growth argues, economic growth is a powerful tool for to more sustainable investment and export- combatting youth unemployment and explains led growth. Between 2007 and 2015, the half of the changes in the youth unemployment SEE6 share of consumption in growth fell by rate across countries and over time; the rest 6 percentage points and the share of exports is explained by differences in education and rose by 10 percentage points. Investment, labor policies, as well as a large residual. The especially private investment, is starting to discussion below highlights and prioritizes by play an important role in economic growth in country some of the key policy areas where Serbia, Albania, and Kosovo. Employment has efforts are required.42 grown throughout SEE6 too, including in the private sector (World Bank 2016b). The sustained economic growth rates required to close the wide youth unemployment gaps between the SEE6 countries and the EU are large. Bringing youth unemployment rates at least closer to the general unemployment rate will 41 The next paragraphs adapt the analysis of Arias et al. 2014. 42 The map was created by aggregating available indicators related to be a positive development with implications for economic growth, skills, work incentives, labor regulations, flexible economic growth, individual incomes, poverty work arrangements, access to networks and productive inputs, and access to childcare. The Annex describes the indicators. reduction, social stability, and macroeconomic 26  | The SEE6 Policy Agenda for Employment Opportunities for Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE sustainability. As illustrated in messages 4 and creation for the young.43 5, as compared to EU economies, in the SEE6 region youth unemployment is more sensitive Beyond policies that foster sustainable to GDP growth and it takes relatively less GDP growth in SEE6 through which to promote growth to create employment—2.2 percent for job creation,44 a multipronged agenda youth and 2.7 percent for adults. Nevertheless, is required to open up more and better narrowing by half the gap between the EU employment opportunities for youth. As economies, where youth unemployment this study illustrates (Messages 6 to 10), youth averages 17.4 percent, and the SEE6, where it are confronted with disincentives and barriers averages 52.9 percent, in 15 years would still to work that can keep them out of productive require SEE6 GDP growth to exceed growth in employment and business activity. Among the EU by about 4.4 percentage points per year. these disincentives are lack of skills; labor Sustaining these positive trends will require taxation; limited access to productive inputs, continued commitment to tackle macro-fiscal information, and networks; exclusionary labor imbalances and implement structural reforms. regulations and institutions; and minimal access to affordable child care services. High The current study identifies two separate reservation wages, rooted in large outmigration, groups of youth in SEE6—one for preference for stable public employment and whom unemployment is a more cyclical informality, also play a role.45 phenomenon and one who are structurally disengaged from the labor market. For each, different policies are needed to combat Skills unemployment. The cyclically unemployed can benefit from policies that allow them to A key item on the SEE6 agenda is to ensure stay somewhat engaged with the labor market that youth acquire solid basic skills that can or in training during downturns; incentives help them succeed in a modern and dynamic for getting more education and training can labor market. Addressing weaknesses in how make sense for them. Those in the structurally well foundational skills are provided requires unemployed group are more likely to become investments and interventions that start early. long-term unemployed or drop out of the labor Policies need to address two main areas: force altogether. For them, policies need to both foster the conditions for firm creation and (i) Provide adequate services—child care, growth and remove institutional disincentives nutrition, maternal health care—in the to productive employment. In this sense, improving the regulatory environment for 43 Studies of Central and Eastern European economies have found business and reducing institutional barriers are that start-ups and small new firms have been the most important contributors to job creation in the region (see Crespo Cuaresma, vital for economic growth that will lead to job Oberhofer, and Vincelette 2014). The most negatively affected by a poor business environment seem to be fast-growing firms— those that disproportionally contribute to employment growth. Improving access to finance and reducing corruption have been found to improve the chances that young entrepreneurs will survive in the market and to increase the rate of overall job creation in periods of economic growth. 44 See World Bank (2016b). 45 Dávalos et al (2016) and Arias et al. (2014). The SEE6 Policy Agenda for Employment Opportunities for Youth  |  27 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC critical first three years of life and expand secondary at the earliest can help ensure that access to quality preschools, especially to students acquire a solid skills foundation.48 low-income families and disadvantaged groups.46 Increased access to preschool Next on the skills agenda for youth can, in addition, remove an important employment should be more effective barrier to female employment. management of the current expansion of tertiary education. Since many graduates leave (ii) Offer quality primary and secondary the education system with inadequate skills, education, focused on foundational skills, making it difficult for them to find productive for all children and youth. Ensuring jobs, consolidating regulatory and quality that youth are equipped with strong assurance mechanisms, such as accreditation, foundational cognitive and socioemotional enhanced performance monitoring, and skills as they enter the labor market47 is giving tertiary education institutions more especially important in SEE6 countries accountability can help raise standards and that are still undergoing a structural reduce the wide variation in education quality. transformation and also aging rapidly. Better use of performance contracts and performance-based per capita financing can also One issue that deserves special attention in improve quality and relevance while expanding the SEE6 is the balance between general and access for low-income and vulnerable youth. vocational education, and the relevance of Moreover, systems that feed educational and vocational education to the labor market. labor market data to students and parents can Education systems in many countries track help them make better choices about which students too early into narrow vocational paths, institutions to attend and which fields to study. at the expense of general learning. Vocational education and training (VET) can endow Furthermore, improving access to and the students with technical and occupation-specific relevance of practical on-the-job training skills that can make it easier to find a first job, and making continuous education and but it can also make it much more difficult training services part of active labor for them to transition to other occupations. market and second-chance programs is an In a modern economy, where transformation important aspect of the skills agenda for is fast and there is an increasing premium for youth. This entails (1) addressing market transferable skills, flexibility pays off. For most failures that prevent more on-the-job training countries, waiting to start tracking until upper and incentivizing firms to provide it by, for example, rethinking financing mechanisms and apprenticeship programs; (2) targeting 46 Longitudinal research has found that returns to ECD are high: for example, for the Perry Preschool program in the United States, which focused on disadvantaged African-Americans, the social rate of return has been estimated at 7–10 percent, accounting for earnings, employment, and education gains and 48 It has been found that in education systems where tracking starts a reduction in crime (Heckman et al. 2010). In Europe, there very early, the choice tends to depend on factors not related to is evidence that ECD has long-term benefits for disadvantaged innate ability. In particular tracking can be affected by the groups: Roma children who attend preschool are more likely to age difference between pupils, especially girls, thus leading to complete secondary education than Roma children from the same inefficient allocation of students (Schneeweis and Zweimüller neighborhoods who did not go to preschool (World Bank 2012). 2014). Poland and other countries have moved to delay tracking 47 For a more detailed discussion, see Heckman and Kautz 2014 and into VET in order to move their economies up the value chain Cunningham and Villaseñor 2016. (Sondergaard and Murthi 2012). 28  | The SEE6 Policy Agenda for Employment Opportunities for Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE technical or job-specific skills gaps of youth reforms may seek to better balance family leave through more effective training as part of active between mothers and fathers. labor market policies and programs targeted to disadvantaged groups; (3) improving second- The gains to reducing labor taxation for chance programs for youth that have left the youth, especially young women, can be education system or that need retooling.49 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 Work incentives, labor regulation relatively large pool of potential workers in this and flexible work arrangements group, a reduction in labor taxation is likely to encourage youth hiring because it reduces Labor regulations could further promote labor costs rather than increasing net wages. youth employment. Facilitating flexible work Addressing tax disincentives for youth would arrangements, such as part-time work, that therefore increase the payoff for employment of allow youth to combine studies with work, labor tax reforms.50 Work incentives for youth can be highly beneficial not only for young can be improved through revenue-neutral workers but also for employers. Furthermore, targeted reductions in labor taxation. Reducing in addition to assessing the general design labor taxation specifically for low wage and of minimum wage legislation, governments part-time earners can increase the payoffs for could consider setting a lower minimum youth from holding a formal job. This could wage for younger workers, which could be be done through either social contribution simply defined by age or by a combination subsidies or in-work benefits, as is done with of age and years in the formal labor market. labor income tax credits in the United States For example, the minimum wage for workers and the United Kingdom. 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 Access to productive inputs of unemployment is particularly high and for and networks whom long periods of unemployment could erode human capital and lead to persistently Policies improving access to productive high long-term unemployment. In most EU15 inputs can have direct positive impact on jobs countries, minimum wages are differentiated, for youth and entrepreneurship. Reforms in and in 40 countries the law sets a youth the financial sector that improve access to credit, minimum wage (Kuddo 2014). This is not the particularly among usually underserved groups, case in SEE6. Moreover, reassessing the design of family leave provisions and its impact on 50 For most socioeconomic groups, it is usually important to identify incentives to hire or work could be considered; 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 49 There are few second-chance programs in the region, though the labor supply decisions of its members. For example, in Albania, some countries in the EU, including Bulgaria, have extended their Bulgaria, Hungary, Kosovo, and Poland, a larger share of youth is literacy programs to disadvantaged populations, such as the Roma likely to be out of the labor force and out of school in households (Sondergaard and Murthi 2012). that receive pensions than in households that do not. The SEE6 Policy Agenda for Employment Opportunities for Youth  |  29 SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.9S SPECIAL TOPIC are important. Technological innovations that identified as a good practice to promote female allow for crowdsourcing of financial capital employment (World Bank 2011). for business ideas, or for credit scoring that goes beyond traditional indicators for credit worthiness may also help. Similarly, in the Policy complementarities context of underdeveloped land markets in SEE6 countries and given that at a young age As illustrated in messages 6 to 10, people are less likely to acquire and own land, most of the barriers to jobs for youth, reforms facilitating the use of movable assets as although not exclusive to youth, affect collateral could enhance access to finance for them disproportionately. Moreover, these youth, alongside overall policies to improve the disincentives and barriers reinforce each other, functioning of land markets. Along the same especially among specific youth groups. Young lines, programs to foster entrepreneurship, for women and youth of both genders from ethnic example, by alleviating capital constraints or minorities or with poor skills are likely to face far by providing business and “soft skills” training, more severe barriers to productive employment. can help youth improve their job prospects. Removing barriers and disincentives so as to Given the limited evidence on the impact of close gender gaps for youth, particularly in these policies in the region, efforts to rigorously labor force participation rates (message 3), will evaluate them would be very valuable. certainly help to close these gaps later in life since there is a lot of inertia in labor market participation. Attitudes and social norms Therefore, the policy agenda to remove With a medium and long term perspective, barriers to youth employment, especially some policies should be directed to among vulnerable groups, would include improving the attitudes and influencing complementary interventions in different the social norms that shape agency and areas. Youth employment programs in many employment decisions. The agenda for countries try to better match young workers and influencing social norms needs to go beyond jobs and improve access to on-the-job training establishing and enforcing legal frameworks; and thus provide not only a first job experience it should take a holistic approach that but also critical production inputs necessary to encompasses at minimum the education and foster youth entrepreneurship. There is evidence legal systems, media outreach, public debate, that, to be effective, these interventions need to and political commitment. Interventions that be carefully designed and targeted to the needs have already been shown to have important and problems of the beneficiaries.51 Moreover, effects for changing social norms are role model these programs need to be rigorously evaluated interventions, job shadowing, and mentoring because the evidence is often mixed, having (see, for example OECD 2011, Eby et al. drawn upon interventions with very different 2008, and Dávalos et al, 2016). In addition, adaptation of human resources management, 51 An example is the Dominican Republic’s “Youth and Employment” particularly in the private sector, has been labor market insertion program, which has yielded positive results for youth of disadvantaged backgrounds even several years after the program. 30  | The SEE6 Policy Agenda for Employment Opportunities for Youth TEN MESSAGES ABOUT YOUTH EMPLOYMENT IN SOUTH EAST EUROPE designs in different contexts, which makes it difficult to draw generalizable inferences. 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