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Europe's Recovery Won't Solve Underlying Problems in the Jobs Market

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Slowly but surely, Europe's economy is starting to recover. After more than half a decade of stagnation, the EU commission forecasts real GDP growth in the EU of 1.5% in 2014, rising to 2.0% in 2015. This will not just be confined to Europe's top performers, with all countries, including the devastated economies of Greece and Spain, expecting output growth in 2014. This is all well and good, but of greater importance is whether improvements in the economy translate into more jobs and higher pay. The same forecasts predict only a small fall in the unemployment rate from 10.9% in 2013 to 10.4% in 2015.

In the early stages of the current crisis, the biggest worry among observers of Europe's economy was a rise in structural unemployment akin to that of the 1980s and 1990s, with many people giving up on looking for work and leaving the labour market. Thankfully, this has not taken place in the more recent downturn. Our estimates put the proportion of European unemployment that is 'cyclical' i.e. likely to disappear after a full economic recovery, at around a third.

Still, that leaves two-thirds of the unemployed, or around 7% of the workforce, for whom economic growth is unlikely to bring about an improvement to their job prospects. The root causes of their difficulty finding work are less linked to the short-term performance of the economy, and more related to the deeper processes underpinning economic change in advanced economies, particularly globalisation and technological progress.

These have caused the structure of Europe's labour market to shift profoundly. Jobs growth has followed a polarised trajectory in recent decades, with increases in the number of highly-skilled and low-skilled jobs (of 18 and 12% respectively), and a fall in the middle of around 2%. While this pattern has varied between countries (Eastern Europe in particular has seen much slower growth or falls at the bottom), in general significant levels of polarisation have been seen. This has been caused by two related phenomena; firstly, many routine middle-skill jobs such as secretarial work have been replaced with technology that can replicate their job tasks. Secondly, the manufacturing sector, source of many skilled manual positions, has largely shifted to other global regions. Together, this has resulted in persistent levels of structural unemployment, with jobs growth not sufficiently strong to replace the disappearing segment of the labour market.

It has also led to increasing levels of skill mis-match in European economies, with the number of those with mid-level skills taking on low-skilled work increasing substantially. This is a poor use of the human capital of the workforce. And while increases at the top have been accompanied by significant levels of up-skilling of young people entering the workforce, this has not prevented the number of graduates taking on mid and low-skilled jobs from increasing.

Tackling structural unemployment and skills mis-matches requires a good macroeconomic policy, yes, but also interventions to supply the right set of skills (those that are in demand from employers) to the labour market, and to make better use of the capacities of those already in work. In the UK, George Osborne's announcement yesterday that full employment should be an explicit target of national policy was accompanied by a set of predominantly supply-side policy prescriptions for getting there. These involve placing greater obligations on job seekers to look for work and changes to their benefits to make work pay. While the relative merits of such measures should be up for debate, Osborne misses out on a range of policy levers on the demand-side that are both pro-growth and pro employment, and fails to tackle the question of how to generate quality, as opposed to quantity, employment.

Employers need additional support if they are going to utilise these skills - ready sources of finance so that they can grow their businesses. Infrastructure in order to support investment, and backing for innovation and the development of new products and services. In short an industrial strategy to move Europe towards a higher-skilled, higher value-added economy.

While this is an enormous challenge, it is no greater than that faced by governments across the developed world in the 1970s, when the scourge was not worklessness but rampant levels of inflation. Back then, it quickly became the received wisdom that policy should shift its focus away from full employment towards inflation. In recent years and during Europe's current recovery, inflation presents much less of a worry for the continent's policymakers. It may be time to shift our focus back to employment.

Nick Pearce is Director of the think -ank IPPR

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