THE EFFECTS OF LABOR MARKET INSTITUTIONS ON YOUTH UNEMPLOYMENT-GREECE

Introduction

The effects of labor market institutions on Youth Unemployment-Greece

Youth unemploymentis a huge topic that is attracting political debates in Greece and pointing out the dwindling of the economy. The proliferated interest in focusing on this phenomenon is due to the following reasons. One, the highest number of populace is aging, and the productivity of current Greece is a majorly contributed to by the aged people. Also, there is asnowballing demand for experienced labor force due to the decelerating economy. According to Collignon (2001, p.190), Greece is being faced by the retrogressing economic growth, due to lack of fresh young brains in the running of the major instructions in the state. He noted in his research that despite the aging population, there is less appreciation of graduates who have energy and innovative ways of doing things, which mitigates the chances of progressing and developing a vibrant economy.

Thus, the need to resuscitate the already falling economy has raised political debates, to value the input of young people and consequently ignite the growth. The other reason for the high rate of unemployment is the paradoxical youth unemployment outgrowing the unemployment of the old people. The scarring phenomenon has caused defects in the economy, for most of the aged citizens are not productive. Below and Ours (2004, p.632) is of the idea that most of the states in the Europe, with a focus in Greece, fails to perform due to the idea of rigidity, which entails keeping the old people in jobs that can perfectly be done by young people. He noted in his research that the mechanism to revitalize such an economy from shrinking is to come up with policies that favor the young people securing the jobs easily, as opposed to driving them to informal sectors where their skills are not well utilized.

Youth unemployment in Greece has traditionally been a problem, contributed to a lack of workable strategies to manage the situation. Breen (2006, p.52) noted in his research that the government has no succinct strategies to incorporate the young graduates, who are skilled within the institutions in the state, due to a high number of old people in jobs. As the state was hit by economic shocks, the chances of creating new opportunities in both the manufacturing and production sectors were considered minimal, that heightened the many cases of unemployment among the youths. The consequence has been a high rate of brain drain, that has aggravated the woes of Greece.  The data released by Trading Economics illustrated that the rate of unemployment in Greece in January 2019 stood at 39.70, which was an increase from 39.50 in the year 2018(Trading Economics,2019). Also, the data portray that the unemployment rate in regards to youths has averaged at 35.52 since 1998 to 2019.

THE EFFECTS OF LABOR MARKET INSTITUTIONS ON YOUTH UNEMPLOYMENT-GREECE

Figure 1:https://tradingeconomics.com/greece/youth-unemployment-rate(Trading Economics,2019)

From the graph above, it is clear that the unemployment rates have been declining, from April 2018 until August 2018, where the numbers started rising again. Since October 2018, the figures have stabilized with minute changes happening, that are allowable in any economy. However, the data elucidate that the cases of unemployment are still high among youths. The paper will provide acriticalreviewof the past literature regarding the issue, and the comparison will be made between the youth aged 15-24 and those above 25 years. This will give a good overview of the issue that is under consideration.

Literature review

Blanchard (2008, p.264) noted that a high rate of unemployment could be caused by rigidity in the market institutions, that find it hard to change the ways of operations. Among them include severe tax, non-competitive salaries, unemployment protection among others. Countries like Greece have recorded high soaring numbers of unemployment among the youths, due to such factors, whose failure to change cancause more aftermath in the economy of this country. The argument is supported by Howell and Rehm (2009, p.86) who is of the idea that inflexible policies and legislations contribute largely to the cases of joblessness.  The current section will appraise the various institutions that have impacted the performance of the economy of Greece, which includes; Employment protection legislation, unemployment benefits, social insurance, and social assistance, bargaining, wages and inequality. The above will be related to their effects on unemployment, to youths between 15-24 and those that are above 25 years of age.

Employment protection legislation

The changing structure of employment has a significant impact on the employment rates among the youths in Greece. According to Breen (2006, p.43) he noted that the modern economy in Greece has less interest in part-time jobs, and his research affirmed that the market only allowed about 5.6 percent of total part-time jobs.  In the same vein, Collignon (2001, p.191) noted that the decline of part-time jobs was as a result of changes in contract on businesses that were offering such kind of jobs. Due to the strict laws of the state mandating the companies to employ on permanent bases after a particular period, most of them feared to create the opportunities, and the consequence was increased rates of unemployment. The scenario hit more the youths that are aged between 15-24 years, as they are regarded as the new entrants into the market. Grounded on the survey conducted by Blanchard (2008, p.265), it revealed the decision affected about 40 percent of the youth with no marketable skills, while about 32 percent of those aged from twenty-five years and above were less affected.

The study conducted by Blanchard (2008, p.267) affirmed that the use of part-time jobs decreased over the years in professional, technical and administrative activities. The author is of the idea that the companies opted to employ the experts permanently to save on cost, which contributed to most of the people retaining the same positions for a long period. Similarly, the assertion is seconded by Below and Ours (2004, p.640) whose study divulges that the non-performing economy creates uncertainty among the investors, who shrug off from employing the new graduates that have no experience in the complex market. To them, they consider utilizing the skills of the professionals, who have had prior experience and most falls in the age bracket of twenty-five years and above.

Breen (2006, p.54) is of the view that employment protection legislation encouraged the labor force from the outsiders and also initiated low labor turnover. The consequence also was observed in the form of age imbalance in the labor market, where a huge number of employees holding positions comprised of old people. The phenomena hampered the innovativeness, which Howell and Rehm (2009, p.85) is of the idea that it is the sole contributor to the slowed growth in Greece. Approvingly, the government abolished permanent contracts, which fueled the cases of unemployment. Therefore, Breen (2006, p.54) proposes that the government should bring back the rebalance in the economy, by restricting the legislation that will ensure that the young people are included in building the economy.

The changes that were made on employment protection legislation after the financial crisis of the year 2009 in Europe seemed to have worsened the case of youth unemployment in Greece (Howell and Rehm 2009, p.86). Among the changes were: an increase in the allowable number of people that could be fired from twenty toone-fifty, the cost of termination of a contract was diminished, trial period increased from two months to twelve months among others. Theory suggests that weaker EPL leads to job creation and job destruction (Blanchard 2008, p.274). In other words, employment is created during the upturns rather than conducting the reforms on existing policies. Empirical research endorses that the changes that were enacted in Greece were fragile, and have contributed to the menace of unemployment, with the youth aged 15-24 years being affected severely than the twenty-five years of age and above.

Unemployment benefit and social assistance

The unemployment benefit by the year 2010 was a flat rate of 55 percent of the total salary (Ernesto et al. 2017, p.26). The number has continued to decrease with time, owed to the changing economic times in the country. While the fifty-five recent applied to individuals who were in permanent employment, others are part-time jobs were entitled to the benefit of fifty percent. The calculation of the interest adopts a complicated formula, that takes into account the age of the individual, the number of days worked and the occupation. These three factors have a significant impact, on the number of people who receive the benefit and end up eliminating a considerable amount of workers from the system. According to Feldmann (2009, p.85), he noted that this statement was meant to curtail and deny the employees the benefits, hence increased the level of dependency in the country.

The law regarding the people to receive the unemployment benefit became stricter by the year 2014, where the government required that for anyone to receive the benefit, they had to spend around four hundred days before becoming legible. The harsh transition eliminated a considerable number of people from benefiting, hence increased the challenges to the employees, whose term of employment was not permanent. According to Basu and Felkey (2008, p.495), the high rate of unemployment was rampant in Greece, and the youths aged between 15-24 years were principally affected. The number of those who claimed to be receiving the unemployment benefits dropped from 33 percent to 16 percent.  Grimshaw et al. (2019, p.186) affirm that this was a crisis, that slowed the growth of the Greece’s economy, as most of the young brains were idle and never participated in the professional jobs, that wasprimarily occupied by the aged and experienced people. The data released by Eurostat (2018), shows that the poverty levels by the year 2016 in Greece rose more rapidly among the unemployed people, which Grimshaw et al. (2019, p.158) is of the idea that it was primarily contributed to the stricter rules on unemployment benefits.

THE EFFECTS OF LABOR MARKET INSTITUTIONS ON YOUTH UNEMPLOYMENT-GREECE

Figure 2: Eurostat (2018), EU Statistics on Income and Living Conditions (database).

Basu and Felkey (2008, p.512) noted that Greece is the second country after Italy, that lacks the particular law regarding the minimum wage that a person can have in the country. Any state should have a workable social program, that aims to support its populace, both those earning high salaries and them that lacks permanent jobs. It was pragmatic that for an individual to qualify for social assistance, certain minimum conditions were to be met, among them being over forty-five years of age and earning an annual income of not less than €5,000. This system alienated the youth from profiting from the program, as most of them started at shallow levels of income. To compound it all, the set number of years only leaves the benefit to the older people, who are perceived to be more experienced. However, Grimshaw et al. (2019, p.184) propounded that the ratio of the minimum wage to the minimum wage of Greece stands at 0.45, which is near the OECD average. This is in line with the current trend, where the rate of unemployment has been becoming decreasing gradually since the year 2010, which sheds more hope of reduction in unemployment rates in Greece. Nonetheless, the disparity between the youth and the old people securing the jobs and having stable employment continues to be the issues that cannot only be addressed by stabilizing the economic growth but also restructuring some of the systems in the country.

Ernesto et al. (2017, p.24) noted that the participation of the people above 24 years old in Greece was 4%, which left the significant number of qualified and skilled individuals to be the youths. This is a common phenomenon in the EU countries, but the opportunities for the graduates are minimal. According to Nickell (1997, p.75), he affirmed that the situation was majorly generated by the government, which failed to come up with market policies that favored the fresh graduate. Instead, the rigidity of employment structures focused on the old people, who ideally have experience, but their productivity levels are low. In the same vein (Jimeno and Rodriguez 2002, n.p) noted that the woes of Greece started after the financial crisis, that left virtually all institutions non-operational. The government resorted to relying on foreign aid to run the economy, and most of the manufacturing and service sectors were malfunctioned. The resultant was cyclical unemployment since the demand was low hence less work. Thus few workers were needed. Such, people continued to hold positions, converting the labor force to constitute of the old generation.

Tax Wedge

Tax play an instrumental role in the distribution of income. According to Scarpetta (1996, p.56), any functional government has succinct measures on how to collect taxes from the citizens, as it is the only way to keep the economy vibrant. The monies received from the individuals’ contributions(PAYE), remittances by the institutions and companies and VAT, are used to support developmental projects such as infrastructure and funding social services. In occasions where the government fails to effectively collect the taxes, most of the services come into a halt, among them the possibility of creating new jobs.

In the study conducted by Grimshaw et al. (2019, p.183) he noted that the tax rates in Greece are brutal, which scares the citizens from seeking employment. To note, he found out that the personal income tax stood at 46 percent, and was subject to uptrend since the government was targeting to collect more funds to reactivate the economy. In the same vein, the corporate tax which is 26 percent, drove awaythe investors to set up industries or any startup in this state. Others are VAT at 23 percent and social security at 42.01 percent. The consequences of the government’s intention to charge those high figures have resulted in tax evasion, and a lot of youth opting to indulge in the informal sector, where they cannot be taxed.  Similarly, the creation of jobs in this market has lowered as some of the investors cannot manage to cater to the enormous corporate tax (Ernesto et al. 2017, p.27).

Strategies for reducing unemployment by the EU

The major drive to the unemployment disparities among the EU member states has been policies that are set in respective countries. In the case study of Greece, which is the center point of discussion in this paper, it has been depicted that the regime only favors the people who are 24 years of age and above. Ideally, they are experienced people but lack the innovativeness and creativity, that pushes the economy forward. Also, some of the policies on wages and benefits suit those in permanent employment, leaving the substantial unemployed population without much cover. Furthermore, Sokou et al. (2000, p.202) noted that corruptions and lack of political good will would have been primary contributors in disproportions observed in regards to the unemployment in the EU states. The following paragraph discusses some of the strategies for reducing unemployment by the EU, to have a deeper understanding of the current state of Greece.

One of the strategies that have been adopted is reviewing the tax policies. High rate of tax is something that is discouraging the investors from starting businesses in the EU countries, among them being Greece (Jimeno and Rodriguez 2002, n.p). Entrepreneurs opt to go to countries, where the projected returns are high, compared to the capital they inject in the business. For most of the EU states, this has not been possible, hence lagging in terms of economic developments. Withal, the consequences hit the youths more, since they graduate and find no place to offer their skills. Therefore, the government should come up with a method to lower the income and corporate taxes to attract more players in the formal sectors. Likewise, the opening of the protected markets is essential, to enhance free trade, that is less of hindrances (Sokou et al. 2000,186). Most of the people in these states indulge in economic activities that the government fails to recognize, as they are not categorized for taxation. To ensure such services or products are exported to the member states and other countries, it is essential to lift the ties and conduct a review to detail what constitutes a legal activity. Moreover, social income protection law should be revisited to include low-income earners. In the case of Greece, it was noted that this type of income only benefits the older people who are over 45 years of age and above. Such a system eliminated the younger generation, who are majorly affected by the problem of unemployment.

According to Feldmann (Eurostat 2018, n.p), the trend of older people, aged from 24 years and above is in a linear move, while that of the younger generation aged between 15 years to 24 is declining. This information depicts that the aged will continue to hold the positions in the job market, and the rate of absorption of the young brains is low. Also, the GDP of Greece is projected to fall from 2.19 to 2.10 in the year 2020, which is an indicator of the poor performance of the economy (Grimshaw et al. 2019, p.182). However, the minute change might not deviate far much from the present way of things in Greece. In the same vein, the income inequality gap is estimated to widen. Therefore, the unemployment rate among the youths continues to remain an issue of concern in Greece, and viable methods to decrease the problems should be identified.

Methodology

Choosing the right methodology is determined by the nature of the research or the topic that is under study. The three types of methodology are qualitative, quantitative and mixed methodology. The concept of qualitative methods refers to the statements and observations of other authors regarding the issue that is being investigated. On the other hand, quantitative methods rely on numerical data while the mixed methodology combines the two. Therefore, the current paper has adopted a qualitative methodology. Peer reviewed papers, books, and resourceful databases were consulted, to shed insight on the effects of labor market institutions on Youth Unemployment in Greece. The main point of consideration was to select the sources that address the issues, and the main points of arguments were noted. This was done by evaluating the methodologies the researchers adopted, the methods of data collection and how the data was analyzed. The method helped to eliminate unhelpful texts and only focused on papers that describe the phenomenon clearly.

Recommendations

  • The government should reduce tax evasion by enhancing proper audits and firming the motivations for voluntary tax compliance. It was noted that several youths are indulged in informal sectors, due to the fear of high tax in the formal sectors. To grow the economy, people should be educated on the need for paying tax to develop other sectors.
  • Create opportunities for the youth who are less skilled but qualified to work in formal areas. The openings in the market are occupied by aged people, who are less creative and innovative compared to young brains. The government should come up with a policy requiring all companies to absorb new graduates.
  • The government should opt reducing tax rates. It was noted that the foreign investors are scared of high corporate tax, which prevent them from setting business that would later offer employment to young people. Coming up with a fair figure would attract them in the country.

Conclusion

Unemployment among the youths is a rancorous issue in Greece, and it has attracted a considerable number of researchers, who have related theories trying to explain the phenomenon. The current paper debates that the institutions in Greece have significantly been at the forefront of the witnessed problem, and it is the same government that can address the menace. Employment protection legislation was cited for having been set in favor of the old people and those already in permanent jobs. It reduced the possibility of securing part-time jobs and enriched the chances of outsiders getting jobs more efficiently, than the Greece natives. Also, the high rate of taxes for individual incomes and corporate tax scares the people from formal employment, thus snowballing the cases of unemployment. Among the strategies proposed to curb the unemployment are reviewing the tax policy, opening protected markets and enhancing social income protection law amongst the low-income earners.

References

Basu, K., and Felkey, A. J. (2008). A theory of efficiency wage with multiple unemployment equilibria: how a higher minimum wage law can curb unemployment. Oxford Economic Papers61(3), 494-516.

BelowM and an Ours J (2004) Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms? Oxford Econ Papers56:621–642

Blanchard, O. (2008). Reforming Labor Market Institutions: Unemployment Insurance and Employment Protection. The Washington Consensus Reconsidered, 260-276.

Breen, R.O(2006). “European Unemployment: The evolution of Facts and Ideas “Economic Policy 21,5-59.

Collignon, S. (2001). Unemployment, Wage Developments and the Economic Policy Mix in Europe. Challenges for Economic Policy Coordination within the European Monetary Union, 183-192.

Ernesto Caroleo, F., Ciociano, E., and  Destefanis, S. (2017). Youth unemployment, labour-market institutions and education. Young People and the Labour Market, 13-30.

Eurostat (2018), EU Statistics on Income and Living Conditions (database).

https://ec.europa.eu/eurostat/web/microdata/european-union-statistics-on-income-and-living-conditions

Feldmann, H. (2009). The unemployment Effects of Labour Regulation around the World. Journal of Comparative economics,37,76-90.

Grimshaw, D., Rubery, J., and Smith, M. (2019). Deconstructing Unemployment: Reassessment of Unemployment Measures and Compensation Schemes. Working Europe, 157-187.

Howell, D. R., and Rehm, M. (2009). Unemployment compensation and high European unemployment: a reassessment with new benefit indicators. Oxford Review of Economic Policy25(1), 60-93.

Jimeno, J. and D. Rodriguez-Palenzuela (2002). Youth Unemployment in the OECD: Demographic Shifts, Labour Market Institutions, and Macroeconomics Shocks. ECB Working Paper, No.155.

Nickell,S.(1997). Unemployment and Labour Market Rigidities: Europe versus North America. Journal of Economics Perspectives,11,55-75.

Scarpetta, S.(1996). Assessing the Role of Labour Market Policies and Institutional Settings on Unemployment: A Cross-country Study.OECD Economics Studies 26,43-98.

Sokou, K., Christofi, K., and Papantoniou, V. (2000). Youth Unemployment and Social Exclusion in Greece. Youth Unemployment and Social Exclusion, 175-204.

Trading Economics (2019). https://tradingeconomics.com/greece/youth-unemployment-rate(Trading

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