The Kids Are Not Alright

Worth A Look, Disruption, Frontier Centre

The latest figures from Eurostat (the EU's official statistics agency) on youth unemployment are depressing for Europeans. On average, in the EU in 2005, unemployment for people under the age of 25 was 17 percent. In the US, by comparison, it was 10 percent. In Japan, it was 4 percent.

Within the EU, there are great differences, ranging from Poland's 33 percent all the way down to 5.7 percent in the Netherlands. The levels in Poland and Slovakia lift the average level in the new EU-10 higher than in the old EU-15, though it is fairly low in most new member states.

In the EU-15, the countries with the highest levels — above 20 percent are Greece, Italy, Sweden, France, Belgium and Finland. Indeed, it is generally acknowledged that France and Italy have serious economic problems. But Sweden and Finland might surprise some. (A new study by McKinsey shows that the real unemployment rate in Sweden is 15 percent — three times what the government claims.)

Obviously, there is no "Nordic Model" when it comes to youth unemployment. In Denmark and Norway, the rate is 8-10 percent, whereas in Sweden and Finland it is 20-23 percent – the same level as in beleaguered France.

The numbers reflect real policy differences. In Denmark, there is the so-called flexicurity model, where the flexibility part is important when it comes to cutting youth unemployment. But in Sweden, the labor market is very regulated, unionized and collectivized, leading to high youth unemployment.

It all comes down to a divide between reforming and non-reforming countries, the latter clinging to a so-called European Social Model. That combination of a big state with high taxes on work, public monopolies and a regulated labor market simply prevents young people from working. And what kind of a social model is that?

In order to know why reformist countries succeed in having more jobs — particularly for the young — and the others fail, the analysis must start at the main features of the world economy today. We live a world of rapid transformation. Production has changed constantly over the last 200 years and so has working life, often in dramatic ways. Once, practically everybody worked in agriculture, now, practically nobody does.

This is a continuing development in which competing producers find new and better ways of production — and better locations — all the time. The old methods, machines, organizations and structures disappear and something new and better emerges — creative destruction. Thus, productivity grows.

One long-term trend in the current transformation is a shift in the US and the EU from industrial manufacturing to production of services. Empirical evidence shows that countries with more invested in services have higher GDP and lower unemployment. They have embraced a transformation to the new.

There have always been counter-reactions to this, people who want to stop change, subsidize old production, protect old jobs and pretend that the world doesn't exist. Now there is a wave of protectionism in both the US and in Europe. Fortunately those forces cannot stop global development — especially with the assimilation of a billion Chinese and a billion Indians into the global economy; they can only delay it at home.

It has always been important for a country to be open and flexible, to be able to adapt to new circumstances. Indeed, the total inability to do that is a main reason why a centrally planned economy has never worked. Innovations and change are oppressed because the essence of such a system is to centrally plan development.

With the rise of the Asian economy the ability to change becomes even more important for European countries. National — and EU — policies should be aimed at simplifying change. Any policies aimed at preventing or delaying reform are doomed to succeed.

Young people are the first and biggest losers from policies designed to stop change. Indeed a big state is in itself an obstacle to change, because by definition the state is centrally planned and inflexible. But regulations in the labor market — minimum wages, privileges for trade unions, obstacles to hiring or firing — may have the most serious negative effects.

There are naturally many factors affecting whether young people get jobs. But a look at the Economic Freedom in the World index confirms that countries with high youth unemployment also have regulated labor markets. Denmark, Ireland and the Netherlands have rather free labor markets and the lowest levels of youth unemployment in the EU.

The new figures from Eurostat imply that young people in Europe should be in the forefront fighting for market-oriented reform. The insiders who currently try to stop reform in the belief that they benefit from today's situation should realize that any society that denies work to the young has no future at all.

The author is program director of the Swedish think tank Timbro and author of “European Dawn”.