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Root-and-branch labour reform needed to put EU back to work

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Unemployment in the European Union has hit some unfortunate milestones. The rate is at a record high in the whole euro zone, as well as in such member countries as France, Spain, Portugal and Greece. It's easy, and fair, to blame the recession, but deep-seated labour market rigidities are culprits too.

The slow economy certainly hurts the job market, as companies with neither liquidity nor customers don't hire. The end of construction bubbles cuts out employment. But there's more than missing GDP behind the high unemployment rates in peripheral countries – on average about twice the rate for the euro zone.

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Sticky labour markets are also responsible. Thanks to powerful trade unions, rigid hiring-and-firing laws and closed professions, it is often very difficult to employ new workers. Insiders, the already employed, have been treated favourably, leaving outsiders, often temporary contractors, vulnerable to job losses.

A mismatch between education and work has also been damaging. The skills gained in education are often irrelevant to those required by businesses, making it harder for academically qualified entrants to find employment. The combination of a skills mismatch and an insider-outsider divide help explain why the youth unemployment rate is about double the general one. The youth rate is an almost incomprehensible 64 per cent in Greece.

Why worry? High levels of prolonged joblessness are costly. Workers miss out on skills, training and regular career development. Most of them usually rebound fully, eventually finding a career path. But some remain stuck in a low-pay-no-pay cycle, re-entering the market with weaker jobs and facing a lower lifetime income. The longer time people spend out of work, the more likely they will end up in the losing group.

The costs for the economy are also significant. In the short term, governments spend more money on benefits and collect fewer taxes. In the long term, more workers will be undertrained and less productive. Troubled countries face a brain drain, as the talented leave for better opportunities elsewhere. Germany, where youth unemployment is 7.6 per cent, is attracting many of the best and the brightest. What's more, unemployment can deepen social inequalities, as groups such as the young, women and the low-skilled are usually hit the worst.

What can be done? While GDP growth will help create jobs, it won't do anything for insider-outsider problems and other sorts of structural unemployment. Genuine labour market reform is crucial. Most countries have already started down this long road, but much remains to be done.

The main obstacles to job creation are the economic slowdown and a resistance to reform. Growth, though slow, will come as economies exit the recession. Reforms are ultimately more important, and they are too often stymied by insiders. Such short-sightedness is unacceptable when dealing with the crippling problem of unemployment.

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