Reallocating the large stock of unemployed workers from depressed activities and/or countries to more dynamic ones will be a major challenge for policy-makers. However, the type of measures that can help enhance the speed and efficiency of this reallocation will depend on the correct diagnosis of the underlying problem. In that respect, it is important to know whether euro area countries and regions are confronted with the same kind of mismatches. Indeed, if the skills demanded by firms in expanding sectors can be matched with the human capital supplied by individuals from inside the euro area, then the observed mismatch problems in the European labour market are linked to a lack of mobility. In other words, due to frictions in the process of search and matching in the euro area or factors hindering the mobility of the labour force we may experience a period of high unemployment that can be partially solved by encouraging labour mobility across different countries or regions within the euro area. Greater mobility can be encouraged by enhancing the flexibility of wages across sectors and regions, so that wages reflect the scarcity of some types of human capital relative to others and thus incentivise workers to move or to invest in appropriate human capital accumulation. It would also help to remove the obstacles associated with housing markets – e.g. by ensuring a well-functioning rental market – and other barriers to movement, such as the provision of public goods in the areas where labour demand is expanding. On the other hand, the euro area economy may be experiencing a more profound “structural” imbalance problem if, for the area as a whole, the skills supplied by the labour force do not match the skills required by nascent economic activities. In such a case, facilitating labour mobility would not solve the underlying problem.78 An index of skill mismatches The skill mismatch index (SMI) constructed is inspired by Estevao and Tsounta (2011),79 who calculate an SMI for the US economy by taking the difference between skill demand and supply at a state level. The EU LFS provides, for the period 1998-2010, six International Standard
2 The crisis and structural features of euro area labour markets
Classification of Education (ISCED) levels of education 80 for both employment (as an approximation of labour demand) and the active population (which corresponds to labour supply).81 The skill mismatch indicator is constructed at different aggregation levels. First an aggregate euro area index of skill mismatches is built, incorporating 16 Member States of the euro area,82 in order to study the relevance and nature of the existence of skill mismatches in the euro area as a whole. One of the novelties of this analysis is its euro area dimension, since we are dealing with a set of countries whose economic dynamics are tied by a monetary union. In addition, country-specific indices are constructed, as well as, for those countries for which the necessary disaggregated data are available, indices at regional level. Formally, the (baseline) SMI is constructed using the following formula: SMIit =
6
Σ (S j =1
i jt
– Di jt)2
(1)
where i represents the euro area, the country or the regional level for which the index is calculated, j is the skill level, t is the period, Sijt is the share of the labour force with skill level j in euro area/country/region i at time t, and Dijt is the share of employed persons with skill level j in country i at time t. The SMI can be informative in several ways. First, the analysis of each country’s SMI across time should inform us whether skill mismatches 78 Such skill mismatches can also occur in a “favourable” situation in which the economy is evolving towards a more innovative one and labour supply needs time to adapt to the implied upgraded skill demand. But, even in this case, the appearance of a mismatch would, at least temporarily, signal a structural imbalance or even a lack of flexibility in labour markets to adapt to a changing environment. 79 Estevao, M. and E. Tsounta (2011): “Has the Great Recession raised US structural unemployment?”, IMF Working Paper WP/11/105. 80 The levels of education are the following: primary education or less; lower secondary education; upper secondary education; post-secondary, non-tertiary education; first stage of tertiary education; and second stage of tertiary education. 81 Compared with Estevao and Tsounta, the measure used is therefore more accurate, as they used the whole population of working age to approximate labour supply. 82 Malta is left out because of a lack of sufficiently disaggregated data.
ECB Euro area labour markets and the crisis October 2012
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