With Austerity Kicking In, Europe’s Motivated Have Nowhere To Run

29 Nov. 2012 | Comments (2)

In current times of high unemployment, low business investments, and low wage growth, job opportunities do not come easily. In a typical recession, government work provides a good substitute for private sector job loss. During an economic crisis, government jobs usually see increasing employment numbers, either due to stimulus or pent up demand filled by people that cannot find work in the private sector. This makes the current European crisis so difficult. The employment safety net of the public sector is failing as budget cuts made across Europe to satisfy investors are resulting in public sector job cuts. This situation is a first in the history of the Euro Area, as public sector jobs that usually continue to grow in times of recession (chart 1) are now on the decline.

Over the past year, only six countries in the Euro Area experienced public sector jobs increases. Not surprisingly, the countries that have held up relatively well throughout the crisis are Austria, Belgium, France, and Germany. All these countries increased public sector employment, but have also seen increases in private sector job growth as well. However, the countries experiencing significant private sector job declines are also the countries experiencing public sector job losses due to government cuts. In Greece, public sector jobs declined over 7 percent since the second quarter of 2011. Spain, Portugal, and Ireland also experienced significant job decline. Italy, in fact, is one of the few countries that faced declining public sector job growth in 2008, and is still shrinking its workforce in the public sector. 

Looking at the impact on public sector jobs in the year after the Lehman Brothers bankruptcy, shows that most countries increased public sector jobs on a large scale after the crisis, which demonstrates why this phenomenon of lower public sector employment is special. This increase in public sector jobs during the peak of the world financial crisis helped the Euro Area have a relatively subdued job decline (chart 2). The result of this change in policy is that more people are now unemployed, and that this unemployment rate can continue to rise well into 2013. The amount of long-term unemployed will also be affected, which is related to the amount of people that fall out of the labor market. This situation has a negative effect on the amount of skilled people in the mid- to long-run, and on increasing government expenditure, as the amount of people on unemployment benefits will go up. It could also dampen demand and therefore have a negative effect on private sector jobs. A healthy recovery of the private sector would likely brush most of that away, but as the economic outlook for the Euro Area remains bleak, it looks as if employment in both the private and the public sector can be declining for a while to come, with all of the negative consequences that this situation brings. 

Chart 1

 

Source: Eurostat

 

Chart 2

 

Source: Eurostat, The Conference Board

 

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  • About the Author: Bert Colijn

    Bert  Colijn Bert Colijn is a senior economist that focuses on the European market. He works on the European Commission FP7 project NEUJOBS, focusing on productivity and economic growth in Europe in 2025. Besides …

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  1. Yolanda Lannquist 0 people like this 29 Nov. 2012 05:19 PM

    Bert - Thank you for the noteworthy points about how a drop in public sector employment, rather than a rise, during a economic downturn is a new trend for the EU. This is an insight I had not realized, and certainly a nice cushion for unemployment. But we must also note that the practice of public sector hiring during a downturn - stretching the public sector's budget even more - may have fed into the over-inflated public sectors of the EU and ultimately the sovereign debt crisis. After all, once hired, it is difficult to lay-off, right? Thank you for your feedback!

  2. Bert Colijn 0 people like this 03 Dec. 2012 06:12 AM

    Yolanda, thank you for your interesting question. You're right that hiring is a burden on government budget. Usually hiring slows down after the recession to limit increasing expenditure. In this case, many European countries are struggling with both a recession and budget cuts at the same time, which takes its toll on the European workers. This therefore results in less of a cushion on unemployment that is already at a record-high for the Euro Area.

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