Friday, 31 August 2012

3 Ways to Fight Unemployment in Europe

Although as stated yesterday, the light at the end of the tunnel is not so far, it is nevertheless a light concerning only macroeconomic variables for the time being. And as is well known, no man can eat on GDP only. (If anyone has proof of the opposite please inform me immediately!). The following graph is copied from a Eurostat press release dated July 31st:
As you may remember and confirm from the above graph both the EU27 and the EA17 unemployment rates have been rising over the past few months. The same holds for youth unemployment which reached 22.6% in the EU27 and 22.4% in the EA17, also rising over the last months. The situation appears to be even worse when one considers that many youths are not on the list because they have not applied for unemployment benefits or have not communicated with their state unemployment agency (recent graduates for example). Even if all macroeconomic indicators move to positive ground the biggest issue European countries (especially in the South) have to face is unemployment. There are however three ways (or policies) which can assist in creating more jobs.

(i) Promote start-ups and spin-offs by youths
The reason I believe that start-ups are important is because they provide the foundation for future growth in an economy. True, they usually need very few people when they begin, however, their growth may be spectacular. (Google, a Stanford University spin-off now employs more than 50,000 employees worldwide) Obviously not every start-up or spin-off can be Google. This is, however, irrelevant to the policy. Even if they end having about 10-20 employees it is more than great. Small and medium businesses (SME's) account for 99% (!) of all EU businesses. EU policies are stating to be in favor of SME's and yet little is being done in order to promote entrepreneurship. I have personal experience of EU funds being targeted to existing businesses in amounts of about 100,000 euros. The EU could have funded 3-4 business start-ups with these and I am not even allocating them correctly (usually, seed money for start-ups or spin-offs are in the realm of 15-20,000 euros). Universities should also be encouraged to spin-off their researchers' discoveries as this may create several successful businesses and employ many graduates (let alone the stream of money the university will gain from the spin-off). Not to be misunderstood, when I say youth, I include all people under 35 not just the under-25's the statisticians consider when they create their tables.

(ii) Promote research in Universities
 With the notable exception of the UK, most universities in Europe are funded by their home nations (maybe some benefactors as well). EU-wide, research-promoting policies would essentially mean that the Universities would have to hire graduates in order to assist to that research. A clause should force them to do so, in the rare case that some Universities will choose not to create a research position for their grant. The current is that many EU Universities earn EU grants, many of which however are targeted to the professor(s) applying. These policies should be expanded in order for job positions to be created, alongside with (i) so that Universities can themselves gain even more from this. An additional advantage for the potential researchers is that jobs of this kind usually pay a lot more than average salary.

(iii) Force distressed large firms (e.g. banking institutions) to spin-off operations
Consider the following scenario: a company which employs 100 people decides to cut its operations in half and create two separate companies. How many people do you think that the two companies will need in order to function properly? If you guessed 50 then you got it wrong. A new company will need new management, and a reallocation of job positions which will almost certainly create more jobs than if it continued to be a single one. The idea that one large company needs less people than two separate ones is called economies of scale in economics. However, I do not mean that companies should be forced to spin-off operational parts. This should only occur with insolvent (or sometimes solvent as well) banks or other companies which face bankruptcy: spinning-off a part would make them focus more on what they do best instead of having to allocate sources all over the place. Even if they end up collapsing, the damage will be less for the economy if less people lose their occupation and the companies are smaller after the spin-off.

The three propositions above are ranked by their ease of implementation. For example, I believe that (i) is the easiest to implement and is also the one which will prove to be the most lucrative for economies. Something that is targeted in that direction is the announcement of the Italian government that people under 35 will be able to start a company with as little as 1 euro for capital. However, the need for more targeted policies, especially at the EU level remains and is now more important than ever.

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