Young and under pressure – Europe is risking a lost generation

OlgaThe following post by Olga Tschekassin ’13 (Master in International Trade, Finance and Development) has been previously published by the World Economic Forum and Bruegel

Ms. Tschekassin is Research Assistant at Bruegel in Brussels, Belgium. Follow her on Twitter @OlgaTschekassin


Since the beginning of the global financial crisis, social conditions have deteriorated in many European countries. The youth in particular have been affected by soaring unemployment rates that created an outcry for changes in labour market policies for the young in Europe. Following this development, the Council of Europe signed a resolution in 2012 acknowledging the importance of this issue and asking for implementation of youth friendly policies in the Member States. Yet, almost 5.6 million young people were unemployed in 2013 in the European Union (EU) – in nine EU countries the youth unemployment rate more than doubled since the beginning of the crisis.

Today I want to draw your attention to two more indicators reflecting the social situation of the young generation: the percentage of children living in jobless households and the percentage of young people that are neither in employment nor education nor training.

photo credit: Juan Carlos Hidalgo / elmundo.es
photo credit: Juan Carlos Hidalgo / elmundo.es

Children in jobless households

The indicator Children in jobless households measures the share of 0-17 year olds as a share of the total population in this age group, who are living in a household where no member is in employment, i.e. all members are either unemployed or inactive (Figure 1).

Figure 1: Children in jobless households
Figure 1: Children in jobless households

Source: Eurostat and Bruegel calculations. Country groups: 10 other EU15: Austria, Belgium, Denmark, Finland, France, Germany, Luxembourg, Netherlands, Sweden and United Kingdom; Baltics 3: Latvia, Lithuania, Estonia; 10 other CEE refers to the 10 member states that joined in the last decade, excluding the Baltics: Bulgaria Czech Republic, Croatia, Hungary, Poland, Romania, Slovenia, Slovakia, Cyprus and Malta; Sweden: data for 2007 and 2008 is not available, the indicator is therefore assumed to evolve in line with the other 9 EU15 countries. Such approximation has only a marginal impact on the aggregate of the other EU15 countries, because children in jobless HHs in Sweden represented only 3% of the country group in 2009. Countries in groupings are weighted by population.

In the EU28 countries this share rose only slightly over the past years to 11.2%. It is striking, however, that the ratio of children living in households where no one works more than doubled in the euro-area programme countries (Greece, Ireland, Portugal) as well as in Italy and Spain to 13% and 12%, respectively. And even more shocking – while the share stabilized in the programme countries, in Italy and Spain it is still sharply increasing. In Ireland in 2013 more than one in every six children lived in a household where no one worked. This is indeed an alarming development. Only the Baltics, which experienced a very deep recession among the first countries hit by the crisis, are reporting a sizable turning point in the statistic in 2010 and the share is presently continuing to decline. The numbers are, however, still well above pre-crisis levels.

A high share of children living in jobless households is not only problematic at the moment but can also have negative consequences for the young people’s future since it often means that a child may not only have a precarious income situation in a certain time period, but also that the household cannot make an adequate investment in quality education and training (see a paper on this issue written for the ECOFIN Council by Darvas and Wolff here). Therefore a child’s opportunities to participate in the labour market in the future are likely to be adversely affected. Moreover, as I discussed in a blog earlier this year, children under 18 years are more affected by absolute poverty than any other group in the EU and the generational divide is widening further.

Not in Education, Employment or Training (NEET)

The financial situation of young people between 18 and 24 years old who finished their education is less dependent on their parents income because they usually enter the labour market and generate their own income. Therefore we are going to have a closer look on their work situation, i.e. how many young people have difficulties participating in the labour market.

Figure 2:  Not in Education, Employment or Training
Figure 2: Not in Education, Employment or Training

Source: Eurostat and Bruegel calculations. Country groups as in previous chart

The NEET indicator measures the proportion of young people aged 18-24 years which are not in employment, education or training as a percentage of total population in the respective age group. We can see in Figure 2 that the situation among EU28 countries stabilized over the last four years. The good news is that for the first time since 2007 we see a decline in the rate in the euro-area programme countries in 2013. This decline is, however, mostly driven by Ireland with an unchanged situation in Greece and Portugal. Also, in the Baltics the ratio is on a downward trend. More worrying, however, is the situation in Italy and Spain. Among all EU28 countries, the young generation in Italy with 22.2% of all young people being without any employment, education or training, is disproportionately hit by the deterioration in the labour market. Every fifth young person between 18 and 24 is struggling to escape the exclusion trap. Europe and especially Italy is risking a lost generation more than ever.

Labour market policies for young people should therefore stand very high on the national agendas of Member States. The regulations introduced in summer 2013 into the Italian labour market reform which are setting economic incentives for employers to hire young people build an important step towards more labour market integration of the youth in Europe. Their effects are yet to be observed in the employment statistics in the coming years in Italy. More action on the national and European level is needed to improve the situation of the young.

Breakfast seminars: food for thought

By Marlène Rump ’15, current student in the International Trade, Finance and Development master program at Barcelona GSE. Marlène is on Twitter @marleneleila.

seminars

On Wednesday, October 22, we didn’t have classes, so we decided to explore one of the numerous events on the GSE calendar. For some brain and other food, the breakfast seminar on Labour, Public and Development Economics sounded just right.

The presentations scheduled were held by two of UPF’s PhD students who are in their last year. This means they are finalizing their “job market paper”, which refers to the paper they will use as a demonstration of their skills and interests when they apply for positions.

One important purpose of the seminar is giving the students an opportunity to practice presenting and defending their work, as well as receiving improvement suggestions from fellow PhD students and professors.

Backlash: The Unintended Effects of Language Prohibition in US Schools after World War I

Vicky Fouka started the seminar with her paper on language prohibition in the US Schools after World War I. She compared two states, similar in most social aspects, one of which banned the teaching of German from the primary schools for a few years and the other, her control state, which didn’t.

The prohibition, which was implemented by the authorities in early 1920s, originated from a German-hatred which was widespread in the United States after World War I. What was promoted as an integration measure had the exact opposing effects: Vicky finds that the Germans living in the state with language prohibition deepened their cultural segregation. In comparison with the control state, they were more likely to marry a German spouse and give their first child a very German sounding name.

Editor’s note: Vicky Fouka is a graduate of the Barcelona GSE Master in Economics. See more of her research on her website.

Cultural Capital in the Labor Market: Evidence from Two Trade Liberalization Episodes

The second presentation was also about the assimilation of immigrants, however Tetyana Surovtseva conducted her analysis with modern day data. Her assumption was that if the host country of immigrants increased trade with their country of origin, these immigrants had an advantage on the labor market in trade related sectors. Her hypothesis was that if the host country of immigrants increased trade with their country of origin, these immigrants had an advantage on the labor market in trade related sectors. Her underlying premise is that immigrants have a certain “cultural capital”, other than language, which is valuable for corporations involved in trade with their country of origin.

Tetyana examined the labor market demand for Chinese and Mexican immigrants in the US after a punctual improvement of trade agreements. Her findings suggest that labor market returns to the immigrant cultural capital increase as a result of trade with the country of origin.

Editor’s note: Tetyana is also a Barcelona GSE Economics alum. More about her work is available on her job market page.

Attend some seminars! Especially if you’re thinking of doing a PhD.

For both presentations there were numerous questions which gave additional insight especially on the methods of research. We also learned that most PhD students start their final thesis three years before the end of their program.

After this experience, I can highly recommend attending the seminars. You learn about interesting economic questions and see a specific application of your econometrics classes and this in only one hour. In addition, for those who are envisaging doing a PhD, the presentations give a genuine insight of the type of research you could be conducting.

Rethinking Fogape – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Rethinking Fogape: An Evaluation of Chile’s Partial Credit Guarantee Scheme

Authors:

Margarita Armenteros, Niccolò Artellini, Andreas Hoppe, Marco Urizar, and Bernard Yaros

Master Program:

International Trade, Finance and Development

Paper Summary:

Small-and-medium enterprises (SMEs) often find themselves credit constrained due to a lack of collateral, limited credit history, and informational asymmetries that entail high monitoring costs for lenders. Governments around the world have introduced partial credit guarantee schemes (PCGS) to overcome these constraints and ease financial access for SMEs. These schemes aim to relieve credit-constrained firms by providing public collateral that reduces the risk borne by private lenders in the event of a default. In recent years, PCGS have been utilized as a way to protect SME lending in the backdrop of the global credit crunch.

Why are SMEs important? Any economy is dependent on the innovation, technological change, and job creation that new enterprises introduce, and in most cases, such firms are small in size. The role of SMEs in Chile is no exception. By 2009, the SME sector in Chile contributed to 20% of GDP, and the percentage of workers employed in SMEs stood at 56.4% in 2011. Nevertheless, Chilean SMEs have pointed to the fact that their difficulties in obtaining a formal loan rest with a lack of guarantees and high financial costs.

In 2000, Chile relaunched its public guarantee fund Fogape (Fondo de garantías para pequeños empresarios) with the goal of providing public guarantees for loans taken out by SMEs with private financial institutions. In 2007 and 2009, the government re-capitalized the fund by $10 million and $130 million respectively as a direct countercyclical response to the international financial crisis. Fogape is unique in the way by which it disseminates its guarantees into the credit market; it does so through an auctioning system that is designed to reduce moral hazard on the part of participating banks that bid for Fogape’s guarantees.

To assess econometrically the impact of Fogape on eligible firms, we used firm-level data obtained from two longitudinal surveys undertaken by the Ministry of Economy. We employed the strategy of regression discontinuity design (RDD) in which receipt of the treatment depends discontinuously on the value of one or more observable characteristics of the subjects. In our case, we exploited an arbitrary threshold of eligibility by which only firms with reported sales less than $750,000 are eligible for Fogape’s guarantees.

We estimated the intention-to-treat, or the effect of eligibility to Fogape on eligible firms vis-à-vis ineligible ones. In keeping with the literature on RDD, we restricted our sample of interest to only those enterprises whose reported sales fall within a distance h on either side of the sales cutoff of eligibility. Our robustness checks confirmed that eligible and ineligible firms at the margins on either side of the cutoff were not systematically different in key baseline characteristics.

We selected the following outcome variables in which we expected to observe a change due to Fogape’s presence: the log difference of sales from 2007 to 2009; debt-to-equity ratio in 2009; profit margin in 2009; and long-term debt over total debt in 2009.

Log Sales Growth

 

We did not obtain any statistically significant results, suggesting that the effect of eligibility is neither positive nor harmful to the various performance indicators of the eligible enterprises in our sample of interest. We found that eligible firms within our bandwidth h, ceteris paribus, experienced less proportional change in their sales from 2007 to 2009 than ineligible ones. We had expected to see firms that are eligible for credit guarantees to have higher sales growth because of the investment in working capital and productive assets that such access to credit would allow for. The finding from our RDD analysis that eligible firms had less debt-to-equity in 2009 than non-eligible ones was equally puzzling. We expected eligibility to have increased their debt-to-equity ratio vis-à-vis similar ineligible firms because of the loans they are getting through Fogape. Finally, the result that eligible, surveyed firms had less long-term to total debt in 2009 than ineligible ones within our bandwidth h was also contrary to our expectations. Fogape has put emphasis on its allocation of guarantees to long-term credit, which led us to believe that there would be a corresponding increase in the long-term over total debt ratio of eligible firms.

We started with the premise that SMEs are credit constrained, which validates Fogape’s raison d’être in the economy as a provider of credit. We also assumed that this guaranteed credit would be used for productive investments, which would then be reflected in firm profitability and sales growth. Why do we find no evidence of Fogape’s impact during the period of 2007 to 2009? Are firms receiving Fogape-guaranteed loans not truly credit constrained? Or are lenders substituting Fogape guarantees for private ones? Do these firms have the expertise or productivity to undertake successful investments? In the survey used in our study, it is possible to identify 369 firms that received Fogape guarantees for a secondary loan in 2009. Out of these firms, 40% obtained their primary loan using physical collateral and 18% using private guarantees, thereby hinting at a substitutability problem. However, it is still not possible to say that Fogape users, which already had access to the fund or other sources of credit, were not credit constrained to begin with. We suggest more research be carried out and that the portfolio of participating lenders be reviewed to determine whether lenders have been substituting private for public guarantees and if Fogape beneficiaries were truly credit constrained. We find evidence that firms also face difficulties besides credit constraints. In the 2010 World Bank Enterprise Survey, Chilean firms identify an inadequately educated workforce as their second largest constraint. Furthermore, 25% of small and 22% of medium-sized firms identify this very constraint as their main obstacle. To address productivity concerns as well as competitiveness issues facing SME’s, we propose more complementarity between Fogape and other pro-SME institutions and public programs.

Read the full paper or view slides below:

Developing a Fairtrade Cocoa Sector in Nicaragua – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.

Photo credit: X. Scheldemann/Bioversity International
Photo credit: X. Scheldemann/Bioversity International

 Developing a Fairtrade Cocoa Sector in Nicaragua

Authors:

Giuliano J. Bandeen, Armen Khederlarian, Edmund Moshammer, Tommaso Operto, and Christoph Sponsel

Master Program:

International Trade, Finance and Development

Project Summary:

This is a policy proposal directed at the Government of Nicaragua. Nicaragua’s cocoa industry achieves a very low export unit value in comparison to global competitors in West Africa, South East Asia and Latin America. Given the promising prospective growth of the cocoa world market and the higher price paid for Fairtrade cocoa, the aim of the present policy memo is to examine whether Nicaragua could benefit if farmers were to switch to certified cocoa production standards. We show that under perfect market conditions this would indeed result in higher profits. However we also identify that there are currently several obstacles preventing farmers from switching. These obstacles include minimum quantity requirements of international buyers, price information asymmetries, a low negotiation power in the supply chain, and financial and technological constraints. We propose three policies targeting these obstacles which consist of a provision of storage facilities, a credit guarantee and an educational campaign. All of them rely on group forming of farmers with mutual liability agreements.

Comparing the net present value profit of selling conventional cocoa with an investment in our proposed policies, which allows selling Fairtrade cocoa, we calculate an internal rate of return. This rate varies between both potential clients, European chocolate manufacturers Ritter Sport and Zotter and is 129% and 20% respectively. This hence encourages our policy proposal. By comparing different scenarios of government intervention we find that the highest average welfare gain results from an intermediate level of intervention. In this scenario the government would pay for warehouse construction and an educational campaign, and would provide a credit line guarantee to avoid that cooperatives pay a high risk premium. Additionally we include several robustness checks where we allow for changes in investment horizon, fertilizer effectiveness, government interest rate, farmers’ risk premium and most importantly international cocoa prices. We show that implementing our policies promises high potential gains from switching for individual farmers and the entire economy under a wide range of scenarios.

Read the full project report or view slides below:

ECB Outright Monetary Transactions – Master Projects 2014

Editor’s note: This is the first post in a series that will showcase Barcelona GSE master projects by students in the Class of 2014. The master project is a required component of every master program.


 An Evaluation of the ECB’s Outright Monetary Transactions

Authors:

Madalen Castells, Alexandros Georgakopoulos, Edgar Giménez Trill, Jesse Lastunen, and Karolos Lymperakis-Pitas

Master Program:

International Trade, Finance and Development

Project Summary:

Since early 2009, the euro crisis has influenced most countries of the European Monetary Union (EMU), contributing to persistent low economic growth, high unemployment, steeply rising public financial costs and several problems with the region’s banks. As a result, a wide variety of policy measures have been adopted to address these problems. The central actors have included not only individual member states but also the European Central Bank (ECB), European Commission (EC) and International Monetary Fund (IMF).

While the success of many of the policies in recent years have been contested by different parties, the ECB’s Outright Monetary Transactions (OMT) program initiated in the summer of 2012 has been widely welcomed. Our paper attempts to understand and investigate OMT’s claimed success, motivated especially by the recent efforts to discontinue the policy. The implications with regard to the continuation of the program are potentially enormous, both economically and in terms of the social welfare of European citizens. Altogether, our motivation stems from the catastrophic consequences of the crisis, mixed success of most mid-crisis policy responses, and the uncertain destiny of OMT – perhaps one of the most crucial policy initiatives adopted in Europe after 2008.

Our research questions build on the uncertain contribution of OMT to the declining bond spreads in the peripheral euro nations. We ask whether OMT was responsible for the decline in their spreads after mid-2012, why this might be the case, and whether the policy can be successful in the future. The underlying policy question is simply whether European legislators should resume OMT. Our study is based on two steps: we first examine the ”theory and practice” of the program, also conducting a compact literature survey on other research studying its effectiveness, and then turn to quantitative methods. Our quantitative analysis consists of a regression study and the application of the synthetic control method to examine OMT’s effect on declining bond spreads in the periphery. In the process, we also analyze the nature and dynamics of the post-Lehman hikes in peripheral bond spreads.

Our results suggest, firstly, that the post-Lehman takeoff in sovereign bond spreads in the periphery was largely induced by fears of sovereign default that were separated from ”normal” associations between spreads and economic fundamentals. In particular, the synthetic control countries we construct based on spread determinants in the peripheral countries do not experience any such increases in their spreads. Our regression analysis also indicates that the mid-crisis evolution of peripheral spreads differs strikingly from the values predicted based on the stable period between 2000 and 2008. Furthermore, countries outside the periphery do not suffer from the pronounced association between spreads and fundamentals.

Secondly we find that OMT was very likely to be responsible for the rapid decline in peripheral spreads after mid-2012. The synthetic control countries we construct are not significantly affected by OMT, and some actually experience slight upward trends in their spreads after the policy is announced. The method lends strong support to OMT’s role in the declines in peripheral spreads. Similarly, the regression analysis suggests that post-OMT trends in spreads approach the stable values predicted based on the pre-crisis period. In most peripheral countries, OMT also breaks up the upward trend predicted based on the period before OMT.

Our results broadly validate earlier studies by Krishnamurthy et. al (2013) and Altavilla et al. (2014) regarding OMT’s effect, and Arghyrou and Kontonikas (2011), De Grauwe and Yi (2012) and Di Cesare et al. (2012) regarding the panic-driven nature of the increased peripheral bond spreads during the crisis. Although we consider that further research regarding the suggested long-term costs of OMT is needed, we strongly believe that the benefits of the policy outweigh the hypothetical concerns, and OMT should therefore be resumed by European policymakers. In particular, OMT had the intended effect of reducing bond spreads and stabilizing monetary policy in the European Monetary Union, and there is no indication that actually implementing bond purchases through the program will be necessary.

Read the full project report or view slides below: