78235 Employment Recovery Stalls in Europe and Central Asia Johannes Koettl, Elizabeth Mata, Gady Saiovici, Figure 1. GDP is still growing, but recovery is slowing and Indhira Santos 10 Key Messages GDP growth rates, (y-o-y, percent, Q3 2012) 8  GDP growth is slowing or stalling in most Europe and Central Asia (ECA) countries. 6  Unemployment rates are stable, but still close to 4 their peak values. Men and especially youth continue to be disproportionally hit; youth 2 ECA average unemployment rates are above precrisis levels, and Non-ECA OECD average in most countries, are still at their peak. 0  CZE POL HRV LTU GEO MKD MDA KGZ BGR SVN HUN UKR TUR SVK ALB RUS EST KAZ UZB BLR LVA ROU TJK SRB AZE ARM Long-term unemployment is still rising and is arguably the biggest labor market challenge ahead -2 for ECA. Despite high unemployment rates, however, activity rates remain stable, with -4 increasing participation of women. Source: Authors’ calculations based on European Bank for Reconstruction and Development (EBRD) data.  Work hours have not fully recovered, but Note: Red bars indicate worsening trend in the last quarter; green bars, productivity per hour has been rising. improving trend; and blue bars, stable trend (percentage point change between -0.5 to 0.5). Growth rates refer to year-on-year change. Slowing Growth Recovery This slowdown in the economic recovery is also evident GDP continues to recover in most Europe and Central at the subregional level. ECA as a region experienced a Asia (ECA) countries, but the recovery remains strong recovery between 2010 and most of 2011, but fragile. In 18 ECA countries, year-on-year economic growth rates have fallen since. The slowdown is most growth was positive by the third quarter of 2012, and in pronounced in the Baltic and Western Balkan countries. Armenia, Georgia, Latvia, Tajikistan, and Uzbekistan, Turkey’s strong growth performance following the crisis growth was more than 5 percent (figure 1). However, in is also weakening, though still positive. Frail economic half of these 18 countries, economic growth is slowing prospects in Western Europe suggest a drawn-out period (red bars in figure 1). Only Albania, Azerbaijan, Estonia, of recovery in ECA. and Lithuania display positive and sustained GDP growth (green bars). Unemployment Stable but High Growth prospects remain poor in a number of Unemployment has stabilized, with an average countries where GDP continues to decline. In Croatia, unemployment rate of 12 percent across the ECA the Czech Republic, Hungary, the Kyrgyz Republic, region. More recently, unemployment rates in most ECA Romania, Serbia, Slovenia, and Ukraine, output continues countries have not substantially changed (blue bars, figure to fall more than three years into the financial crisis. In 2), or have improved noticeably only in Moldova, Serbia, Romania, Serbia, and, Ukraine, growth deteriorated even and Ukraine. In contrast, in Croatia and Latvia, further between the second and third quarters of 2012. unemployment actually increased in late 2012. ECA Knowledge Brief Figure 2. High unemployment rates remain stagnant Russia, and Turkey have unemployment rates fallen below precrisis levels (figure 4). Compared to their peak values, 35 though, unemployment rates have significantly fallen only Unemployment rate (latest available) 30 in the Baltic countries and Moldova. However, the number of unemployed who also receive an unemployment cash 25 benefit is significantly below its peak and in many cases, 20 is even below precrisis levels. Especially in Estonia, 15 Latvia, Lithuania, Romania, the Slovak Republic, and ECA average Turkey, the difference between the peak and current 10 Non-ECA OECD average number of unemployment beneficiaries is significant, 5 suggesting that many unemployed have exhausted their unemployment benefits. 0 POL HRV CZE TUR LTU SVK MDA RUS UKR EST BGR MKD KAZ SVN HUN ALB LVA ROM MNE SRB Figure 4. Unemployment rates still close to peak values 40 Source: Authors’ calculations based on International Labour Organization (ILO) data, seasonally adjusted. 35 Note: Red bars indicate worsening trend in the last available quarter; green 30 bars, improving trend; and blue bars, stable trend. Unemployment rate 25 This stabilization has occurred at historically high unemployment levels. ECA unemployment rates remain 20 high, both when compared to non-ECA Organisation for 15 Economic Co-operation and Development (OECD) 10 countries and non-Europe OECD developing countries 5 (figure 3). In all subregions, unemployment rates today are higher than before the crisis. Unemployment is 0 POL CZE LTU HRV MDA UKR KAZ RUS TUR EST BGR MKD SVN HUN ALB SVK LVA SRB ROM MNE particularly serious in the Western Balkans, exhibiting Last quarter 2008 Q1 peak constantly high rates even before the crisis. The Baltic Source: Authors’ calculations based on ILO seasonally adjusted data. countries are still recovering from peak levels in early 2010, but their average unemployment rate is now Since the start of the crisis, men have been stabilizing at a level higher than before the crisis and disproportionally hit by unemployment. In Lithuania, above the regional average. for example, the unemployment rate among men has Figure 3. Unemployment is stabilizing at higher rates increased by 11 percentage points since early 2008, compared to 8 percentage points among women (figure 5). 25 With the exception of Romania, the impact of Unemployment rate (latest available) 20 unemployment follows a similar gender pattern in other 15 countries in the region. These differences partly reflect a 10 smaller initial impact of the crisis on female unemployment, but also a more rapid recovery in female 5 than male unemployment in most countries. 0 Figure 5. Unemployment increase was higher for men 2012Q1 2012Q2 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2011 Q1 2011 Q3 2011 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q2 14 between Q1 2008 and Q4 2012 Change in unemployment rate 12 CIS, GEO,UKR Western Balkans and Turkey (percentage point) 10 Non-European OECD Non-ECA Europe 8 Baltics ECA 6 Source: Authors’ calculations based on ILO seasonally adjusted data. 4 Note: CIS countries are ARM, AZE, BLR, KAZ, KYR, MDA, RUS, TJK, and UZB. Western Balkans countries are ALB, MKD, SRB. Non-European 2 OECD countries are AUS, CAN, CHL, ISR, JPN, KOR, MEX, NZL, and 0 USA. Non-ECA Europe countries are Western European countries. CEE TUR ROM POL HUN SVK SVN EST BGR LVA HRV LTU countries are BGR, HRV, CZE, HUN, POL, ROM, SVK, and SVN. -2 Males Females As a result, ECA unemployment rates are still close to their peak values. Only in Kazakhstan, Macedonia, Source: Authors’ calculations based on Eurostat seasonally adjusted data . ECA Knowledge Brief Youth also continue to be particularly hard hit by been looking for a job for more than 12 months in most unemployment. In all ECA countries (except Turkey) ECA countries. where data are available, youth unemployment rates have Figure 8. Long-term unemployment is increasing increased much more—in fact, by more than twice as 35 much in most countries—than adult unemployment rates rates between Q3 2008 and Q3 2012 Change in long-term unemployment 30 since the onset of the crisis (figure 6). In Slovakia, youth 25 unemployment rates have increased almost five times (percentage points) more. In all cases, youth unemployment remains above 20 precrisis levels, and with the exception of the Baltic 15 countries, is at peak levels (figure 7). 10 ECA & non-ECA OECD average Figure 6. Youth unemployment increases were higher 5 25 0 Change in unemployment rates between Q1 2008 and Q4 2012 POL CZE HRV LTU MKD TUR BGR HUN SVK EST SVN LVA ROM 20 -5 (percentage points) 15 -10 Source: Authors’ calculations based on Eurostat non-seasonally adjusted 10 data. Note: Red bars indicate worsening trend in the last quarter; green bars, 5 improving trend; and blue bars, stable trend. 0 Long-term unemployment is arguably ECA’s biggest HRV POL LTU HUN EST BGR TUR OECD SVN LVA SVK ROM ECA labor market challenge. The fact that long-term -5 unemployment is still on the rise carries the risk that in the Youth Adults future, more workers will become discouraged or hardly Source: Authors’ calculations based on Eurostat seasonally asjusted data. employable, thus exiting the labor force. This, in turn, will Figure 7. Youth unemployment still above precrisis levels affect the ECA countries’ ability to recover from the crisis 50 and, in the long run, to successfully meet the challenge of 45 an aging and declining labor force. 40 Figure 9. Activity rates are improving Unemployment rate 35 12.0 30 Q2 2008 and Q2 2012 (Percentage points) Change in unemployment rates between 25 LVA10.0 8.0 LTU 20 HRV BGR 15 6.0 EST 10 SVN 4.0 SVK HUN 5 CZE POL MDA 2.0 ROM 0 0.0 RUS TUR EST ROM LVA LTU SVN BGR POL HUN SVK HRV TUR Last Start Peak -6.0 -4.0 -2.0 0.0 KAZ 2.0 4.0 -2.0 MKD Source: Authors’ calculations based on Eurostat seasonally asjusted data. -4.0 Change in activity rates between Q2 2008 and Q2 2012 Long-Term Unemployment and Activity Rates (percentage points) The recent pace of job creation has not been sufficient Source: Authors’ calculations based on ILO and Eurostat non-seasonally to absorb the large pool of unemployed, resulting in adjusted data. growing long-term unemployment. The share of long- Despite the rise in long-term unemployment, activity term unemployed1 among the overall unemployed is very rates have increased or remained constant in most high in ECA and has kept increasing since the onset of the countries since 2008 (figure 9). Moldova, where activity crisis, particularly in the Baltic countries (figure 8). rates have fallen by 5 percentage points, is a notable Critically, the latest trend indicates that the problem of exception. As expected, in countries where the long-term unemployment is becoming more acute; unemployment rate increased the most, activity rates have currently, roughly 40–60 percent of all unemployed have fallen more—although on average, the relationship is weak. Still, activity rates increased in late 2012 in most countries, and as figure 10 shows, in all ECA countries 1 This is defined as those who have not worked for more than 12 where data are available, women’s participation has either months but who keep actively looking for a job. ECA Knowledge Brief been increasing more or decreasing less than men’s. This Hourly labor productivity in parts of the region has could hint at an “added worker� dynamic, meaning that been rising. Relevant data are available only for European household members who are not the main breadwinner— Union (EU) countries. Especially in Bulgaria, Latvia, especially women—are forced to work or look for work as Lithuania, and Poland, real hourly labor productivity has a result of income shocks caused by the crisis, although no grown by more than 15 percent since early 2008 (figure firm evidence of this trend can be provided. 12). In fact, hourly productivity growth was much higher Figure 10. Women’s participation is increasing more in the EU10 countries than in other EU countries. Hungary and Slovenia, on the other hand, have been lagging in 10 productivity growth. Change in activity rates between Q1 2008 and Q3 2012 (percentage 8 Figure 12. Hourly productivity has mostly been increasing 6 25 points) 4 changebetween Q1 2008 and Q4 2012 Real hourly labor productivity 2 20 0 15 POL HRV CZE LTU HUN MKD SVK BGR EST SVN ROM TUR LVA (percent) -2 EU10 average 10 -4 male female average male average female Source: Authors’ calculations based on Eurostat seasonally adjusted data. 5 EU15 Figure 11. Work hours are stabilizing at lower levels average 0 0.5 HUN SVN CZE SVK EST POL BGR LTU LVA between Q3 2008 and Q3 2012 (hours) -5 Change in weekly hours worked 0.0 POL HRV CZE TUR LTU MKD BGR HUN EST SVN LVA ROU SVK Source: Authors’ calculations based on Eurostat seasonally adjusted data. -0.5 ECA average Conclusion: a Stalling Employment Recovery -1.0 Unemployment in ECA is stabilizing at high levels and is Non-ECA OECD average stuck close to peak values. Going forward, three factors -1.5 will undermine the employment recovery in ECA: (i) weak economic growth; (ii) a large pool of long-term unemployed who could become discouraged and -2.0 increasingly harder to employ; and (iii) a recovery in Source: Authors’ calculations based on Eurostat data. hours worked rather than new hires. Thus far, activity Note: Green bars indicate improving trend in the last quarter, and blue bars indicate stable trend. rates do not seem to be negatively affected by the crisis, but as the long-term unemployed become discouraged, Recovering Work Hours and Rising Productivity this could change. Given the already low levels of ECA labor markets adjusted to the crisis not only employment in the region and a bleak demographic outlook, avoiding labor market detachment among the through higher unemployment, but also through fewer work hours. All ECA countries where data are available long-term unemployed, the inactive, and youth is the main have cut down on hours worked since 2008 (figure 11). challenge for policy makers in the near term. The Czech Republic and Latvia saw the largest decline in About the Authors hours worked; only in Slovakia did hours worked increase. Although recent trends show that hours worked Johannes Koettl is a Senior Economist, Elizabeth Mata, are either stable or on the rise everywhere, countries are a Junior Professional Associate, Gady Saiovici, a Junior still well below the level of hours worked before the crisis. Professional Associate, and Indhira Santos, an This could delay the recovery of employment levels Economist in the Human Development Sector, Europe and because employers might prefer a continued expansion in Central Asia Region of the World Bank. hours of the currently employed (intensive margin) over hiring new workers (extensive margin). “ECA Knowledge Brief� is a regular series of notes highlighting recent analyses, good practices, and lessons learned from the development work program of the World Bank’s E urope and Central Asia Region http://www.worldbank.org/eca