Inequality, poverty, and unemployment – these are the three major social problems facing Europe as identified by a policy brief recently published by Bruegel, a Brussels-based think tank. Despite the fact that Europe’s social problems are diverse and there has been a rising divergence especially within the euro area, income inequality, rising poverty, and high unemployment have been identified as common denominators of the social problems of almost all EU member countries.
Already prior to the euro crisis, the European model of welfare state was not generally considered growth-friendly, yet still deemed efficient enough to provide adequate social protection. However, since 2008, the ability of the system to protect the most vulnerable ones has been seriously questioned. The Bruegel study first argues that the increase in income inequality has been particularly pronounced for the top income in a number of EU countries. Second, according to Eurobarometer (2012), 80 percent of respondents think that poverty has increased in their own country over the past year. Third, staggering joblessness and especially youth unemployment has been more pronounced in many EU member countries. All of these phenomena are major concerns as all three – rising inequality, poverty, and unemployment – are generally considered major obstacles to faster, more sustainable, and more inclusive economic growth.
When talking about poverty, inequality, and unemployment in developing countries, we often speak about three separate issues. In poor countries, unemployment and poverty are mostly very distinctive problems. It is because the poor are often uneducated and unskilled, which is why their participation in the formal labor market is very limited. However, in developed economies, this trio of social problems is much more intertwined. Specifically, rising poverty and inequality are often a result of unemployment. When speaking about poverty in Europe or the United States, we often speak about something very different from the poverty in Africa.
In Europe, the majority of the poorest have a set of skills that can be readily used in the labor market. The problem, however, is that Europe is not able to create jobs that would not only match those with lower skills but also those who have just left school. Dealing with unemployment would therefore be the most desirable policy to deal with both poverty and inequality. Without claiming that job creation would solve most of income inequality, which is for instance rising in the United States, despite much better macroeconomic developments than in Europe, tackling unemployment would definitely go a long way with solving the rising poverty.
A quick glimpse at Germany’s unemployment figures reveals that even the labor market in a country widely seen as Europe’s leading economic success story is failing. In Germany, unemployment is often hidden behind the so-called “400-euro-minijobs”. A person “employed” full time for about 400 euros monthly can be directly described as poor by EU standards as already in 2010 Germany’s poverty threshold at 40 percent of median income was 592 euros. Moreover, a 400-euro-employee is not considered unemployed in official unemployment statistics and thus mostly not eligible for unemployment benefits. Frankly, calling a 400-euro job “employment” in a country where an average salary is more than 2,000 euros net takes a great degree of courage.
Unemployment is a terrible thing. William E. Barrett was right when he once asserted that “Hunger is not the worst feature of unemployment, idleness is.” Long-term unemployment can not only deepen poverty and inequality but it also severely undermines productivity and negatively affects work-related skills and habits of the jobless. Integration into the active labor market gets more and more difficult with time. Unemployment among the young is therefore even worse, because the young do not even get a chance to develop those work-related skills and habits, which can in turn undermine their whole careers. This could also create a lost generation and have trickle-down effects on child support and fertility rates, which are already very low in Europe.
Naturally, persistent unemployment also means that the jobless do not contribute to the current productive process, thereby increasing the pressure on those working ones to provide all the resources. Moreover, consumption, which is among the main drivers of economic growth, is hampered as demand is weaker in countries with higher unemployment. Speaking about poverty, inequality, and unemployment, we do not speak about three separate social problems of Europe. We speak, in fact, about one problem that rules them all. Thus, addressing unemployment should remain the highest priority and a number one bullet point on Brussels’ agenda.