EUROPEAN PAPERS ON THE NEW WELFARE

Abstract

An important objective for social welfare policy has always been to provide safeguards against reductions in income and living standards that result from unemployment, disability, separation, widowhood and other such life course events. This paper examines the effect of such life course disruptions — unemployment, disability, separation and widowhood — on the income and living conditions of those living in EU Member States.
The risk of experiencing such a disruption is first outlined and the effects on income is then analysed, followed by consideration of the role of public policy in alleviating these effects. Empirical evidence shows that unemployment is closely linked to low income and high risk of poverty. In terms of policy, the widespread shift from passive to active labour market measures has contributed to reducing unemployment in the EU. This includes increasing incentives to return to work and training programmes for the young unemployed and retraining for the long-term unemployed, which have been developed in almost all Member States. The Nordic countries provide the major example of how State involvement and an extensive social security system can facilitate re-entry into the labour market and maintain living standards of those experiencing unemployment.
Review of existing studies indicates that labour market events are critical to an individual’s risk of entering into poverty and the chances of escaping it. There is a clear gender differential in the effect of the labour market events, with women’s loss of employment often buffered by the employment of their partner. Among family related events, widowhood seems to double the chances of women’s income falling to poverty levels as compared with men, while separation appears to have an adverse effect on the income of women alone. By contrast, the effects of having children and cohabitation on the risk of poverty do not show much variation between men and women. These findings suggest a need for greater gender mainstreaming of social policies and the provision of a safety net which takes into account the often different situations of men and women.
In the case of separation, the evidence suggests — not surprisingly — that women with better education and those who work full-time before separation tend to have higher income afterwards, while income declines with the number of children. The effect of different types of social welfare systems seems to be relatively weak, though post-separation income in the more ‘liberal’ countries (such as the UK and Ireland) seems to be higher than in more ‘corporatist’ countries (such as Austria, Germany and France). This, however, could reflect the greater participation of women in the labour force in the former or a different composition of women becoming separated — i.e. those with higher education levels in full-time work.

1. Introduction

Social security systems were developed in European countries to provide support for people whose life is disrupted because of unforeseen events, such as falling ill or losing their jobs. The concern here is to examine the effect of such life course disruptions — unemployment, disability, separation and widowhood — on the income and living conditions of those living in EU Member States. The risk of experiencing such a disruption is first outlined and the effects on income is then analysed, followed by consideration of the role of public policy in alleviating these effects. The focus is primarily on unemployment, which for most people represents the most important risk of disruption to their working lives and of income falling to poverty levels. Other life course disruptions, however, are also considered. Details of the different institutional arrangements, which are in place across the EU for providing a protection against unemployment, are outlined in an Appendix, focussing in particular on the differences in generosity, eligibility and coverage of different national systems.

2. Unemployment

The three main questions addressed here in respect of unemployment are:
1. What is the risk of becoming unemployed in different EU Member States?
2. What kinds of arrangements exist across EU countries for replacing income lost by those becoming unemployed?
3. What is the risk of poverty faced by those who are unemployed in different parts of the Union, in the sense of their income falling below what is considered to be the poverty level in relative terms?

1.1 The Unemployment Risk in the EU25 Member States

Unemployment in Europe rose steadily during the 1980s and the first half of the 1990s. This rise spurred a range of research not only on the underlying causes and the means of reducing unemployment but also on how best to protect those who face involuntary unemployment. The main causes identified in the literature are a combination of labour demand and labour supply factors, the former being linked to differences in labour market institutions (union membership, employment protection legislations, regulation of part-time and temporary employment contracts) as well as to macroeconomic factors (such as oil price shocks and changes in international competitiveness leading to industrial restructuring and job displacement. Supply side factors, on the other hand, are linked to decisions of individuals to stay in employment (when already employed) or return to work by actively searching for jobs. These decisions are influenced by widely diverse factors such as the statutory maternity leave, the availability of affordable childcare services, and training programmes to improve employability.
In the second half of the 1990s, unemployment rate in EU15 countries declined, though it has risen slightly in recent years (see Figure 1 below). In addition to economic growth, a progressive shift of national policies from passive to active labour market measures to promote employment (in-work benefits, employment subsidies, subsidized job training programs) in a number of countries contributed to this decline.

Figure 1: Unemployment rate (1963-2004)

Source: EUROSTAT, Labour Market Statistics, and OECD, Labour Market Indicators.

The enlargement of the EU to include the 10 new Member States from May 2004 has posed new challenges for policymakers, as there had been a large rise in unemployment in these countries at the beginning of the 1990s. Although there were some success stories since the mid-1990s, (e.g. the so called ‘Czech miracle’), unemployment in the new Member States taken together increased by nearly 5% in the late 1990s and remained in excess of 10%.
The question then arises as to who the unemployed are. The most salient features of the “old” European unemployment phenomenon still persist: the section of the population at most risk of unemployment are young people under 25, especially the low skilled and low educated. Moreover, unemployment still has a strong regional dimension in many countries, particularly in Southern Europe and in many new Member States. In many countries (Italy, Spain, Portugal) half of those unemployed have been out of work for longer than a year. (Figure 2 shows unemployment rates across the EU in 2005 together with long-term unemployment rates calculated in relation to the total active population. Figure 3 shows the proportion of the unemployed who are long term unemployed.)

Figure 2: Unemployment and long term unemployment in the EU25 (2005)

Source: EUROSTAT, Labour Market Statistics.

In the majority of countries, overall and long-term unemployment rates are in general positively correlated, with the exception of Sweden, Finland, and Spain. The incidence of long-term unemployment is particularly high in the new Member States (in particular in Slovakia and Poland), Southern European countries (with the exception of Spain), and among some of the EU15 block of countries (in Germany, Greece, Belgium, Italy and Portugal). In all new Member States except Cyprus, nearly half of the unemployed are long-term unemployed, which suggests underlying structural problems, and the limited capacity of labour markets to absorb long-term job seekers. A different picture emerges for the Nordic countries (Denmark, Finland, Sweden) and Anglo-Saxon countries (UK and Ireland), where there is a low rate of long-term unemployment, reflecting a higher degree of flexibility in both entry into and exit from the labour market. The Danish model of ‘flexicurity’ – balancing flexibility to hire and fire with extensive social security and training for employees – in particular, provide a potential example for other EU countries. In Spain the low incidence of long term unemployment can be related to the rise in net job creation after the labour market reforms of the early 1990s, many of the jobs being fixed-term or part-time.

Figure 3: Long term unemployed as percentage of the total unemployed in the EU25 (2005)

Source: EUROSTAT, Labour Market Statistics.

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