Long-term labour market effects of the Great Recession

This section contributes to the analysis of long-term labour market effects of the Great Recession in the euro area. First, the section shows empirical results suggesting that the risk of unemployment persistence and labour market polarization should not be ignored. For several euro area Member States, there is indeed statistical evidence of a slow labour market adjustment using a dataset covering a sample ranging from the mid-90s (for some Member States from the early 00s) until 2016. Moreover, the dispersion of both unemployment and employment rates across euro area members appears to have increased from the start of the crisis until mid-2013, after which it tempered somewhat, but still remains above pre-crisis levels. Between 2014 and 2017 labour market reforms introduced in a number of euro area Member States may nonetheless have contributed to improving labour market adjustment going forward, though there remains scope for further reforms in this policy area. Two mechanisms that may trigger labour market persistence are empirically investigated in this section. The econometric analysis suggests that wage adjustments, over the period 1999-2015, reflected primarily changes in short-term unemployment, while being less responsive to changes in the long-term unemployment rate. Moreover, labour reallocation from sectors that were booming before the crisis towards sectors with stronger growth potential was sluggish. The policy implications of these empirical findings are briefly discussed, thereby highlighting the merits of policy initiatives that limit skill erosion and support skill formation during persistent downturns, as may be the case for well-designed shorttime working arrangements.