Scope and impact of the crisis in 2009

„I do not fear that there will be any dramatic changes or turmoil in our labour market.“

How would you evaluate the developments in the Slovak labour market in the context of the development of the European Union market, from last year's perspective, marked by the global financial and economic crisis?

First, I will talk about the situation in a broader view. The crisis is taking its toll on all EU labour markets, causing a reversal of the employment growth, which we had experienced in almost all areas since 2000. It should be noted that improvements from the previous year have been mostly structural. At the onset of the crisis, the first stage hit the financial sector, and then it grew into a recession with a broad impact on nearly all sectors of the economy. The current recession has had, and continues to have, a significant impact on labour markets in the EU, which has led to an increase in the unemployment rate.

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So what are the pan-European trends or expectations?

In some member states, there have not been large losses of jobs yet, due to specific factors that influenced the composition of the economy, financial institutions and business environment. Despite the strong resilience of the labour markets, it is expected that Europe, in the period 2009 to 2010, will have lost more than 7 million jobs, and unemployment could rise to more than 10%. Since employment rates tend to lag behind changes in economic conditions, the labour market situation will continue to deteriorate for still some time, even after the economy starts recovering.

Which group of people has felt the crisis the most, in the form of lost jobs?

On the Slovak labour market, the impact of the crisis was particularly felt by contract workers, temporary agency staff and workers on short-term contracts, and very often, Slovak citizens working abroad. Also, youth unemployment last year in several countries of the European Union reached new historical highs.

You are always in communication with employers. How are they responding to the current situation?

During the financial crisis and later after the start of the economic recession, there was limited initial impact on the labour market. This is partly because of the standard six-month lag between the decrease in production and job losses, but also due to the fact that labour demand had started to adjust through flexible working conditions (e.g. part-time) rather than by reducing employment. The negative impact of the crisis on the labour market was felt in the second quarter of 2009, and this trend is expected to continue in the next few months in the European Union, although in a more moderate form. In 2010, unemployment in the EU will increase by approximately 1.1%.

Let us return to the European market. Can you help us see things more clearly through figures?

Despite the clear signs of deterioration, the situation in the European labour market was relatively stable, given the sudden nature of the economic downturn. Unemployment rose, but not to a level that could be expected from the severe economic recession and a significant drop in confidence. Despite the greater economic downturn and further weakened business confidence in the EU, in comparison with that of the U.S.A., the situation in Europe was not as dramatic (unemployment rate in EU in September 2009 increased by 2.1%, compared with the previous year, while in the U.S. it increased much more dramatically – by 3.6%). Although the unemployment rate in the EU since last spring has seen an upward trend – by September 2009, it reached 9.2%; compared with spring of 2008 this was an increase of 2.5%. The total number of unemployment workers increased by more than a third (38%), i.e. by 6 million and reached 22.1 million people.

What are the indicators in Slovakia, for comparison?

In this context, the crisis hit Slovakia quite hard (while the unemployment rate peaked in December 2009 at 12.66%). The causes are well known, above all, it is the widely open economy, its export-focused character, low diversification in the manufacturing sector and large dependence on the automobile industry, high drop in cross-border mobility of Slovak Republic citizens and a significant decline of employment opportunities abroad. Unlike other states of the European Union, Slovakia has low self-employment; registered unemployment rate is linked to the compulsory health insurance payments, increased growth in undeclared jobs, etc. In the period from August 2007 to August 2008, unemployment rate in Slovakia had been steadily declining, then it levelled out, and starting in September 2008, it began to increase. In spite of this trend, the position of Slovakia in the EU, with regards to unemployment, changed. In March 2008, Slovakia had the highest rate of unemployment in the EU (Eurostat), – a position that remained unchanged since November 2006. In November 2008, Slovakia was in 25th place; in September 2009, it went up to the 22nd place. Five countries are worse off than Slovakia in this respect, in Latvia – 19.9% (annual increase of 11.9%), Spain – 19.7% (annual increase of 11.8%), Lithuania – 13.9% (annual increase of 8.9%), Estonia – 13.8% (annual increase of 9.8%) and Ireland – 13.3% (annual increase of 6.5%). The annual increase in unemployment in September 2009 in Slovakia was only 3.2%, which is a good indicator in comparison with those countries. Even though the Slovak economy in the third quarter of 2009 contracted by 4.9%, in comparison to the previous year, our economy had recorded a second consecutive quarterly improvement. The third quarter showed a 0.4% increase in production over the second quarter, suggesting that the harsh impact of the recession was subsiding. The economy is recovering, but remains in the „red“. In the third quarter, Slovakia's gross domestic product (GDP) totalled €16.5 billion. A total of 2,178,000 people were economically active. Employment however, suffered an annual decrease of 3.7% in the third quarter of 2009. The quarterly GDP growth is especially due to the development of industrial production. Industrial production has improved over the second quarter by 9%. This recovery is also connected to a recovery in foreign demand (especially the moderate economic growth in Germany and France), and due to some fiscal incentives, for example scrapping bonus.

What do you see happening in the nearest future?

The labour market conditions in the EU are likely to become a bit worse. Despite the recent encouraging economic signs, the full impact of the economic crisis on the labour markets, in part at least, has yet to be felt. While the overall labour markets have shown to be quite resilient, we expect that in the years 2009 – 2010, the EU will lose approximately 7.5 million jobs, thus the level of unemployment by the year 2010 will likely reach 10.3% – i.e. 3% more than in 2008. As employment lags behind the economic conditions, and according to most forecasts, expectations are that despite the recovery of the European economy, relatively little economic growth will occur in the next few years. The most important measures, implemented to mitigate the downturn in economic activity, established in the autumn of 2008, were felt only in 2009. Expectations are that labour market conditions will worsen for some time to come, even after the revival of economic growth. Signs point to an excessive accumulation of labour capacity, as until now most measures were focused on reduction of labour productivity rather than job losses. Another mechanism used to adapt to the reduced demand and the sudden economic downturn, were concessions in terms of the wages – workers settled for lower wages in order to keep their jobs. Overall, the EU labour market adapted to the crisis by reducing labour productivity, rather than reducing employment. In Austria, Belgium, Germany, Italy and the Netherlands, almost all labour market adjustments were in terms of lower productivity, with almost no reduction in employment. Businesses and companies consider the lower labour productivity as a temporary phenomenon and try to avoid destroying skilled human capital that they really need. In addition, public policy sought to curb the rise in unemployment through a variety of proactive measures and incentives, such as increasing the quantity of public sector jobs, or providing state assistance to help maintain jobs in companies. Until the labour productivity of the workforce returns to levels that are more normal and until labour costs come down, the price competitiveness of firms will not improve. There is a significant risk of further increasing the accumulation of labour productivity in the coming months, leading to a further deterioration in terms of unemployment, until economic activity significantly increases.

Do you see any possible solutions?

Policies to support the economy and mitigate job losses were of particular importance in the medium term, as any increase in employment will delay economic recovery. Europe, including Slovakia, must not only tackle the recession, but use this opportunity to create a more productive, a more innovative and greener economy, with a higher-skilled labour force, economies with open and inclusive labour markets, which offer more and better jobs for men and women . This should not be a one-time effort, but a continuous and coordinated process involving not only structural policies for the labour market, but also measures in other policy areas such as education, environment, and the like. The European labour markets must change significantly after this crisis, and companies and their employees should be given the necessary tools and incentives for successful adaptation to this new reality while respecting inclusion, equality and social justice. Flexicurity, combined with comprehensive active inclusion policies, will continue to be the correct approach to modernizing the labour markets and ensuring a successful recovery.

The Slovak reality in the labour market, it is possible to say, is to provide adequate opportunities for the economic development of our country and improving the economic situation of our major economic and trading partners. Are you not afraid of further turmoil and dramatic reversal of development?

I do not fear that there will be any dramatic changes or turmoil in our labour market. On the contrary, all indications suggest that a gradual, albeit very modest economic recovery in the economically crucial partner-countries, will increase the GDP in Slovakia and should translate into stabilization and gradual reduction of unemployment this year.

The three priorities identified by the European Council, remain the basic policy framework for our employment policy.

• The maintenance of employment, job creation and support of mobility.
• Skills development and their alignment with labour market needs.
• Increasing access to employment and family income support.

The severity of the current recession is a legitimate reason to continue the employment policy, the active labour market policy, to strengthen these and to ensure income support for those most in need, even if a slight increase in GDP is expected. Consequently, emphasis should be placed on a gradual transition from the short-term crisis responses, to structural labour market reforms aimed at stimulating the growth potential and attracting people to an active labour market.

More: www.eures.sk

Author: Martin Hakel

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