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By Andreas Charalambous and Omiros Pissarides
Unemployment has traditionally been viewed as a major macroeconomic challenge, with implications far beyond the economic sphere, extending across the political and social spheres. However, more than a decade after the 2013 financial crisis, the situation in the European Union, including Cyprus, appears to have fundamentally changed.
The EU average unemployment rate is around 6.5%, the lowest since 1988. At the same time, even in periods of slow growth, there are severe labor shortages, especially in low-skilled occupations.
A key factor behind the new trend is an aging population, with a shrinking domestic workforce due to rising living standards and complex social attitudes. Aging affects all developed economies, and developing economies are increasingly affected by it, including China.
In the past, labor shortages were mainly addressed by immigration from southern Europe and later from eastern European countries to central and northern Europe. But recently, these sources of immigration are actually drying up, as southern and eastern European countries themselves face similar demographic problems.
The growing problem is attributed to three factors: (a) growing resistance to immigration and foreign employment, especially those from non-European countries with different cultures, and ineffective policies to deal with the social integration of large numbers of refugees and asylum seekers; (b) social changes and evolving career expectations since the outbreak of the pandemic, which have prompted people, especially young people, to seek jobs with flexible employment conditions, such as working from home and adjustable working hours; and (c) limited labor mobility, which favors high-demand occupations.
The science clearly shows that incentives for fertility don’t work. So what are the appropriate policies to adapt to the new reality?
First, develop a long-term strategy for selectively attracting immigrants, focusing on both high-skilled occupations and low-skilled occupations where shortages exist.
As for the former, it is recommended to develop active policies to support industries related to cutting-edge technologies and the green transition, as former ECB President Mario Draghi suggested in a report.
In the latter case, migrant selection procedures should include qualitative and quantitative objectives and cover genuine labour needs, with appropriate skills and qualifications assessment criteria. Support measures aimed at helping migrants integrate into society are also needed.
Second, the EU should encourage employment for the non-working workforce by: (a) addressing the root causes of the problem through appropriate training and more effective career guidance for students; (b) removing existing tax and other disincentives that currently have a negative impact on flexible forms of work, including part-time work, working from home or abroad, and flexible working hours; and (c) adopting and implementing progressive retirement systems that allow voluntary employment after the age of 65, consistent with the higher life expectancy of our time.
Andreas Charalambous and Omiros Pissarides are economists
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