Inclusive Growth

Is Europe Facing a Lost Generation?

Zsolt Darvas of Bruegel discusses the future of inclusive growth in Europe.

Is Europe Facing a Lost Generation?

March 17, 2017

A groundbreaking report by researchers Zsolt Darvas and Guntram B. Wolff of Bruegel, a leading think tank in Brussels, tracks changes in social mobility and inequality in Europe over the past few decades. The report is the first to combine in-depth research, detailed data and policy analysis with a focus on inclusive growth.

Their findings cast Europe in distinct contrast to the US, with less poverty and income inequality. However, they also find some disturbing trends in high youth unemployment and limited social mobility that, without business and government attention, could leave a generation behind.

We talked with the lead author, Zsolt Darvas, to dig deeper into the their findings.

What is the key takeaway for readers of your report?

Zsolt Darvas: The key message is that the social problems in Europe are very different from the US and Asia and Latin America. In Europe, inequality as a whole is not such a major issue. The same applies for poverty, which is rather low in the EU. That said, we have two major issues. One is unemployment and the other is social mobility, which varies a lot across EU countries. Southern Europe or the UK has low social mobility, for example.

What is social mobility and why does it matter?

Darvas: Social mobility is whether children born in a particular socioeconomic class has the potential to move out of that class when they grow up. Why it matters? It’s an issue of fairness. Talented and hardworking people should have opportunities to progress. It also matters because if a person is stuck in the bottom 10 percent of earners with no chance to rise, that’s a tragedy. But also, for politics and the larger economy, inequality matters. Higher inequality can lead to higher volatility in economic developments. We found that higher inequality supported “leave” votes in the Brexit referendum.

Youth unemployment is particularly alarming, especially in southern Europe. The share of young people aged 18-24 who are neither employed nor in school is about 15 percent in the EU overall, but as high as 29 percent in some southern European countries.

Darvas: High unemployment should be the prime target for governments. Long spells of unemployment erode skills and discourage labor market participation. Youth unemployment is especially alarming and can undermine whole careers. It risks creating a lost generation, with trickle-down effects for fertility rates. We need more focus on integrating people into the job market. Countries with high unemployment could focus on improving education and providing more vocational training. Regulations could be instituted that favor the employment of the young (for example, through the tax system), and of course, creating conditions for robust economic growth.

What can government and policymakers do?

Darvas: Social policies play a role in limiting inequality in Europe. That’s clear from the fact that net inequality is much lower in the EU than in the US. That is, “market inequality”—the income distribution arising from market forces—is about the same in Europe and the US. But if you look at inequality after government taxes and social transfers, then Europe is much more equal than the US.

That said, some countries are more efficient in their welfare policies. Scandinavian countries, for example, spend similarly (or more) on social policies but have much less inequality than southern Europe.

Darvas: That’s right. Many in southern Europe say, “We need more money.” That’s not the case. Instead, if the money were spent in a more efficient way, they could achieve much more. Yet if they really need more money, they could actually collect taxes (tax evasion is typically highest in those inefficient countries) and could, for example, have more progressive taxes on income and wealth.

They should also provide more support for children, and more targeted support. The rich don’t need support for their children, but if someone comes from a family where half the time father is unemployed, then he can’t provide a good education for his children. So, more targeted, more progressive, more fair.

What should researchers be looking at going forward?

Darvas: One issue is this so-called wage-share in national income. We find that the share of wages to GDP (total income) is coming down in number of countries. [That is, more of a country’s total income is going to people with assets like real estate or stocks than people earning wages.] Some people say that this is due to globalization, but there is clearly room for a discussion of what’s driving this issue.

Another possibility is the role of inherited wealth. A study found that families who were the richest families 700 years ago are still the richest. An inheritance tax is a powerful tool for addressing wealth inequalities. If someone is superrich, why not pay a large tax on what he inherits and then prove how talented he is by earning a living?

There’s also the skills gap, right? In the US, the demand for high-skilled workers is driving wages to rise for those workers. In Europe, this is not happening.

Darvas: That’s right. The findings in the report for Europe are opposite of what’s happening in the US, and in fact in a number of countries: high-skilled workers are seeing wages decline relative to lower-skilled workers. Europe has robots too, but it’s not inevitable that this new machine age should lead necessarily to inequalities. It’s not happening in Europe, and why that is should be explored more.

Are you optimistic for Europe?

Darvas: It depends on what we mean by optimist. I’m a bit more optimistic about the future of the EU and its economy than many, and one reason is that economic growth and job creation have restarted in all 28 EU member states. Some major institutional reforms, like the banking union, will make the EU economy more stable. The biggest issue is youth unemployment, and here job growth is a positive sign. On the other hand, whether government will do more to make the social protection system more efficient and the tax system more progressive, I’m less optimistic.

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