Youth unemployment in old Europe: the polar cases of France and Germany

The Great Recession broadly affected labor markets around the world, but individuals in vulnerable positions were strongly hit—including the young generation. Although entry into the labor market already posed major challenges before the crisis, the Great Recession has intensified cross-country differences. Among others, Bell and Blanchflower (2010,2011a,2011b) analyze this new rise in youth unemployment after the crisis with a particular focus on the United Kingdom and the United States. In fact, while in some countries youth unemployment was hardly affected during these times of trouble, it dramatically increased elsewhere and reached new record highs. This demonstrates the crucial role that institutional settings and public policies can play in influencing school-to-work transitions.

France and Germany are two extreme cases in Europe. Whereas Germany has hardly been affected by rising youth unemployment, France is one of the European countries in which a “lost generation” of young individuals who enter the labor market under the current adverse economic conditions could become a tragic reality. How to effectively tackle the youth unemployment problem has therefore become a major concern and policy issue in Europe—not only because of its immediate negative impacts, but also because early adulthood unemployment creates long-lasting scars affecting labor market outcomes much later in life (Schmillen and Umkehrer, 2013).

However, before starting any policy action, it should be clearly understood how youth unemployment can be tackled most effectively. Therefore, to select measures that successfully target the roots of the problem, this paper aims to provide empirical evidence for informed policy decisions. More specifically, we focus on the question of why Germany performs exceptionally well in terms of youth unemployment while France does not. The interactions of economic and demographic factors, along with labor market institutions, are central in explaining cross-country differences in youth unemployment. Our analysis thus considers the following aspects separately: a) the Great Recession’s impact on labor demand patterns, the economic structure and economic growth; b) labor market institutions, labor policies, education and vocational training designed to enhance the labor market prospects for disadvantaged youths; and c) demographic trends, in particular the size of younger cohorts determining young people’s labor supply.

The remainder of this paper is organized as follows. Section 2 presents stylized facts which lead us to conclude that France and Germany are indeed two polar cases in the debate about rising youth unemployment in Europe. Then in Sections 3, 4 and 5 we explain the differences in youth unemployment between the two countries by separately analyzing the Great Recession’s impacts, labor market institutions and labor policies for youths, and demographic trends. We summarize concrete policy proposals to fight youth unemployment in France in Section 6 and discuss policy responses and general lessons in a broader perspective in Section 7. Finally, we conclude in Section 8.

Figure 1 shows the development of youth unemployment in the United States and Europe from 2000 to 2012. Clearly, there has been a strong rise in youth unemployment on both sides of the Atlantic after the beginning of the Great Recession in late 2008. However, there are significant differences in the respective levels. In the early 2000s, European youth unemployment had already been about twice as high as in the United States. The Great Recession’s impacts have to some extent reduced this gap, but the European Union’s figures still by far exceed those of the United States. By the end of 2012, youth unemployment in the European Union stood at 23.3 percent, while it was at 16.3 percent in the United States.¹

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Within the European Union, however, there is a substantial degree of heterogeneity in youth unemployment. France and Germany can be viewed as two extreme cases in this regard. In the first case, France basically follows the pattern that can be seen across the European Union, albeit on a slightly higher level. For example, by the end of 2012, the French youth unemployment rate was at 25.5 percent. On the other hand, youth unemployment in Germany has been falling relatively steadily since its peak in the beginning of 2005. Even the Great Recession had only a modest and short-term impact; and by the end of 2012, the youth unemployment rate stood at 7.8 percent in Germany.

Even though unemployment is a key socio-economic indicator, it only provides a partial view of youth’s situation. For instance, it does not provide information about individuals outside the labor force. While some are inactive, many of those aged 16 to 24 are still in the education system. As a result, the share of active youth in this age group is often small. Furthermore, in some countries students often combine work and education and therefore are looking for a job. For this reason another useful indicator is the share of youth which is not in employment, education, or training, also called the NEET rate. This category is comprised of youth either looking for a job (while not studying), or inactive (often discouraged).

Figure 2 shows how this rate evolved in the United States and Europe from 1997 to 2011 among youth aged 15 to 19 years (Panel A) and 20 to 24 years (Panel B). Trends and differences across countries turn out to be similar to those observed for the unemployment rate. For the youngest group, the NEET rate is of comparable size between the United States and Europe; however, it is strikingly lower in Germany compared with the European average (notably with France) as well as the United States. The difference has been relatively constant and only slightly growing during the 2000s. Thus, Germany now boasts a rate twice as low as France at 3.5 percent.

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Among those aged 20 to 24, the NEET rate is two to three times larger than it is for the younger group and much more volatile in all countries. This reflects the fact that many young people finish their initial education and enter the labor market at this age. However, the same differences between countries can be observed: a declining rate in Germany, now almost twice as low as in France and Europe at 12.5 percent in 2011. For this age group, France now features one of the highest rates in Europe, at 20.5 percent, just behind Spain, Italy and Greece (between 25 to 30 percent). However, it is worth noting that the striking differences in this age group have emerged only since 2005, when France and Germany shared a similar NEET rate.

France and Germany are thus two polar cases with respect to youth unemployment and inactivity in Europe. However, what factors can explain this diametrically opposed pattern? As pointed out above, the Great Recession had different impacts on youth unemployment in the two countries. Hence, we analyze this issue in greater detail in the next section.

If the impact of the Great Recession had been different between France and Germany, it would at least partly explain the different development of youth unemployment in these two countries. Figure 3 thus displays the Great Recession’s impact on Gross Domestic Product (GDP). Accordingly, output declined to a similar extent on both sides of the Atlantic, although countries in the European Union were on average even more strongly affected than the United States. However, the largest output drop in all countries was in early 2009.

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When comparing output decline between France and Germany, the impact of the Great Recession in terms of GDP was apparently weaker in France. The output drop in Germany exceeded both the average in the European Union and even the one in the United States. On the other hand, recovery took place earlier and was stronger in Germany than in France and the European Union average. Already by 2010, Germany performed just as well as France and the United States when using the respective GDP pre-recession values as a benchmark. Hence, the Great Recession’s impact on GDP was not too markedly different between the countries considered here. If anything, one may conclude that its immediate impact on output was smaller in France than in Germany, but recovery was both earlier and stronger in Germany. However, the crisis’ impacts on the labor markets may have been different.

And indeed, Figure 4 shows that the labor market impacts of the Great Recession greatly varied between countries. Adult unemployment rates have generally increased since late 2008, but the extent to which they have increased—and subsequently decreased (or not)—is very heterogeneous. Adult unemployment in the United States strongly increased. It more than doubled from roughly 4 percent to more than 8 percent in 2009 and 2010. But since then it has been falling, and by the end of 2012, it was at 6.5 percent. In contrast, adult unemployment in the European Union did not increase as strongly. Although it reached a similar magnitude of about 8 percent in 2009 and 2010, it had already been at a higher level than in the United States before the crisis started. Importantly, adult unemployment has continued to increase since 2011 in the European Union while it has been falling in the United States.

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Adult unemployment in France closely resembles the pattern observed for the entire European Union. It therefore noticeably increased during the Great Recession and has not fallen since. By the end of 2012, adult unemployment in France was at 9 percent. In stark contrast, the crisis had only a very modest impact on adult unemployment in Germany. Its steady decline since the peak in 2005 has been just briefly interrupted, but otherwise adult unemployment has continued to fall. By the end of 2012, it stood at 5.1 percent.

The resilience of Germany’s labor market during and after the Great Recession is very remarkable—and exceptional. Sometimes labeled as a “new economic miracle,” the country’s success story has received a lot of attention and several studies analyze its underlying mechanisms. Representative for this literature, Rinne and Zimmermann (2012,2013) argue that the interaction of different factors resulted in employment adjustments mainly at the intensive margin. Among these factors is the specific nature of the economic shock that hit Germany (mainly export-oriented sectors were affected), the concrete policy responses during the critical period (e.g., short-time work), the significant reforms that had improved the functioning of the labor market (“Hartz reforms”), and long-term demographic trends that are expected to result in shortages of skilled labor.

Although the Great Recession’s impact in terms of GDP was similar in France and Germany, the French labor market was much more strongly affected than the German one. This is true in terms of both adult and youth unemployment. Although this fact can explain at least part of the differences in youth unemployment between the two countries that we currently observe, it is important to additionally consider the development of the youth-to-adult unemployment ratio over time. By doing so, two additional questions can be answered. First, one can assess whether adults and youths were affected by the crisis to a similar extent. Second, the youth-to-adult unemployment ratio can be viewed as an indicator of potentially existing structural problems with the labor market integration of youths in a given country.

Figure 5 displays the youth-to-adult unemployment ratio during the period from 2000 to 2012. For the European Union, this ratio has practically been constant over time, rising slowly until 2008 and falling thereafter. During this period, youth unemployment was about 2.5 times higher than adult unemployment. Importantly, we do not observe any substantial impact of the Great Recession on this ratio in the European Union. Therefore, the two age groups were similarly affected by the crisis. In contrast, the youth-to-adult unemployment ratio substantially dropped in the United States at the start of the Great Recession. While it had been at around 3.0 until 2008, it fell to less than 2.5 afterwards. Thus, in the United States, the crisis affected youths to a much smaller extent than what could have been expected.

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The youth-to-adult unemployment ratio in Germany has been at a very exceptionally low level, close to 1.0 in the early years. Although it significantly increased during the early 2000s, it has been around 1.5 since 2005 when the labor market reforms took place. Consequently, we do not observe any effect of the Great Recession. In France, the ratio is notoriously high, with values rising over 3.0 in 2009 but falling below 3.0 thereafter. This ratio remains above the European Union’s average, however. This is first evidence that structural differences in youth unemployment exist between France and Germany.

To further assess this issue, we perform a decomposition exercise. More specifically, we decompose the evolution of youth unemployment into a component which is specific to youths (the youth-adult ratio) and another which refers to the older population (the adult unemployment rate). Based on the observation that the youth unemployment rate can be expressed as the product of the adult unemployment rate and the youth-to-adult unemployment ratio, we calculate two counterfactual youth unemployment rates. For counterfactual 1, we take the German youth-to-adult unemployment ratio and multiply it by the French adult unemployment rate. Comparing this with the actual French youth unemployment rate should give us a solid impression about the extent to which country differences are due to youth-specific factors (i.e., due to differences in the extent to which unemployment affects young and older individuals differently in the two countries). For counterfactual 2, we multiply the French youth-to-adult unemployment ratio by the German adult unemployment rate, and compare it again to the actual French youth unemployment rate. Relying on the observations that the German adult unemployment rate was hardly affected by the crisis and the youth-to adult unemployment ratio remained approximately constant in France, this analysis should reveal the importance of factors that affect the unemployment rate of the whole population in France.

Figure 6 displays the results of this counterfactual analysis. When focusing first on counterfactual 1, we clearly see the importance of youth-specific factors in explaining the differences in youth unemployment between the two countries. If France had faced the same youth-to-adult unemployment ratio as Germany, its youth unemployment rate would have actually been lower than the German rate—at least until 2009. After the Great Recession had hit both countries, the situation changed. Counterfactual 2 indicates that factors affecting unemployment more generally gained importance since then. The German labor market was very resilient to the economic shock (Rinne and Zimmermann, 2012,2013) which made the overall economic situation, especially in terms of unemployment, substantially more favorable in the German context. However, youth-specific factors still play a very important role as counterfactual 1 remains well below the actual French youth unemployment rate, also during the crisis.

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It is therefore important to analyze the labor market institutions and policies that shape youth labor market integration in France and Germany. This is done in the next section.

Institutional settings and public policies can play a crucial role in influencing school-to-work transitions. As shown above, the French youth-to-adult unemployment ratio—as well as the NEET rate—are about twice as high as in Germany. We therefore assess which labor market institutions and labor policies can explain these structural differences. Our analysis focuses on the following issues: a) vocational education and training; b) minimum wages and employment protection; and c) activation measures and labor policies. In addition, as labor market entry poses a particular challenge for low-qualified youths, our subsequent analysis has a special focus on this population group.

Minimum wages and employment protection

Labor costs can be an important barrier in the transition from school to work—in particular for low-qualified job seekers. A number of studies show the detrimental employment effects for young people when a minimum wage is set too high (Abowd et al., 2000; Kramarz and Philippon, 2001; Neumark and Wascher, 2008).⁴ As a general rule, studies on labor demand effects estimate that a 1 percent increase in labor costs reduces employment of the low-skilled, a group in which unemployed youths represent a large proportion, by 1 percent (Cahuc and Carcillo, 2012).

Labor costs in France are characterized by a minimum wage level that is the highest amongst OECD countries with regards to 20 year-old workers (Cahuc et al., 2013). Monthly labor costs at the current French minimum wage amount to €1,616 for a full-time position. This creates not only a substantial barrier for low-skilled job seekers to access employment, but it is also a complex issue for society. A large number of young people in France are not sufficiently qualified to be as productive as the minimum wage requires them to be.⁵ This certainly limits their chances of finding a job. While other countries allow a reduced minimum wage for young people compared to adults, France has not adopted such an approach—apart from select exceptions.⁶

Germany follows a different approach. There is no national statutory minimum wage, but minimum wages are negotiated by industry and occupation among the social partners. They can be declared as legally valid for a whole market segment by a governmental commission. In principle, the state does not intervene in this process much, at least so far.⁷ Figure 7 displays the result. Excluding apprentices, 30 percent of low-skilled young Germans who are employed have labor costs between €7 and €10 per hour. However, it should be noted that the German welfare system generates an implicit minimum wage, which may similarly act as a barrier to access employment for youths. Müller and Steiner (2009) calculate the implicit minimum wage as the hourly wage which would yield the same net income in a full-time job as long-term unemployment benefits. They find an implicit minimum wage of less than €5 per hour (around €600 per month) for singles without children, which is the typical situation for youths in Germany.⁸ Moreover, if youths still live in a household with their parents, they will typically have no access to these benefits since eligibility is assessed at the household level. Welfare generosity should thus not provide disincentives for German youths.

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A related argument in the German context is that job quality has deteriorated in general, with an increased segmentation of the labor market and an increased share of low-pay work. However, these issues are not particularly age-related, but are rather driven by skill levels and occupational change (Eichhorst et al., 2013b, p.81). The vast majority of skilled younger workers still have decent prospects of entering open-ended contracts in Germany. This is also the case for those who have successfully completed a dual apprenticeship.

Nevertheless, there is a popular myth that German labor market reforms have created a growing low-wage sector with precarious jobs. The introduction of a statutory minimum wage thus appears as the “silver bullet” in the political sphere to combat this unintended side effect. However, who would actually be affected by—and potentially benefit from—a minimum wage of €8.50 or €10? These are the values currently being discussed. Figure 8 shows that actually only a small fraction of full-time employees would be affected. On the other hand, larger fractions which would be affected include the marginally employed, pupils, students, pensioners, unemployed, employees in jobs requiring no formal qualifications and younger workers.

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As a result, even a relatively high minimum wage of €10 would reduce income inequality only by 1 percent (Brenke and Müller, 2013). There are a number of reasons why this is the case. Low-wage employees are not concentrated in poor households, but are rather distributed along the net household income distribution. Many are secondary earners contributing additional income to relatively rich households. Hence, the effects of a minimum wage would be cushioned by the tax and transfer system as many low-wage earners face high marginal tax rates. Effects on income inequality would then be even lower assuming that a minimum wage increases the risk of becoming unemployed for the individuals who are affected. Moreover, this increasing risk may be particularly concentrated among young individuals who enter the labor market for the first time.

Ideally, the labor market gradually compensates for inequalities resulting from different initial education levels by allowing non-graduates to acquire professional skills on-the-job. However, this is not the case in France. Unlike many comparable countries, where inequalities resulting from different initial education levels gradually dissolve, the French labor market actually tends to emphasize them. This is related to the strong and increasing segmentation of the French labor market. On the one hand, there are employees in permanent contracts, protected by many rules, which ineffectively protect employees as well as result in very uncertain outcomes for employers, often leading to contentious litigation. On the other hand, there are employees on fixed-term contracts for which the terms and costs are precisely known in advance. Importantly, this dualism has increased since the early 1990s and today more than 90 percent of employees are hired on fixed-term contracts.⁹

In France, this segmentation of the labor market affects young people more strongly than in other countries. In 2009 fixed-term employment was five times higher for young people than for adults (Cahuc et al., 2013). In comparison, this ratio is around three for Denmark, the United Kingdom as well as the average in OECD countries. Only in Austria, Germany and Switzerland does this ratio exceed the one in France. As described above, this can be explained by the fact that these three countries have a long tradition of dual apprenticeship systems. In these countries, temporary employment of young people is thus not necessarily synonymous with job insecurity, but rather part of their vocational education.

Historically, the increasing use of fixed-term contracts in France coincided with rising youth unemployment. The reason why a strict separation between permanent and temporary jobs may create additional unemployment is quite obvious. As terminating an open-ended contract is expensive and accompanied by legal complexity which causes great uncertainty, French firms increasingly rely on fixed-term contracts. This type of employment is much easier to handle, and therefore firms are adopting it more and more. Many firms therefore “turn” towards short, or even very short, fixed-term contracts. Therefore, often in between two fixed-term contracts, workers register as unemployed. However, finding a new job takes time, especially when the public employment service is poorly equipped to cope with the permanent inflow of job seekers. Thus, the intensive use of fixed-term contracts tends to inflate unemployment figures. Fixed-term contracts moreover only act as stepping stones towards permanent contracts for qualified workers (Junod, 2006). This causes related problems. For example, workers on fixed-term contracts encounter difficulties finding accommodation or to obtain a mortgage since workers with permanent contracts are preferred.

The French labor market is thus characterized by a high minimum wage and strong segmentation. This hampers school-to-work transitions, particularly for low-qualified youths. While labor market segmentation has also been increasing in Germany, effects on youths are not as detrimental. This can be attributed to labor costs, but to a large extent also to the dual apprenticeship system absorbing many youths during a critical stage of their career.

Population aging is not unique to European countries yet is a worldwide phenomenon. For example, Asian countries also face this challenge because of policy measures (e.g., the one-child policy in China) or gender preferences (in favor of sons). Lutz et al. (2008) investigate the future paths of population aging that the world’s regions are likely to follow. They show that—with the exception of Sub-Saharan Africa—the average population age in all regions of the world will significantly rise until 2100. However, the extent to which populations will age varies across the globe¹⁴—and also throughout Europe. The fertility rate is an important factor underlying this heterogeneity. Moreover, this rate is crucial when assessing cross-country differences in youth unemployment, as the size of younger cohorts directly determines young people’s labor supply.

Figure 9 therefore displays the development of the total fertility rate in the European Union, France and Germany over the last decade. While French fertility has been slightly increasing to values around 2 in recent years, fertility in Germany has been substantially lower, constantly below 1.4. The fertility rate in the European Union lies between the French and the German one, although in recent years it has been slightly increasing to values around 1.6.

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As fertility rates are a crucial factor in determining population aging, the projected population sizes by age group look significantly different for the two countries. Future demographic trends put Germany in a relatively advantageous position in terms of youth unemployment when compared to France.¹⁵ Although this fact should not be neglected when discussing youth unemployment in a comprehensive context (e.g., these trends may influence the current situation of youths to some extent through possible changes in firms’ recruitment strategies), the development of recent cohort sizes is clearly more directly related to current youth labor supply.

Figure 10 depicts the proportion of the population that is aged between 15 and 24 years in recent years. In the European Union as well as in France and in Germany, population shares of youths have been decreasing since at least 2007. These decreases are moreover similar in magnitude (about 1 percentage point). Hence, there are no indications that recent changes in the size of cohorts of labor market entrants play a substantial role in explaining the differences in youth unemployment between France and Germany. Future projections, however, are different for the two countries.

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Although to some extent a number of factors can explain the diverging trend in youth unemployment between France and Germany, the bottom line of this comparison does not change: the situation in France is very alarming and the future prospects of French youths are increasingly dire. This is a socially explosive situation and politicians must act now to avert a lost generation.

There are several underlying causes for this development. First, the share of high-school dropouts is relatively high in France. In fact, one-fifth of these dropouts never graduate. In total there are now over 900,000 young adults in France without a high-school diploma. Second, the strong segmentation of the French labor market is particularly detrimental for young labor market entrants. During the past several years, atypical employment and fixed-term contracts have been five times more common for youths than for adults. Finally, a relatively high minimum wage creates an additional barrier in the access to jobs. In light of these findings, Cahuc et al. (2013) derive a number of concrete policy proposals (see the Additional file 1: Textbox: Proposals to fight youth unemployment in France.).

Cahuc et al. (2013) propose, for example, the implementation of effective activation measures similar to the German principle of “supporting and demanding” (Fördern und Fordern). Current structures and methods in France that are dedicated to support young people in difficulty are insufficient. The public employment service thus needs to be urgently given the means to take charge in a targeted and intensive manner for these young people. Next to establishing regular evaluations by independent experts examining the counterfactual situation (“What would have happened in the absence of the program or intervention?”) using modern scientific tools and methods, effective activation measures would include a monitoring program for young people without formal training, as well as a mandatory system of state-sponsored advice and counseling for young job seekers. In addition, a “youth guarantee” scheme should grant basic income support to the age group of 18 to 25-year-olds while at the same time requiring job search efforts or participation in training programs. Moreover, the problem group of school dropouts should profit from a strengthening of existing in-company training programs. Cahuc et al. (2013) also recommend shifting employer training subsidies (e.g., exemptions from social security contributions or financial rewards for offering apprentices permanent employment) towards small and medium-sized enterprises.

More generally, it appears desirable to reduce labor costs for low-skilled youths. This could be done, for example, by increasing the existing reductions of social contributions paid by employers at the minimum wage level, or upgrading the permanent in-work benefit for low-wage workers. A number of studies show that reductions in social security contributions create many more jobs if they are specifically targeted at lower wages (see, e.g., Cahuc and Carcillo, 2012).¹⁶ This is the reason why a specific targeting at lower wages is essential to the success of a policy aimed at stimulating the creation of low-skilled jobs for young people. Cahuc et al. (2013) also call for an expansion of the “second chance” program. On the other hand, they strongly advise against public employment programs without qualification components.

Furthermore, at least over the medium term, it is desirable to introduce a dual training system combining school courses with apprenticeships in firms. Such a system is successfully practiced in other countries such as Germany. Because it directly reflects the human capital needs of firms, the dual apprenticeship system paves the way for labor market integration. Therefore in this respect, France would be well advised to emulate the German system.

Europe’s youth unemployment crisis calls for broad policy action. Eichhorst et al. (2013a) illustrate the worrying scope of this problem in the European context, summarize recent policy responses, and discuss additional policy options. To illustrate the dimensions of the problem in Spain, Italy, Greece and Portugal alone (i.e., the countries that are especially affected by the financial and economic crisis), there are currently about two million unemployed persons aged 25 or younger. In the 27 European Union member states, more than 5.5 million young people were out of employment at the end of 2012. These figures clearly underline the urgency to introduce measures tackling youth unemployment both at the national and European level.

At the European level, the European Commission tries to fight youth unemployment to the best of its abilities. This is done primarily through targeted stimulus and by supporting reform measures in the member states, but also through the program “Youth on the Move.” This program aims to improve general education, vocational training, higher education, and the mobility of young apprentices and job seekers. Additionally, the support of start-ups and an enhanced labor market entrance of young people in EU countries with above average youth unemployment rates are among the goals of this program (European Commission, 2010).

Furthermore, the EU Commission rightly criticizes high school dropout rates and claims that preventive measures exist which should be applied. At the same time, it advises to strengthen the recognition of informally acquired qualifications by EU member states in order to dually modernize training systems and to offer internships to push early labor market experience acquisition in countries lacking this in the vocational education system. Against the backdrop of increasing qualification requirements, it also calls for stronger efforts to modernize higher education in order to significantly increase the number of graduates across Europe.

This concept is furthermore related to several recommendations and decisions of the EU Commission and the EU Council of Ministers. These proposals not only helped to clearly define the planned measures but also provided the respective funding. At the same time, within the program “Youth on the Move,” a European “Youth Guarantee” should be implemented that enables every EU citizen aged between 15 and 24 years to claim the right for employment, vocational training, or participation in a training program. This proposal was inspired by similar approaches in a number of EU countries (e.g., Austria, the Netherlands, Sweden, and Finland). After the European Parliament joined this proposal and called for its legal implementation in January 2013, the “Youth Guarantee” was decided by the EU Ministry Council for Employment and Social Policy (EPSCO) in February 2013 (Eichhorst et al., 2013b). In late June 2013, the EU summit decided to go forward with this concept. However, once converted into national law, EU labor market policy will face the huge challenge to provide every young person with (regular or subsidized) work, training, or an internship within four months after graduating or entering unemployment. The “Youth Guarantee” would thus force government authorities in many countries to cooperate more closely with public and private employment services, schools, universities, vocational training providers, employers and unions.

However, there is great danger that the “Youth Guarantee” will lead to disappointment—which will presumably be blamed on the EU—and substantial economic mismanagement. With the prospect of more than 5.5 million unemployed youths in the EU, the member states would have to go to great lengths in terms of designing and coordinating large-scale national programs to fulfill the “Youth Guarantee” even though (or perhaps because) its budget is more than €6 billion. Experience shows that authorities are tempted to set up extensive public employment and training programs aimed at an immediate effect on unemployment statistics without necessarily creating sustainable employment prospects for the target group.

Hence, instead of devoting organizational efforts and scarce financial resources to this “Youth Guarantee,” other key features of the “Youth on the Move” strategy should be pursued. Additionally, the current crisis states should be encouraged to reform their labor markets in a way that would reduce structural disadvantages for young people and promote the creation of new employment. Ultimately, only structural reforms in the respective countries can substantially improve young people’s employment prospects. European politics should thus maintain the pressure to reform, but not give “guarantees” and raise expectations that cannot be kept.

This issue can be illustrated by the comparison of France and Germany in this paper. The fundamental differences in youth unemployment between the two countries are primarily the result of structural differences in labor market policies and the (vocational) education system. The Great Recession hit France and Germany differently, but its impact on younger and older age groups was not too markedly different. Hence, any programs that do not aim for (and create) sustainable employment prospects will only lead to temporary relief. While this may be a reasonable (short-term) policy objective given the current dimension of the problem across Europe, it should be very clear that such an approach does not tackle the roots of the problem. The roots of the problem are located in the structural design of national labor markets and education systems. Hence, Europe’s youth unemployment disease has to be cured with structural reforms. While the policy proposals for France (see above and Cahuc et al., 2013) can serve as a benchmark, it should be clear that each country has to develop its own concepts since labor market institutions and policies greatly vary across Europe.

France and Germany are two polar cases in the current debate regarding alarmingly high youth unemployment in Europe. This papers shows that there are several factors that can explain at least part of the significant differences in youth unemployment between the two countries. First, general economic conditions differ as the Great Recession had very different impacts on the French and German labor markets. Whereas the impact in terms of GDP has not been markedly different, the German labor market has shown a remarkable resilience to the crisis. Youth unemployment also remained largely unaffected. On the other hand, both adult and youth unemployment strongly increased in France, albeit to a similar extent in relative terms. Second, demographic trends are very different between the two countries. While Germany will face shrinking cohorts of labor market entrants, their number is expected to remain virtually stable in France. This is due to underlying differences in fertility between the two countries. In recent years, however, youth cohort sizes have declined to a similar extent in both France and Germany.

Additionally there are substantial differences between France and Germany in labor market institutions and labor policies. In general, these appear more favorable in Germany with respect to smoothing school-to-work transitions and integrating youths into the labor market. In this context, the established dual apprenticeship system is a very strong German asset. Furthermore, the country has less prominent labor market segmentation than France, and in addition, a national statutory minimum wage has so far not been introduced. Finally, the German approach of the public employment service towards youths appears more efficient in activation than what is currently in practice in France. Hence, when thoroughly considering the factors determining youth unemployment, the strikingly different patterns which France and Germany recently display appear less surprising than at first sight. While it is beyond the scope of this paper to quantify the exact role of each factor, we highlight the importance of labor market institutions and labor policies. These are also the areas in which policy can act—although it should be clear that even the best-designed policy action will not lead to immediate improvements in every case.

It is moreover crucial to thoroughly consider the interactions between labor policies and institutions (e.g., the interaction between vocational education and labor market segmentation). One explanation for the strong segmentation of the French labor market that particularly affects youths can be seen in the country’s vocational education system. Temporary employment only acts as a stepping stone towards permanent contracts for qualified workers. Hence, in addition to making permanent contracts more attractive, it also seems important to provide youths with sufficient qualifications. It therefore may be viewed that Germany’s dual apprenticeship system could be one factor preventing labor market segmentation in France—at least to some extent.

One important general lesson from our comparison is that efficient labor markets are a crucial factor to effectively fight youth unemployment. More efficiency in this regard then calls for structural labor market reforms. This should be accompanied by labor policy with a targeted approach towards youths, for example, strategies involving activation measures. Establishing a vocational training system combining theoretical dimensions in specialized schools with practical work experience in the private sector appears to be the most effective way to smooth school-to-work transitions. Although such a dual apprenticeship system cannot be implemented overnight, as it relies on a broad support of society, the process of gearing efforts towards its implementation can be started today. Finally, it should be noted that more efficient labor markets and more employment may come at the cost of more inequality. In the German case, the solution to this fundamental trade-off has been to balance these aspects over a person’s working life, in particular by providing solid fundamentals, i.e., skills and qualifications, through the dual apprenticeship system.¹⁷ In general, a key factor to avoiding (too much) inequality is education.

While it is crucial to fight youth unemployment in Europe in the short run, many possible improvements can only be achieved in the long run. This includes, among other things, the introduction of dual apprenticeship systems in countries other than Germany, Austria and Switzerland. However, short-term improvements of the status quo, which improve the current situation of unemployed youths, can only be achieved through costly labor policy measures. This includes, for example, a targeted and intensive activation strategy by public employment services. This strategy could be combined with offering (subsidized) training or employment, both of which should importantly be provided by private sector companies. Broad international evidence shows that the provision of employment opportunities in the public sector should be avoided. Private sector work experience paves the way for labor market integration because it directly reflects the human capital needs of firms.

Importantly, this approach does not need to be restricted—and should not be restricted—by national borders. Geographic mobility is a very important channel through which youth unemployment can be reduced in the short-run. Countries like Germany could make an important contribution by training and employing young job seekers from other EU countries until their prospects at home have improved.

In a broader policy context, the German success story over the last decade—i.e., the country’s remarkably quick turn from “the sick man of the Euro” into “Europe’s engine”—raises the question of what other countries can learn from this process. Rinne and Zimmermann (2013) argue that although, in general, it is not possible to directly replicate this success story, there are many features of the German model that other countries should closely investigate. For example, measures that increase the overall functioning of the labor market, e.g., only implementing ALMP measures that prove effective as well as improving the overall efficiency of public employment services, should be considered by other countries. However, one should resist the temptation of believing in a one-size-fits-all solution. Instead, models for a given context have to be developed, which can be inspired by several aspects of the German model. In fact, to copy and steal what works in other countries is the bottom line of evidence-based policymaking—and also of the German experience.

Finally, one should also mention in this context that there is also scope to reform the German model. With respect to youth unemployment, for example, its dual apprenticeship system is nowadays regarded as a role model for many countries. However, only a couple of years ago the same model was broadly regarded as an old-fashioned and inflexible model rooted in medieval, guild-based structures. This criticism is at least partly still valid. Inherently, the system can only slowly adapt to changing labor market needs, especially with regards to new occupations that emerge. Furthermore, the German education system can still be regarded as a system allowing for only limited inter-generational mobility. Also the share of pupils leaving the education system without a formal degree is still too high.

¹The global youth unemployment rate, i.e., the unemployment rate of all young individuals aged 15 to 24 years in all developed and developing regions of the world, stood at 12.4 percent in 2012, which corresponds to an increase of about 1 percentage point since 2007 (ILO, 2013).

²The duration of the training can be reduced to two years due to other (previous) qualifications or due to performance.

³Winkelmann (1997) compares training for young workers in the United States and Germany. A more recent survey by Lerman (2013a) also summarizes the returns to apprenticeship training in a number of countries (including Germany). Lerman (2012) reviews studies according to which apprenticeship training can be effective even in the United States. Finally, Lerman (2013b) makes a strong argument in favor of learning from “best practices” in this regard.

⁴Note that not all empirical studies on the effects of minimum wages on youth unemployment find that these effects are necessarily negative. Counterexamples include Portugal and Cardoso (2006) and Hyslop and Stillman (2007).

⁵About 900,000 individuals in France have no formal educational degree (Cahuc et al., 2013).

⁶For example, exceptions are in place for individuals aged under 18 years and apprentices; however, these situations remain marginal.

⁷Minimum wages have been introduced in some sectors, including the construction sector and temporary agency work. Most parties in Germany are currently open to extent the coverage of minimum wages in the future, and some even support a statutory minimum wage of about €8.50.

⁸Note that Müller and Steiner (2009) calculate higher implicit minimum wages for couples, in particular for those with children; these implicit minimum wages can be as high as €9 per hour.

⁹Behaghel and Postel-Vinay (2003) show that the chance that an employee on a given date will be unemployed a year later doubled in France from the late 1970s to the late 1990s—but only for those who with less than five years of work experience. This change can be almost entirely attributed to the increased use of fixed-term contracts in the French labor market.

¹⁰Examples include the September Guarantee in the United Kingdom, the Youth Guarantee in New Zealand, and similar programs in Denmark and Germany. See Section 7 below for a broader discussion of the Youth Guarantee at the European level.

¹¹The only other two exceptions are Spain and Luxembourg.

¹²This finding is in line with Gurgand and Margolis (2008) whose conclusions also tend to minimize the “inactivity trap explanation” (except for single mothers).

¹³For example, and in contrast to conventional wisdom, receiving benefits is not associated with lower geographic labor mobility (Tatsiramos, 2009).

¹⁴According to Lutz et al. (2008), the world’s regions that are presumably most strongly affected by population aging are Japan/Oceania, Western/Eastern Europe, the European Soviet Union and the China region. North America is likely to be affected to a somewhat smaller extent, but its population aging will probably still exceed that of Pacific Asia, Latin America and South Asia.

¹⁵Whereas the French population is projected to increase from roughly 65 million in 2010 to more than 73 million in 2050, the German population is projected to shrink to less than 71 million during this period. Importantly, especially younger age groups are expected to decline in Germany, whereas their size is projected to remain virtually stable in France. However, older age groups are projected to increase in size in both countries until 2050.

¹⁶A reduction in social security contributions for higher wages results mainly in wage increases and has little effect on employment.

¹⁷However, it remains to be seen whether this model can be sustained in the future. For example, a system of lifelong learning is underdeveloped in Germany. But it is very likely that providing solid fundamentals at the beginning of a career will soon not be sufficient anymore to prepare individuals for the increasing speed at which labor market needs change.