The Impact of the 2007/08 Global Financial Crisis on Employment in the EU - Literature review Example

……………………………………………………………………..xxxxxxx ………………………………………………………………….xxxxxxx ……………………………………………………………………..xxxxxx ………………………………………………………………………xxxxxx @2014 Abstract The current paper examines the impact of the 2007/08 global financial crisis on employment in the European Union (EU). The paper shall present evidence that the financial crisis had tangible consequences on the labour markets of the region and their performance. It shall review the specific impacts of the financial crisis on the determinants of regional unemployment that could have spawned such drastic changes (Marelli, Patuelli & Signorelli 2012, p.8). The study will analyze the impact of the financial crisis at the country level and later consider the impact at the regional level. It is significant to understand that even though countries might be located in the same region, they may respond variously to financial crises and may have different capabilities to withstand their impacts. Literature Review We begin by providing a discussion of “financial crisis” as considered in the literature. It should be noted that financial crises that does not have significant external effects is very different in a worldwide perspective from the international financial crises. Eight episodes formed major international financial crisis since 1870. This paper depicts the whole picture on how the 2007/08 global financial crisis affected employment in the EU. The paper will make use of micro-data based on age, sex and educational attainment to determine the employment rates in EU following the financial crisis (Barakat et al., 2010). Economic model will also be used to the determine impacts of the global financial crisis on employment in the EU. Survey and econometric analysis will be used to estimate the impact of the global financial crisis on national labour market. It is speculated that the long spells without employment has negative effects on individual ‘human capital” and this makes it more difficult in securing jobs. Hence it is speculated that financial crisis will lead to an increase in structural unemployment rate (Jansen & Uexkull, 2010). Financial crisis has been defined by various sets of economic and social variables. Two such variables are the Debt as a percentage of GDP and Deficit/Surplus ratios of a nation. Richard Rahn (2013) in an article in the Washington Times reported that increase in the debt as a percentage of GDP is not only a marker of the impact of a financial crisis but if the ratio increases it will create newer financial crisis in times to come. The new financial crisis will hit the most indebted countries, having large growth deficit (growth deficit means deficit/surplus ratio). Actually the growth deficit is the difference between expected GDP growth and expected spending deficit as a percentage of GDP (Washington Times, 2013). The major conclusions put forward by Rahn were that growth deficit elimination is one of the major strategies to combat predisposal to financial crisis. Growth deficit can be eliminated by increasing economic growth or reducing government spending. The economic growth can be spurred by reducing taxes on labour and capital, eliminating counterproductive regulations and putting an end to monetary uncertainty. The Classical Austrian economists school believes that reducing government spending by itself ( especially when a country is highly indebted) speeds economic growth as it is observed increased government spending tend to waste and misallocate resources. While the Keynesian economists think if a country is not heavily indebted government spending stimulates economic growth (Washington Times, 2013). The emerging countries including the EU have experienced financial crisis since the early 80’s. The studies dating back to the early 90’s reflected that due to the financial crises, creation of jobs to people in those countries became a very huge challenge (Barakat, Holler, Prettner & Schuster, 2010). An obvious result that emerged from empirical literature on past financial crises is that it leads to an increase in unemployment. Studies by Choudhry, Marelli, & Signorelli (2010), showed that financial crisis led to decrease in jobs and production in the mining and manufacturing sectors. Recent crises indicated employment opportunities are lowered due to such economic turmoil. In addition, theoretical literature suggested that the rates of unemployment tend to rise significantly and remain higher for several years following a financial shock. The crises have long term impact causing prolonged lack of employment in the future. Literature also suggests that, after the crises period is over a boom to the economy does takes place. After the boom, a burst is felt in the economy, hence leading to a very confusing state in the economy as noted by Marelli, Patuelli, & Signorelli (2012). They further indicated that the prices of goods and services reduce to a great extent which is also a cause of a very unstable economy. Economic models are being commonly used in studying the impacts of the global financial crisis on the employment characteristics of a nation. The period of 2007 and 2008 was a big blow for the financial sector in the EU. Such crisis hit the EU without any warnings. Such a hit caused there to be a huge crises and turned out to be a very unpleasant shock. In order to sense financial issue in the economy, a country should be able to observe the stocks and financial flow patterns (Terazi & Senel 2010). Further the government of a country is a good instrument to avoid crisis in the economy. Trends of how the government revenues are faring on is a good measure to undertake to avoid such crisis. For example, the stocks, debts, housing and many other sectors should be checked to save a country or states from financial crisis by ensuring that they should not lose value to end into subprime mortgage (Terazi & Senel 2010). The period preceding crisis should first be considered, to create more awareness and prevention of such crisis. It is a crucial step so that the right policies can be implemented to prevent any foreseen future financial crisis. It will indicate a very clear pattern of the economy hence specialists will be able to provide strategic decisions to prevent the fall of the economy. To take reform measures it is important to understand the state of affairs of a nation or region when an economy is in its boom state (Garcilazo & Spiezia 2007). It is seen that during such period, too much investment beyond the normal levels takes place making the economy vulnerable. People make investments without considering for the risk factors associated, when there is a boom in economy. The financial leaders should be vigilant in monitoring the progress and status of economic affairs of a country or a region. It is noted that the crisis in one country creates crisis on a dependant country (Allen& Gale, 2000). This is because when such a country goes down the other countries depending on it for their financial link; end up in a financial crisis. Such situations not only lead to an unstable economy for a country, but also for the region too. Allocation of resources becomes unplanned which impact labour markets and miss-usage of Government funds occur leading to further crisis (Allen& Gale, 2000). A country may fall into the trap of financial crisis due to over dependency on international trade. Studies have shown that such dependency further leads to financial crisis. Research has also indicated that crisis in the economy leads to high levels of poverty and gender inequality (Lethbridge, 2012). This situation is mainly noted in the developing countries, where the women end up either unemployed or receive very low payments. In contrast to this, companies like construction prefer higher number of male employees than females, leading to gender inequality. Gender inequality ends up creating anger among the citizens of that country. Strikes are common, since most people are not satisfied with the current situation (Lethbridge, 2012). The economy runs to a further worse situation as most people are not willing to work at all until their problems solutions are brought on board, which reduces the productivity. Economic crisis also affects the young population, as industries fall back on experienced labour rather than experimentation with new workforce (Lethbridge, 2012). Sector specialization is an important area in determining the economy of a nation during such crisis (Marelli, 2006, p.41). Studies further indicated that manufacturing based countries are in a better position to be saved especially during economic crisis. By manufacturing, one country guarantees that they are independent and can sell their products in other economies even at a higher price. The unique product produced by specific economics should be the key identifier in stabilising that economy (Marelli, Patuelli & Signorelli, 2012). This is possible through increasing the productivity and price levels to ensure maximization of profits for improvement of the economy. A different strand of literature shows that unemployment highly depends on the geographical location and less on the national factors. In Europe, neighbourhood effects are stronger than the state effects (Garcilazo & Spiezia, 2007). EU believe in neighborhood philosophy since good relationships with neighbor countries ensures recovery from a crisis. Strong bonds with other neighbors, also helps to prevent the economy of one country, from falling into the pit. It helps in economy stabilization more than a country having weak or vulnerable economies around. It makes it safer as Europe believes that strong economies near one country will help in maintaining a stabilized economy with no crisis issues (Garcilazo & Spiezia, 2007). In most economies, the financial sector has really grown leading to uncontrollable situations in the economy. Central banks and government are held responsible for financial sector regulation. The way supervision goes on dictates whether there will arise problems in the finances leading uncontrollable situations in future. Therefore the government and central banks in each economy should be able to have in place good management policies which will avoid financial crisis issues (Calvo & Mendoza 2002). Capital relocation ability for the financial markets impacts productivity, when an economy suffers. It brings a negative impact, because the resources are not able to be directed to the most productive uses. These can bring long term problems to the economy hence leading to financial crisis. It follows like a chain whereby the financial crisis leads to a problem in the labor markets (Calvo & Mendoza 2002). For investments to be done during crisis one needs to be first informed about that area to avoid loses or future regrets. Planning will be followed by a good structured information system or whatever method used to get the information. Planning in consideration of the available information makes an investor confident enough to take a certain risk that might aid in improving the crisis (Calvo, 2008). Through information the investors may end up investing more resources hence leading to a boost in the economy. This makes the economy levels to remain in a stable situation. The moment an investor invests without enough information, they may suffer loses and future fears for investment will always remain. They will definitely fear to invest on better economies which can be of advantage to them but they end up being unwilling to do so. This becomes a disadvantage to the economy since most of the highest investors in that economy are not willing to take risks because of past experiences. Finally the economy ends up being unstable and even ending up in a financial crisis (Calvo, 2008). The study Global Financial Crisis shows that the shocks of global crisis have been least transferred to the Indian economy. This has been possible through the finance sector, trade issues and business confidence (Viswanathan, 2010). During the crisis India adopted measures like liquidity, inflation and also stabilization of the interest rates. They tried to employ the above measures to avoid a fall of their economy and also provided a provision for the fiscal stimulus (Viswanathan, 2010). Developing countries are negatively affected by importation verses exportation flows. These countries need to have financial exportation and importation experts to advise on when it is safe to carry out the transactions. Through strategic plans the economies of such countries will be safe on time. Most of the developing countries depend on other donor countries for support. Another country Nepal was not highly affected by the global crisis. This is an example which suggests that countries whose financial market is minimally integrated into the global financial market, is less impacted by global financial crisis. This is an advantage of non-involvement in the global financial market. In case of any crisis in the market, such an economy is safe from financial crisis. Partial participation in the global financial market ensures that an economy is safe, since when the global financial market is in a good state the economy of that particular country will also enjoy the benefits. On the other hand, they need to consider collaborations with neighboring countries so that they can strengthen their finances. Nepal needs to put these issues under consideration since it is not highly developed. For such countries it is important to achieve financial solvency through global collaborations. This will increase the countrys job opportunities and improvement of the infrastructural facilities encouraging foreign direct investments (Viswanathan 2010, p.23). Data Time-series data will be utilized in this study especially estimates and projections during and after the crisis (Choudhry, Marelli & Signorelli, 2010). Micro-data especially touching on sex, age, and educational attainment will be useful in this study (Barakat et al., 2010). These data will help highlight the situation in individual EU member states. The study will also factor in cross-country panel data that helps in the quantification of the relationship between employment and unemployment rates and financial crises (Choudhry, Marelli & Signorelli 2010, p. 5; Terazi & Senel 2010, p.187). Data will be collected from the Eurostat website and economic variables like Debt/GDP and deficit/Surplus ratios will also be extracted. Methodology Survey design will be used in data collection and non-parametric models (World Banks Global Economic Monitor) will help in examining the neighbourhood effects of the financial crisis prevalent in Europe and their strength (Marelli, Patuelli & Signorelli, 2012). Econometric analysis will be used in estimating the impact of the global financial crisis on national labour market (Choudhry, Marelli & Signorelli, 2010). The econometric analysis will take into account pre-crisis conditions, specializations, and trends in the EU regional labour market. Descriptive statistics will be useful in measuring the EU regional unemployment cluster changes (Marelli, Patuelli & Signorelli, 2012). The conceptual framework that the dissertation will follow is that countries with increased deficit /surplus ratio will be heavily indebted which will increase the debt/GDP ratio and either will mark financial crisis or will predict that financial crisis is about to happen, through regression modelling. Then these two parameters (deficit/surplus and Debt/GDP) as the tangible variables (quantitatively measured) to predict financial crisis or the impacts of it like employment rates or unemployment rates again by using regression equations. Results The analysis is expected to show that the global financial crisis leads to an increase in the unemployment rate in the EU region. The persistence of the adverse effects of the crisis on the unemployment rate in the region is projected to have been felt significantly in the second and third years after the crisis but there should be proof that this should recede in the fifth year (Choudhry, Marelli & Signorelli, 2010). Gender dimensions are expected to have significant implications on the impact of the 2007/08 global financial crisis on employment in the EU region. Based on the results of prior studies on the effects of previous global financial crises on employment, the 2007/08 global financial crisis is expected to have affected female employment rate than male employment rate (Lethbridge, 2012). It is projected that the global financial crisis raised the demand for higher educational attainment as people sought to become more marketable in the labour market (Barakat et al., 2010). Finally, the adverse effects of the 2007/08 global financial crisis on employment in the EU are estimated to have had significant impacts on the wage trends in the region. It is expected that the crisis will disrupt the growth rate for real wages in the region (Jansen & Uexkull, 2010). References Barakat, B., Holler, J., Prettner, K. & Schuster, J. (2010). The Impact of the Economic Crisis on Labour and Education in Europe. Vienna Institute of Demography Working Papers 6/2010. Pp.1 – 12. Choudhry, M., Marelli, E. & Signorelli, M. (2010). Financial Crises and Labour Market Performance. 69th International Atlantic Economic Conference Prague, Czech Republic 24 – 27 March 2010. Pp. 1 – 24. Jansen, M. & Uexkull, E. (2010). Trade and Employment in the Global Crisis. Geneva: Switzerland. International Labour Office. Lethbridge, J. (2012). How women are being affected by the global economic crisis and austerity measures. Public Services International Research Unit (PSIRU). Pp. 1 – 18. Marelli, E., Patuelli, R. & Signorelli, M. (2012). Regional Unemployment in the EU before and after the Global Crisis. Alama Mater Studiorium. Universita di Bologna. Quaderni - Working Paper DSE No. 791. Pp. 1 – 25. Terazi, E. & Senel, S. (2010). The Effects of the Global Financial Crisis on the Central and Eastern European Union Countries. International Journal of Business and Social Science, 2(17): 186 – 192. Beck, T., A. Demirgüç-Kunt, R. Levine,(2006), “Bank concentration, competition, and crises: Firstresults”,Journal of Banking & Finance. Marelli, E. (2006). Regional Employment Dynamics in the EU: Structural Outlook, Co- Movements, Clusters and Common Shocks. In F. E. Caroleo & S. Destefanis (Eds.), The European Labour Market: Regional Dimensions(pp. 89-121). 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