ON MAKING A SUCCESSFUL EXIT FROM THE CRISIS

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ON MAKING A SUCCESSFUL EXIT FROM THE CRISIS THE ROLE OF EDUCATION IN THE

ON MAKING A SUCCESSFUL EXIT FROM THE CRISIS THE ROLE OF EDUCATION IN THE IMPLEMENTATION OF EU 2020 Christopher A Pissarides University of Cyprus and London School of Economics

2 Setting the scene • Can education policy help accelerate the exit from the

2 Setting the scene • Can education policy help accelerate the exit from the crisis? • I think not – but it can help offset any long-term impact of the crisis on growth and it can help achieve a more robust growth after it • The prolongation of the crisis is due to the length of time that it is taking to fix the housing market and the financial sector • And to the austerity policy necessitated by the speed that the Union wishes to see sovereign debts fall

3 Role of education • Primary role of education is its contribution to longer-run

3 Role of education • Primary role of education is its contribution to longer-run economic growth • It has a big role to play in the success of Europe 2020, in terms of the quality of jobs and productivity growth • Our first and most important concern should be not to allow the austerity to put at risk this function of education

4 Costs of educational “recession” • Recession necessitates cutting down spending on discretionary measures

4 Costs of educational “recession” • Recession necessitates cutting down spending on discretionary measures – there is bigger pressure this time in Europe than in previous recessions • With education this can be more serious than with other spending, because of the nature of human investments • Public investment can be postponed; the investment can still take place at the end of recession and can still be productive • Education cuts leave a permanent scar on a generation because the affected age groups move on and cannot return to school as if recession didn’t happen • The “scarring” effect can be large and last for decades

5 Educational costs • For this reason it is important to give priority to

5 Educational costs • For this reason it is important to give priority to maintaining the quality of education during recession over (e. g. ) the quality of road construction • Not necessarily excluding teachers’ pay from other public sector pay restraint – but cut salaries within limits to avoid disillusionment and lack of motivation • An unmotivated teacher is bad for pupils; a striking one even worse – teachers are role models • Attracting top graduates into the teaching profession is a sure way of achieving good standards into the long term

6 Educational spending • To ensure that recession does not have a negative impact

6 Educational spending • To ensure that recession does not have a negative impact on education, a minimum of expenditure on education should be off the fiscal balance sheet (e. g. , through special EU loans/grants) • It is reasonable to allow annual spending up to 5% of GDP in the last pre-recession year, or the country’s actual spending in the same year, whichever is higher • This maintains the standards in advanced countries and encourages growth in the ones below the mean

7 Education’s shorter-run role • Recession is tough especially for youths; but it is

7 Education’s shorter-run role • Recession is tough especially for youths; but it is tougher on less educated youths than on those with good education • This carries on in later life: unemployment is always higher amongst less well educated workers • Education cannot reverse the impact of recession on unemployment, but it can help • I refer to this as the second contribution of education to economic and social development

8 Timing of educational expansion push • It is an objective of Europe 2020

8 Timing of educational expansion push • It is an objective of Europe 2020 to increase post- compulsory educational attainment • A consequence of the second role of education is that the best time to increase educational attainment, from the social/optimal point of view, is recession! • In fact, in recession it makes sense to overshoot – not just keep up with the pace

9 Choosing the level of education • It is now fifty years since Gary

9 Choosing the level of education • It is now fifty years since Gary Becker gave us theory of Human Capital • Education is an investment: the main social cost of this investment is the foregone output of the student • The return is the higher productivity and lower unemployment of the beneficiary (as much as 12% currently in Europe? )

10 Reasons for expansion • In recession balance tilts in favour of lower costs

10 Reasons for expansion • In recession balance tilts in favour of lower costs • The cost is lower partly because production is less valuable but mainly because the chance of unemployment for the school leaver is higher • Returns are not affected very much by recession

11 Lower private costs too • Cost of education in recession is lower for

11 Lower private costs too • Cost of education in recession is lower for the individual too, because the alternative to the individual is higher unemployment • So there will be willing school leavers taking up the new places, even more so than in normal times • (In more technical language: the demand for educational places is up for private reasons; supply should increase to match it for social reasons)

12 Risks from this policy I: lock-in effects • Lock-in effect: lock a student

12 Risks from this policy I: lock-in effects • Lock-in effect: lock a student in for three years when recession might end in one? • Emphasise more “sequenced” learning – one or two-year self-contained courses at first, followed by more • In the United States two-year community colleges increased enormously in popularity in this recession • But lock-in effect should not be a problem for countries aiming to increase their educational attainment

13 II. Standards • A second risk is standards: is recession, when money is

13 II. Standards • A second risk is standards: is recession, when money is short, a good time to push for educational expansion? • In my view yes, when you think of the alternative: tolerating higher unemployment of less privileged youths to protect the standards of more privileged ones • Important to improve standards in the long term but let them fall temporarily if money is not available for highstandard expansion in recession

14 Other related policies against youth unemployment • Other active labour market policies can

14 Other related policies against youth unemployment • Other active labour market policies can have an impact too: education expansion is suggested as one such policy • For maximum short-term impact of ALMP, employment subsidies or direct job creation by the government seems to be best • But apprentice-type training for youths also likely to have long-term impact

15 Types of education • What type of education should the government support in

15 Types of education • What type of education should the government support in recession? • If the expansion is to be temporary, to satisfy high demand in recession and keep youths off the unemployment register, it should be for types that are less expensive • Inexpensive courses such as social care services, basic management skills etc. can have substantial impact on employability • General education better than specific because specific training better left to firms

16 Implications for labour market • Education expansion removes school leavers from the labour

16 Implications for labour market • Education expansion removes school leavers from the labour market one-for-one • No impact on job creation • So it is likely that the youth employment rate would increase and demand for other ALMP would decrease if more school leavers stay on • Likely also to benefit women’s market, which is competitive with young market

17 Other implications • After end of recession, there are more graduates than in

17 Other implications • After end of recession, there are more graduates than in normal times • Graduate incomes might suffer and if school leavers react to current observations, demand for education might fall • Care should be taken to avoid too big a drop in education when the economy picks up (and cause a “cobweb” cycle)

18 Comments about jobs and skills • Europe is falling behind in productivity growth

18 Comments about jobs and skills • Europe is falling behind in productivity growth and this is a motivating factor in EU 2020 • Claim that the demand for higher-skill employment will rise and for lower-skill employment will fall may well be right • We need more skilled workers to push through the R&D and create the new companies that will become world leaders

19 Comments cont. • But we also need a more balanced view of skills

19 Comments cont. • But we also need a more balanced view of skills and jobs that will cover the spectrum of jobs • Growth and wealth accumulation increase the demand for labour intensive, lower skilled services • In the US, post-industrial growth led to enormous increase in the demand for health workers, domestic assistants and shop/office assistants • These workers are either low-wage immigrants or very poorly paid American citizens

20 Employment trends in Europe • Europe is heading the same way. • Take

20 Employment trends in Europe • Europe is heading the same way. • Take Cyprus as an example: spends more on education than other EU countries, has one of the highest tertiary level qualifications • As a result, it has a very large financial and business service sector and relies on low-wage immigrant labour to run its tourist industry and its shops and hospitals

21 What do we want in Europe? • Time to take an across the

21 What do we want in Europe? • Time to take an across the spectrum view and decide what we want in Europe • US-style inequality? • Nordic-style welfare state? • Universal push for more education supported by low-cost immigration? • For these reasons, the initiative of DG Employment to study the future of jobs in ICT, green sectors, health and domestic services should be welcome • There should be more coordination between such initiatives and education policies

22 Key conclusions • The key conclusion is that recessions should not be allowed

22 Key conclusions • The key conclusion is that recessions should not be allowed to put at risk the longer-term objectives of education • They are times when both the private and social cost of regular education are low, so they are good times to take advantage of and enhance society’s human capital • But pay also attention to the needs of the labour market at the more labour-intensive services end