Perspectives | Economy

A Microeconomic Perspective on Unemployment

By - 03.06.2019

The significant but overlooked factors.

It is no news that Kosovo has one of the highest unemployment rates in Europe, a problem particularly affecting the youth in the youngest country in Europe. This sad fact breeds impatience and pessimism about the future.

The rate typically oscillates around 30 percent. However, some more staggering figures have been revealed recently. In 2018, 101,612 people or 30.1 percent of the youth population (aged 18-24) were NEET, i.e. not in education, employment, nor in training. What is the future of this youth?

Microenterprises have a much lesser potential to benefit from economies of scale than medium and large ones.

While the economy was estimated to have experienced a 3.9 percent growth rate, around 12,000 fewer people were employed compared to 2017. Why isn’t this growth translating into employment? The reasons are plenty, but here we shall focus on the microeconomic aspects.

Partly size — too small to grow

While the reasons are plenty, some data from the Open Business database paint part of the picture. 98 percent of businesses in Kosovo are categorized as microenterprises employing only one to nine workers. One percent are small sized enterprises, while medium sized and large enterprises together constitute roughly for the other one percent.

The relationship between enterprise size and employment is still a debatable topic among economists. Empirical evidence exists to support both sides. However, a less debatable issue is the fact that microenterprises have a much lesser potential to benefit from economies of scale than medium and large ones. Because they do not expand their operations while becoming more efficient in the process, they do not grow as much, hence there is no need to employ more workers.

Partly activity — too many in trade, while production is lacking

Besides the size, the type of activity is crucial. Six out of the top ten activities consist of businesses in retail and wholesale trade. Those six activities account for around 80,000 enterprises. Overall, the wholesale and retail trade sector is estimated to employ around 59,000 workers, constituting the largest sector of employment.

Production, on the other hand, is the sector in which most of the added value takes place.

These figures should not mislead us, however. In 2018, Kosovo’s trade deficit reached around 3 billion euro, and in 2019 we should expect an even wider one. In the meantime, foreign direct investments, most of which go to real estate, have declined by 16 percent or around 42 million euro between 2017 and 2018. Remittances, on the other hand, have reached over 800 million euro or over 41 million more than in 2017. What does this mean?

Well, first, it means that we are heavily dependent on imports, a great chunk of which is being financed by our diaspora. In the meantime, foreign direct investments are declining, concentrated in real estate, and not generating enough jobs. And, given the discrepancy in technology and capital between businesses here and foreign ones, the competition for domestic businesses may even become lethal.

Moreover, one should not forget that the wholesale and retail trade generates most of its profits from the price differences between buying and selling. Production, on the other hand, is the sector in which most of the added value takes place. It is where much more employment could be generated both in primary and supporting industries.

Partly longevity — easy to be born, difficult to live

In the latest World Bank’s Doing Business Report, Kosova rank has dropped to 44th out of 190 economies, down from from the 40th position in the previous report. The same report ranks Kosova in the 13th place when it comes to starting a business. So, the procedures to legally start and formally operate a company, time and cost required to complete each procedure, or paid-in minimum capital, do not seem to be major issues.

However, if we go back to the Open Business database, we see that out of 191,860 business that were established between 2000 and now (June 2019), 26,592 have been dissolved. Opening a business is far easier than maintaining it. Issues ranging from the economic (e.g. access to capital) to the legal (e.g. enforcing contracts) remain major impediments for these businesses to first be sustainable, and then grow and thrive.

The Open Business database shows that only 14.56 percent of businesses are owned by women.

One should note that the burden of dissolving a business does not fall as heavily on the owner as it does on the workers. Laid-off workers immediately join the large reserve army of the unemployed, thereby increasing the competition for jobs.

Furthermore, the informal sector is estimated to represent around 30 percent of the Gross Domestic Product (GDP). This creates unfair competition and further deteriorates labor conditions, which already are an issue. Just last year, 24 workers died in their workplaces, and the working conditions for the rest are far from optimal.

Partly because half of the population is not there

Almost half of Kosovo’s population are women. However, this fact is not reflected in the economy.

Only one in five women are active in the labor market and only 12.3 percent are employed. In particular young women are struggling. 65.7 percent of women aged 15-24 and 43.5 percent aged 23-34 are unemployed.

The situation does not look much better in terms of business ownership either. The Open Business database shows that only 14.56 percent of businesses are owned by women. It is clear that increased business ownership does not necessarily resolve the problem of unemployment for women. However, it is an indication of their position in the economy — because in order to open and maintain a business, among other things, capital is needed. And, in this context, capital can either be inherited, created during the lifetime, or borrowed.

Only four percent of women inherit property and only 15.4 percent have some property registered under their name. Inherited capital is therefore not the most abundant source to open and maintain a business for women.

Then, with more than 80 percent of women being inactive in the labor market, it is obvious that earned capital does not seem like a viable solution for financing the opening and maintenance of a business either.

Finally, when one is inactive or unemployed and does not have property under her name, it is very difficult to take a loan and start a business. Some income and collateral is necessary, in most cases, in order to receive a business loan.

While the issue of unemployment at the state level is a macroeconomic one, and tackling it should be among the top economic priorities of the government, a microeconomic perspective allows us to view the problem from a “microscopic” standpoint. It is this perspective that allows us to see how business size, activity, longevity, and ownership, are micro issues that, when added up, constitute a significant part of the reason for which our unemployment rates are so high.

Feature image: Faton Selani / K2.0

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