Breaking the Unemployment Cycle Using Circular Economy: Sustainable Jobs for Sustainable Futures

Abstract

The goal of this paper is to examine the impact of the circular economy (CE) on unemployment in European countries from 2010 to 2019. Firstly, using spectral clustering, we identified three clusters among European countries in terms of the CE-unemployment nexus. The clustering results reveal that the countries with the highest level of CE belong to a cluster with the lowest level of unemployment. Next, we estimated eight different panel data models using various CE indexes to ensure the robustness of the CE-unemployment nexus and to identify the specific aspects of CE that have a greater impact on reducing unemployment. The empirical results, obtained using the Panel GMM method, demonstrate that all eight indexes of the circular economy significantly decrease unemployment in European countries. Our proposed CE index, which utilizes the PCA method and reflects a comprehensive measure of CE, has the highest impact on reducing unemployment, suggesting that moving towards CE significantly decreases unemployment. Among the sub-indexes of CE, the following factors have the highest impact on reducing unemployment: "private investment and gross added value related to circular economy sectors," "trade in recyclable raw materials," "circular material use," "recycling rate of municipal waste," "recycling rate of packaging waste," "recycling of bio waste," and "consumption of renewables and biofuels in the industrial sector." Therefore, among the sub-indexes of CE, the two most influential aspects in reducing the unemployment rate in European countries are private investment in CE and trade in recyclable raw materials. From a policy perspective, our findings emphasize the need for targeted incentives—such as tax breaks, grants, and low-interest loans—to stimulate private sector investment in CE activities, which can drive equitable job growth. Additionally, policies facilitating trade in recyclable materials through reduced tariffs and international standards can improve the viability of recycling industries, contributing to job creation across regions. To ensure a fair and inclusive CE transition, policymakers should address the social impacts on all communities, with particular attention to marginalized groups. Integrating circular justice principles can help prevent CE from perpetuating existing inequalities, fostering both economic growth and social equity. Consequently, promoting a just and inclusive CE transition can strengthen its role as a catalyst for sustainable socio-economic progress.