July 2, 2012 7:20 pm

Soaring youth unemployment stokes fears

Imagine two young men who lived in the same town, had identical backgrounds and qualifications, and graduated from the same school in 2009, just as the economic crisis was at its height.

Bob was lucky: he got a job quickly and has been employed ever since. But John was unemployed for two years before finding a job.

Youth-unemployment

Youth-unemployment

It is not surprising that Bob is paid more than John now. But past evidence suggests that even if both remain continuously employed to the early 2020s, John will still bear scars from his late start. Assuming they lived in the UK, John is likely to be paid 16 per cent less than Bob when they are in their early 30s.

Youth unemployment matters. Across developed and emerging economies, the young are being left behind as never before. And once a gap emerges, it tends to be persistent and difficult to close.

Policy makers have taken note, however. Helping out-of-work youth was a theme in François Hollande’s successful campaign for the French presidency, and governments across Europe have been engaged in a re-examination of their labour practices.

But many worry that the resulting policies are not enough to prevent a lost generation, given the scale of the crisis. And a slowing global economy could only add to the headwinds.

The statistics are alarming. In crisis-hit Europe, the rates of under-25 joblessness are the highest since the OECD began recording it. One in two young Greeks and Spaniards are out of work, and the youth unemployment rate in Saudi Arabia and Italy is four times the older jobless rate.

The Organisation for Economic Co-operation and Development warns that “a significant and growing proportion of youth, even among those who would have found jobs in good times, are at high risk of prolonged unemployment or inactivity. This will likely hurt their entire careers and livelihoods.”

True, some countries have made progress in reducing youth unemployment. In Germany, for example, the rate has dropped from more than 11 per cent in 2007 to 7.9 per cent in May, only a touch higher than the 5.6 per cent national unemployment rate. Studies of scars left by youth unemployment in France do not show the persistence generally found in the UK and many other countries. And in Japan, some of the lost generation who failed to follow their predecessors into salaried jobs in the 1990s became the vibrant entrepreneurs of the new century.

Calculation methods can give alarming results

Youth unemployment statistics are so alarming that it is important to take a closer look at their composition, writes Chris Giles .

At its most basic, the unemployment rate is a ratio of the numbers out of work compared with a wider base group, so both the denominator and the numerator deserve scrutiny.

For adult unemployment rates, the numerator counts those out of work and seeking employment. The denominator represents the total number of people either working or seeking work. The sick, carers and housewives are excluded as they are “inactive” in the labour market. For young people, the “inactive” includes students and those in training – often a large group.

If few people under 25 are in work, the denominator in the youth unemployment rate can be much smaller than the total population. If all Spanish under-25s were in university, except for a few stragglers, the unemployment rate would be 100 per cent. If a different denominator – total population – is used, all calculated youth unemployment rates plummet. Greece’s unemployment rate drops from 49 to 13 per cent and, according to Eurostat, the European average falls from 22 to 9 per cent.

Perhaps the best measure of youth unemployment is NEETs: the proportion of all under-25s who are not in education, employment or training. OECD data show that NEET rates are also much lower than the youth unemployment rates, because they use a larger denominator but the numerator is also bigger.

Even this does not tell the whole story. Those in work in some countries might be employed in jobs well below their level of skills and so might be compromising their future prospects even though they are employed, particularly in emerging economies.

The official statistics can also be misleading. Far fewer than half of Spanish under 25s are languishing without jobs. The unemployment rate seeks only to measure the proportion out of work relative to those active in the labour market. Those in college do not count, and a large proportion counted in the official figures are in full-time education.

These caveats, while important, do not invalidate the alarm over youth unemployment. In the short term, youth unemployment adds to strains on government budgets, raises crime and threatens social stability.

“If the right policies are not put into place there is a risk not only of a lost decade in terms of growth but also of a lost generation,” warns Nemat Shafik, deputy managing director of the International Monetary Fund.

Medium-term problems mount. Young people with poor employment prospects delay forming stable families. The more energetic and employable often emigrate from their homelands, while those who stay often find themselves overqualified for the jobs they can get.

In the long term, those who suffer lengthy spells of unemployment are likely still to feel the effects decades later. In the US, where private payment for university education is most ingrained, the burden of student debt hangs around those with less than stellar careers – and also threatens to undermine financial stability in future if graduates cannot pay.

With so much at stake, policies to tackle youth unemployment are central to the electorates in many countries. The OECD and other international organisations have a textbook response, which calls for sufficient demand at the economywide level augmented with policies specifically targeted at under 25s.

These policies are aimed at ensuring today’s students have a chance to start real careers when they leave school. Across Europe, many young people say they feel trapped by policies that dissuade companies from providing long-term contracts.

Among those is Paolo, 28, who graduated from university in Milan two years ago and has since had a succession of short-term jobs. “Every time I start a new job I’m enthusiastic, but soon that peters out when you realise they won’t keep you for some reason that has nothing to do with you.”

But what works in a policy paper is often much more complicated when translated into policies on the ground.

Interactive

Youth unemployment in OECD countries

Youth unemployment

Youth unemployment has grown rapidly across the developed world since the onset of the economic crisis in early 2008. Track the numbers here

In France, Mr Hollande’s “contract of the generations” will provide tax breaks for companies that hire young people on a long-term basis. The Portuguese recession is creating a short-term imperative for the young to emigrate. While in Algeria, the administration says the youth who rail against petty restrictions are unrealistic in their ambitions.

These different policy approaches are creating something of a giant global experiment. For a generation of young people, much is riding on its success.

This is the first in a series on youth unemployment. The next article will focus on Portugal, where the destruction of jobs is forcing people to question what many believed were irreversible social advances since the country emerged from dictatorship in 1974

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