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Generation jobless

Generation jobless

7.5.2013 13:22

Unemployment statistics are one of the particularly difficult ones to read. Officially, you are only unemployed if you are out of job up to a certain period of time (differs by country) and actively seeking a job. If you are unemployed longer or just not looking, you drop out of these stats and become invisible. That is exactly at the time when you really become a problem for a society.

Going by youth inactivity, which includes all those who are neither in work nor education, almost 300m 15- to 24-year-olds, or almost a quarter of the planet’s youth, are not working. There is even a special term coined for them: “Not In Education, Employment or Training”, or NEETs.

The figures of course don’t reflect regional cultural and religious differences. For example, they include young women in South Asian countries where they are rarely part of the workforce. On the other hand, more than a third of the “employed” young in rich countries and one fifth in the poorer ones have only informal and intermittent jobs. That means that nearly half of the world’s young people are either outside the formal economy or contributing less productively than they could.

The crazy thing about it is that youth unemployment and inactivity impacts massively both the emerging countries which struggle with very high population growth, and the rich countries which suffer from the exactly opposite problem. What has caused this epidemic of joblessness? And what can abate it?

Young people have long shown higher unemployment rates as they are perceive as unreliable, lacking experience and often without required education or skills. Historically, the unemployment rate for those ages 15 to 24 in advanced economies has been two to three times higher than for older age groups. But since the global crisis began in 2008, things got a lot worse. The crisis had a disproportionally big impact on the young as many employers sack the newest hires first. Labour market practices are mostly to blame. Young people are more likely to work under temporary contracts offered by companies to get around regulations that make it difficult to fire permanent workers. So it was easiest to let go of them. Moreover, many did not qualify for company-paid severance so it was cheaper, too. Half of young workers in Spain were on temporary contracts before the crisis, the first to lose their jobs. In Greece and Spain probably nearly 40% of the young are inactive now.

In rich countries with generous welfare states this imposes a heavy burden on taxpayers. One estimate suggests that in 2011, the economic loss from disengaged young people in Europe amounted to $153 billion, or more than 1% of GDP. And failure to employ the young not only lowers growth today. It also threatens it tomorrow.

Studies show that people who begin their careers without work are likely to have lower wages and greater probability of future unemployment. A wage penalty of up to 20%, lasting for around 20 years, is common. These have been called the “scarring effects”. The scarring seems to worsen fast with the length of joblessness and is handed down to the next generation, too. This may be one of the explanations for the odd phenomenon that is persistent UK youth joblessness. The UK has one of the most flexible labour markets in the rich world, where it is notoriously easy to fire people and minimum wages aren’t prohibitively high. Yet it has one of the highest youth unemployment rates in Northern Europe (currently 12%, with 1 million NEETs). If you look back at the early Thatcherite years some 30 years ago, which were marked by the collapse of swaths of UK heavy industry and widespread unemployment, you may detect some of the roots of the problem.

It has been shown that unemployed young people are much more likely than their working peers to have another member of their family out of work, both in the parental and sibling generations. Japan’s youth joblessness, which surged after its financial crisis in the early 1990s, has stayed high despite a fast fall in the overall workforce. A large class of hikikomori live with and off their parents, are completely withdrawn from the labour market and don’t even leave the house. Despite the pick-up of the economy, employers prefer to hire recent graduates instead rather than those trapped in long-term unemployment. The phenomenon appears in emerging markets, too. A study of the labour market in Indonesia a decade after 1997 financial crisis shows that young people who lost their jobs then more likely to be unemployed now or would have only informal jobs. Young people in Argentina and Brazil who joined the labour force during a recession fared systematically worse as adults.

Rigid labour markets exacerbate the problem. Countries with high labour taxes, high minimum wages and tough restrictions on firing, are bad places for the young jobless. These include Spain and France but also, somewhat surprisingly, India (which has over 200 state and federal laws governing work and pay), South Africa (notably strict laws on firing) and North Africa and the Middle East (which suffer from a bloated and over-regulated public sector, heavy labour taxes and high minimum wages).

Another problem is the mismatch between education and skills the young possess and the requirements of the workplace. Global consultancy McKinsey reports that only 43% of the employers in the nine major countries that it has studied think that they can find enough skilled entry-level workers. The most obvious problem in Western countries is poor basic education. In most advanced economies the jobless rate for people with less than a secondary-school education is twice as high as for those with university degrees. What helps counter this is a close relationship between education and work. Germany has a long tradition of high-quality vocational education and apprenticeships, and a modest youth unemployment. In France, a country where in some areas youth unemployment is as high as 40-50%, few high-school leavers have any real experience of work. On the other side of the spectrum, how many liberal arts’ graduates can we reasonably expect to employ? Or, on a similar note, in North Africa universities focus on preparing their students forl civil-service jobs in an already bloated public sector. The unemployment rate in Morocco is thus five times as high for graduates as it is for people with only a primary education.

A deeper worry is that business is going through a particularly dramatic period of change. New technology is unleashing a wave of “disruptive innovation”, forcing firms to rethink their operations from the ground up. Companies are constantly redesigning work, separating routine tasks (which can be automated or contracted out, preferably off-shore) from skilled jobs. The life expectancy of companies is declining. Policymakers are finding it difficult to adapt their labour-market institutions to this new pace.

As mentioned before, unemployment can exact a big personal toll on young people. In addition to harmful effects on future wages and employability, studies find evidence that spells of unemployment for a young person often hurt the individual’s happiness, job satisfaction, and health for many years thereafter.

Youth unemployment can also lead to high economic and social costs for society. Underutilization of young people in the labor market can result in a vicious circle of intergenerational poverty and social exclusion and may trigger violence and juvenile delinquency. Recent high youth unemployment has contributed to social unrest in many countries—advanced, emerging, and developing.

The increase in youth unemployment also contributes significantly to growing income inequality, or gap between rich and poor, in advanced economies. Spain and Ireland are estimated to have suffered the largest deterioration in income distribution: a rise in income inequality of 18 percentage points and 12 percentage points, respectively.

The energy, skills, and aspirations of young people are invaluable assets that no society can afford to waste, especially with the poor reproduction rates our society has shown in the past decades.

Let’s all hope for a healthy economic recovery accompanied by job creation to bring down youth unemployment. But as we are facing a protracted period of low growth in the Western world, there is little hope there. In addition, the governments should actively work towards addressing the mismatch between the skills students acquire and the needs of employers, relax protections for regular workers, while enhancing them for temporary workers and massively invest in R&D, investment incentives and creation of a more business-friendly environment.

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