Welcome to REDI-Updates, a bi-annual publication which will get behind the data and translate it into understandable terms. West Midlands REDI staff and guest contributors will discuss various topics, with this first publication focusing on how inclusive growth can be a tool to tackle regional imbalances across the UK. In this article, Dr Andre Carrascal Incera discusses why it is important to tackle youth unemployment, which has negative short and long term impacts on young people, as well as damaging productivity and economic growth at the regional and national level.
You can view and download the magazine here.
A high youth unemployment rate means that a large proportion of younger people seek work but find none. This can severely harm the present and the future of any city-region or even national economy. Why? First, it is a sign of resources not being used. Second, it reveals structural problems in the labour market, in the matching between those looking for employees and those looking for jobs. Finally, because unemployment happens at the beginning of a young person’s working history, it causes important individual and general effects of the depreciation of those resources in the long run.
What is youth unemployment?
Following the statistical definition proposed by the International Labor Organization (ILO), youth unemployment includes those in the age range between 15 and 24 years without a job, but available to be employed and also looking for work. From a life-cycle perspective, youth employment or unemployment is what takes place at the very beginning of the working career.
Theoretically, the demand for labour is a derived demand from one of goods and services (Brue et al., 2016), so any shock that reduces the aggregate demand, like the 2008 economic crisis, would cause a decrease in the number of workers needed, whether those workers are young or adults. The transmission of the impact from the aggregate demand to labour demand is different for each region and production factor depending on the economic structure and the institutional framework, especially with regards to the labour market. This is in line with the findings of Bell and Blanchflower (2011), who concluded that youth unemployment in some countries like Spain, Latvia, Lithuania and Ireland rises when housing prices fall as a result of the reduction in the construction demand. Previous literature also found that young workers tend to absorb macroeconomic shocks because of the higher flexibility of their contracts (Blanchard and Wolfers, 2001; and O’Higgins, 2014) and that their situation is more sensitive to business cycle oscillations than adult employment (Ghoshray et al., 2016), and also because they are less expensive to dismiss (Pastore, 2012).
Why is it so important to address youth unemployment?
Academics that studied the consequences of youth unemployment have been mainly focused on analysing the individual effects, resting on the idea that the negative effects associated with unemployment depend on its duration. The first studies assumed that, for the young working population, the unemployment spells are shorter and a natural part of the job search process (Freeman and Wise, 1982; Fagin and Little, 1984). However, some studies such as O’Higgings (2001) found that, in the OECD countries, they present equal long-term unemployment incidence than the rest of the workforce. More recently, relying on longer longitudinal panel data, studies have found that unemployment in early working life could reduce an individual’s productive potential and long-term employment prospects (Narendranathan and Elias, 1993; Ryan, 2001; Ciociano, 2014), i.e. the so-called scarring effect. Gregg and Tominey (2005) obtained a wage scar penalty of 13-21% at the age of 41 for the UK, meaning that people that suffered unemployment earn between 13% and 21% less than their counterparts. The penalty goes down to 9-11% if individuals avoid repeated exposure. Mroz and Savage (2006) found a catch-up response for those that experienced unemployment, but still a negative effect on life-cycle earnings. Moreover, they found that unemployment experienced ten years in the past continues to affect earnings adversely. Bell and Blanchflower (2011) discovered that early unemployment creates longer-lasting scars than recent unemployment experience (at the age of 50). Other authors such as Jimeno and Rodríguez (2002) have found that youth unemployment can affect negatively human capital accumulation or, even, fertility rates.
Another important consequence of youth unemployment is the discouragement that it causes to this group of the population. In 2012, the European Commission estimated that 12.6% of inactive young people wanted to work but they were no longer seeking a job actively. This is also closely related to the high percentage of NEETs (Neither in Employment nor in Education or Training) for these ages. In 2013, 12.9% of the young population were NEETs in Europe. 1 out of 5 in countries like Bulgaria, Italy or Greece. The ONS states that 11.3% of all young people in the UK were classified as NEETs in December 2018.
If we take a look at the youth unemployment figures in the UK, from 2004 to 2018, the West Midlands always present a higher rate than the UK average. According to the Annual Population Survey, West Midlands’ youth unemployment rate was 13.8% in 2004, rising to 22.3% in 2013 and falling to 14.7% in 2018. For the UK as a whole, the corresponding rates were 12.3% in 2004, 20.2% in 2013 and 11.6% in 2018, a little bit lower than the EU average.
None of these figures should be taken lightly. Both human capital and discouraging effects can have also macroeconomic impacts on regional and national productivity, affecting ultimately the potential future growth rates of the economy. In ageing societies, youth unemployment can impose an additional sustainability problem.
What policies can reduce youth unemployment?
The heavy influence of the age-mix factor (the proportion of young with respect to adults in the labour market) suggests that during times of crisis young workers need more job protection compared to their adult counterparts (Eichhorst et al., 2013a; Carrascal, 2017) across the entire EU15 (the number of member countries in the European Union prior to the accession of ten candidate countries on 1 May 2004). Indeed, the loss of youth employment during the crisis was remarkably steeper than that for adults. This quick drop in youth employment is largely explained by declines in the demand for goods and services in sectors that tend to employ larger shares of youth, by the distorted input-mix of these sectors during a crisis and by the share of young among all workers, because, as we stated before, they are cheaper to dismiss. This shouldn’t be translated as a need for policies that favours the young against the older. As Eichhorst et al. (2013b) shows, policies should improve the employment prospects of young people while keeping older people on the job, since they complement one another in the labour market (i.e., they do not compete for the same jobs, as also shown by Kim and Hewings (2019)).
Three areas of intervention can be identified: stimulation of labour demand, avoidance of long-term unemployment, and elimination of educational mismatch (see Caliendo and Schmidl, 2016, for a comprehensive evaluation of the different active labour market programs (ALMP) for youth in Europe).
Following Carrascal (2017), when the output is growing (e.g., 1995-2007) it seems that youth employment policies must be country-specific. For instance, Germany, Finland, the Netherlands, Sweden, France and the United Kingdom could pursue policies that fostered employment in general. Youth in these countries lost jobs mainly because labour productivity improved, i.e., the sectoral labour requirements per unit of output decreased. On the contrary, countries more affected by the age-mix —like Greece, Spain, Italy and Portugal— during the same period, could have implemented job policies focused on younger cohorts to enhance youth employment.
Conclusion
Any regional inclusive growth strategy should thus consider the significance of youth unemployment and its residual long-term scarring effects on productivity and wider economic growth.
This blog was written by Andre Carrascal Incera, Research Fellow, City-REDI / WM REDI, University of Birmingham.
Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI / WM REDI or the University of Birmingham
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References
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Bell, D. N., & Blanchflower, D. G. (2011). Youth unemployment in Europe and the United States. Nordic Economic Policy Review, 1(2011), 11-37.
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Fagin, L.; Little, M. 1984. The forsaken families. Harmondsworth, Penguin.
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Carrascal, A. (2017). Drivers of change in the European youth employment: a comparative structural decomposition analysis. Economic Systems Research, 29(4), 463-485.
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