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Mind the employment gap

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High youth unemployment threatens long-term competitiveness in the UK

High youth unemployment threatens long-term competitiveness in the UK

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  • 1. MIND THE EMPLOYMENT GAP High youth unemployment threatens long-term competitiveness in the UK Written by The Economist Intelligence Unit Y outh unemployment has surged across Europe since the 2008‑09 global financial crisis, in what the German chancellor, Angela Merkel, has described as “perhaps the most pressing problem facing Europe at the present time.” In the UK, nearly 1m young people (aged between 16 and 24)—or one-fifth of the youth population—are jobless. The crisis is not just affecting individuals and society today, but it also threatens the long-term growth and competitiveness of the British economy. “Young people are the future generation,” says Lena Levy, head of la‑ bour market policy at the Confederation of British Industry, a business lobbying group. “If they disengage, businesses eventually will have problems recruiting. The economic costs to the country are there.” Youth unemployment is a “time-bomb under the nation’s finances”, concludes a 2012 report by the Association of Chief Executives of Voluntary Organisations Commission on Youth Unemployment. It esti‑ mated that, at current levels, the “scarring effects of youth unemploy‑ ment”, including higher welfare benefits paid out and lost potential tax revenue, would cost the exchequer £2.9bn (US$4.8bn) per year and result in annual lost output to the economy of £6.3bn. “The net present value of the cost to the Treasury, even looking only a decade ahead, is approximately £28bn,” the report said. Meanwhile, a UK-based youth charity, the Prince’s Trust, has put the cost of lost productivity to the UK at as much as £133m (US$220m) per week, and for youth crime at £1.2bn a year. Other costs are harder to quantify. Studies have shown that young people who have been long-term unemployed experience more ill health later in life and become more susceptible to committing crime. Widening inequality can increase social tension and instability. Furthermore, given the greying of Britain’s workforce, the presence of a large group of unemployed in the new generation could undermine the financial health of government welfare programmes and weaken the talent pool for businesses. “Being unemployed at a young age tends to have a big effect later on,” says Glenda Quintini, a senior economist at the Paris-based OECD, a club of rich countries. “Skills unused can deteriorate. [Unemployed youths] can drift into inactivity and become disengaged. This is a very big problem for business, because human capital is the no. 1 input.” Youth unemployment is not a problem only in the UK. A recent report by a global consulting firm, McKinsey & Company, notes that 75m young people are currently unemployed around the world, and that, if estimates for the number of underemployed were included, the total would triple. In countries such as Greece and Spain, youth jobless rates exceeded 50% in 2013. Poor economic prospects do not trans‑ late only into high unemployment rates, but can also become reasons to emigrate. In Ireland, where the economy has stagnated for most of the past five years, well-educated young people are leaving in large numbers. A study by University College Cork found that up to 62% of emigrants aged between 24 and 34 have completed tertiary educa‑ tion, compared with 47% for the rest of the same age group. Even when the UK economy was booming before the crash, a growing number of young people struggled to find work. Terence Tse, an SUPPORTED BY
  • 2. associate professor of finance at the London campus of the ESCP Europe business school, says that one reason for this trend was that youths lacked the basic skills that employers sought. “But the economy was growing fast enough to absorb whomever,” he says. This situation changed in the wake of the 2008‑09 global financial crisis. As companies scaled back and cut jobs, first-time jobseekers, still lacking basic skills, struggled even more to find work. Young people who were already employed often became the first to be made redundant, as they had less experience and the least seniority. The number of jobless youths and NEETs—a term first coined in the UK in the 1980s, referring to young people who are “not in education, employment or training”—surged. Recently, the UK economy has started to grow again, expanding by an estimated 1.9% in 2013, and The Economist Intelligence Unit forecasts that growth will accelerate to 2.5% this year. The overall jobless rate has also improved, falling to 7.1% for the three months ending November 2013, the lowest level in more than three years (compared with 8.4% in 2011). The effects of the economic rebound have been slower to accrue to those in the 16-24 age category, with the unemployment rate for this group easing by 0.5 of a percentage point to 20% compared with the previous year. This compares with an unemployment rate among 25‑34 year olds of 6.7% between Septem‑ ber to November 2013, down from 7.5% for the same period in 2012. Tony Dolphin, the associate director for economic policy at the Insti‑ tute for Public Policy Research, a London-based think-tank, says that there is likely to be a mix of reasons for this, but he believes that the main factor is the shifting structure of the workforce. “Due to globali‑ sation and technological changes, jobs that young people would be recruited for have disappeared,” he says. These include manufacturing jobs that have become mechanised or shipped overseas. The government has introduced a number of policies and programmes to address youth unemployment, but—say critics—with mixed success. The administration has gradually raised the age for full-time compul‑ sory education to 18 by 2015. Jobcentre Plus, a service offered by the UK Department for Work and Pensions, provides assistance with job About the sponsor learndirect is one of the largest integrated providers of Apprentice‑ ships, training, e-assessment and employment services in the UK. It has helped around 4.5 million people get the skills they need for work and more than 75,000 organisations improve the skills of their workforce. www.learndirect.com/business searches and building curricula vitae (CVs). However, “more intensive support is needed for young people” says Sue Maguire, a professor at the University of Warwick. In addition, the government has made significant funding cuts which have affected many programmes, including one that tracks under-18 NEETs, notes Professor Maguire. In January 2014 the prime minis‑ ter, David Cameron, suggested that he favoured reforms that would require those under 25 to take up work, education or training, or face losing their housing benefits and jobseeker’s allowance. Companies are also stepping in to tackle the youth unemployment problem, inspired by Germany’s youth apprenticeship programmes. Close collaboration among businesses, educational institutions and the government has resulted in Germany enjoying the lowest youth unemployment rate in Europe. Barclays, a London-based financial services company, has established its own apprenticeship programme to recruit and train underprivileged youths. Other companies are working with schools or the government to review curricula, and ex‑ plore how they might better arm graduates and apprentices with the skills needed in the current labour market. Business in the Community, a non-profit organisation that promotes corporate responsibility among multinationals in the UK, has helped to mobilise the hospitality sector to create 130,000 apprenticeships, work-experience placements or job opportunities for young people, backed by government funding. Multinationals, in any case, tend to have their pick among top gradu‑ ates when recruiting, as well as the manpower and budget to provide on-the-job training. Economists say that small- and medium-sized enterprises are more likely to be hurt by the country’s high youth unemployment rate; these companies are more likely to hire from the pool of youths who do not continue into higher education. Ultimately, however, everyone loses. Professor John Van Reenen, the director of the Centre for Economic Performance at the London School of Economics, says that companies might temporarily benefit from high youth unemployment rates, as wages decline. But, in the long term, “if fewer people are looking for jobs, wages go up.”