MIND THE EMPLOYMENT GAP
High youth unemployment threatens long-term competitiveness in the UK
Written by The Economist Intelligence Unit
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
“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
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
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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.”