Edited by Ellen Kalisperati
Youth unemployment in the Eurozone looks like a social and economic disaster in the making – 30%, 40%, even 50% of young people sitting on their hands instead of building skills and experience. This column argues the headline numbers are misleading. While youth unemployment is a serious problem, a large share of EZ youth are not in the labour force, so the headline figures overstate the labour-market ‘scar tissue’ that will be left over from the crisis. Hardly a day goes by without a reminder of youth unemployment rates in excess of 50% in Greece, Spain, Italy, and other parts of the European periphery. Sometimes the reminders are in the form of rants by economists or pundits about the moral deficiency of EZ demands for austerity and the risks of a lost generation of young people. The challenge for Europe’s youth is stark, and demands for government action are long overdue, especially in liberalising the insider biases that make it hard for outsiders to get jobs.
The situation is illustrated in Figure 1, which shows youth unemployment rates in the 15- to 24-year age group in the OECD countries in Q1 2011, compared with the latest available data1.
Figure 1.OECD Harmonised Youth Unemployment Rates, 15-24y
Source: OECD Labour Market Statistics.
The current OECD average is 16%, with the US average marginally higher at 16.8%, while the UK and the EZ average lies around 22%. Meanwhile, the intra-EZ range is remarkable, with Germany at just 8%, the lowest youth unemployment rate in the OECD, and Spain and Greece exceeding 50% in the latest data. Moreover, youth unemployment rates have increased in the last 18 months in the OECD, and in the four ‘Club Med’ EZ countries of Italy, Portugal, Spain and Greece. With these remarkable youth unemployment rates, it is striking how limited the social unrest has been. But as pointed out by Steven Hill in the Financial Times earlier this year, youth unemployment rates are a flawed basis for outrage because of their methodological shortcomings (Hill 2012).
- Unemployment rates are calculated as the share of people in the labour force (i.e. employed or looking for work).
- A large share of the youthful cohort is still in school and hence not in the labour force, at least in industrialised countries where educational opportunities are widely available.
- This means that the actual percentage of unemployed people is lower than it appears.
For example, if 70% of the age group from 15-24 years in Spain and Greece are enrolled in education2, and just 30% is employed or actively looking for work, a 50% unemployment rate would be estimated as 50% of the 30% in the labour force, or a 15% share of the total. That is not healthy by any means, it is a lot better than suggested by a 50% headline number. It also helps explain why there has not been more social unrest since 2010.
Less than the headlines but still a major problem
Despite the ‘true level’ of youth unemployment in a given country, the poor job opportunities for youth in many countries is still a serious concern, because of the negative impact on lifetime earnings and career paths that an early spell of unemployment might inflict on affected young people (the so-called ‘scarring effect’ in economic jargon). At the same time, it is important to note that there are several dynamics that can affect the true impact of a severe crisis on an entire generation of young people. In countries with ample and affordable educational and training options available and which before the crisis went through a cyclical boom, one would for instance expect a high movement from the workforce back into education/retraining after the crisis hit, causing a significant decline in the size of the youth workforce. In general, a decline in the size of a country’s workforce is a bad economic development. But if large numbers of young people go from relatively low-skilled jobs into education, the long-term effects are harder to predict. Higher skills could lead to better future career paths and a school offers a chance to sit the recession out in a safe place.
To better calculate the true idleness and ‘wasted youth’ phenomenon in advanced economies, the OECD calculates the share of youth ‘not in employment, education or training’ among the total in the 15-24 age group3. This is the so-called NEET ratio, which comprises ‘idle youth’ both in the labour force (looking for work, but unable to find it) and outside the labour force (inactive). Figure 2 shows the developments in the NEET ratio for available OECD countries from pre-crisis Q1 2007 to the latest available data from Q1 20114.
Figure 2. OECD NEET Ratios, 15-24y
Source: OECD Employment Outlook 2012.
Figure 2 illustrates several important trends. The range within the OECD for NEET ratios ranges from less than 5% in the Netherlands in Q1 2011 to 30% in Turkey, even after Turkey (likely as a result of its economic boom and better access to education) saw an 8% decline in its NEET ratio from Q1 2007. In almost all OECD countries, the NEET ratio has gone up as a result of the crisis. The increases have been most pronounced in some Eurozone peripheral countries – Ireland at a 7.4 percentage point increase, Spain a 5.9%, Italy 3.4%, and Greece 2.5 percentage points5. Remarkably, however, Portugal’s NEET ratio has dropped by 0.9 percentage points during the crisis, which probably indicates a substantial increase in young Portuguese people going back into education. It is also clear from Figure 2 that measured on this more genuine measure of ‘idle youth’ with associated potential detrimental long-term ‘scarring effects’, the EZ periphery countries look relatively less bad than other OECD countries. Yes, there have been significant increases in Ireland and Spain during the crisis, but thenQ1 2011 NEET ratio of these two countries was still only 2.8 percentage points higher at 17.6% than the corresponding 14.8% in the US. It is indeed noteworthy that the US NEET ratio is in Q1 2011 higher than in the EZ aggregate, the 27 members of the EU aggregate, and the UK ratio. With an increase of 2.7 percentage points over the crisis, the US rate has increased more than these countries.
In the aggregate, therefore, American youth is today idler and worse affected by the crisis than their EZ and UK counterparts. This result probably reflects both the depth of the labour market contraction in the US (which has been worse than the EZ and UK aggregate) and the fact that many American youth have fewer education and training opportunities than in Europe – especially following the dramatic cuts to US state and local government education budgets during the crisis.
Too bad that neither President Obama nor Mitt Romney wanted to discuss this outrage in their first debate.