Show Hide image

The scars of a jobless generation

As youth unemployment figures approach one million, an analysis of this seemingly intractable proble

As a labour economist, I have been investigating youth unemployment for many years. Back in 2000, I co-edited a book entitled Youth Employment and Joblessness in Advanced Countries, in which experts analysed the problems facing the youth labour market. The evidence from this book - and from a great deal of more recent work - is that the youth labour market is different from that of adults. These studies also made it clear that long spells of unemployment at a young age can create permanent scars.

A number of other facts stand out. First, youth unemployment rates tend to be two to three times higher than adult rates. Second, youth joblessness is especially volatile, rising faster in a slump and declining more rapidly in a boom. Third, the size of the youth cohort matters: the more people there are chasing the jobs available, the higher the unemployment rate will be.

Before the general election in May last year, youth joblessness in Britain, having worsened during the recession, was showing signs of improvement as a result of measures introduced by Labour and paid for by a tax on bankers. But no longer. The Justice Secretary, Kenneth Clarke, spoke of the "calamitous position" that we are in. Perhaps the phrase applies to young people more than to anyone else.

George Osborne and David Cameron shake off the blame for rising youth unemployment by claiming that it has been a problem for some time and that we are still seeking an explanation for it. We are not. The answer is simple and has two different parts: for the years up to 2008, it has to do with the supply side (the number of workers); for the years since then, it is down to the demand side (the number of jobs).

Number crunch

The main explanation for rising youth unemployment between 2000 and 2008 is on the supply side. The number of youngsters between 16 and 24 increased from about 6.26 million in January 2000 to 7.36 million in June 2009. It fell back slightly in November 2010, to 7.34 million. The blue line on the graph below plots the size of the youth population compared with the overall population; it rose from 13.6 per cent to a high of 14.9 per cent between June and August 2008 and has recently fallen back to 14.7 per cent. The pink line plots the youth unemployment rate, which increased steadily from 2003 to 2008. Because of the growing size of the cohort (partly the result of an inflow of young people from the EU accession countries), there were more people in the age range looking for work. The pool of jobs, however, was not growing fast enough.

The graph shows that, since 2008, the size of the youth cohort has remained quite steady. If anything, it has begun to decrease as youth joblessness has exploded. The story for this later period is that there has been a decline in demand. As demand has collapsed, most of the workers from eastern Europe have left.


The table below sets out the changes in the youth labour market between November 2007 (before the onset of recession) and November 2010, allowing us to compare the last seven months under Labour with the first seven months under the coalition government. The data shows that the coalition has sent the youth labour market back into crisis.

The main employed figure is the sum of workers who are not in full-time education and those who are in full-time education who also have a part-time job. The unemployed figure is the sum of those out of work who are not in full-time education as well as those who are but say they are looking for a part-time job. The labour force is the number of unemployed plus the employed, while the unemployment rate is the number of unemployed divided by the labour force. This stands at 20.5 per cent, up from 19.4 per cent in May 2010 and 14 per cent in November 2007. More than a quarter of a million young people currently without work have been unemployed for over a year.


During Labour's last seven months in office, youth unemployment fell slightly while youth employment increased by 39,000. Under the coalition, youth unemployment has increased by 45,000 and youth employment has fallen by 69,000. Overall employment has in fact increased by 98,000, so the employment of older adults has risen by 167,000. Our labour market problem is thus primarily a youth problem. The increase in youth unemployment since May 2010 is entirely among those who are not in full-time education. Their numbers have increased by 64,000, compared to a fall of 20,000 for those in full-time education looking for a part-time job. The numbers in full-time education increased by 31,000 under Labour but have fallen by 116,000 under the coalition. Being in college is better than being on the street.

The right kind of U-turn

The Future Jobs Fund (FJF) and the Education Maintenance Allowance (EMA) are being cut, as are university places, at a time when tuition fees are rising. Applications to universities through Ucas have risen by 180,000 - more than a third - since 2007 and almost as many applicants are likely to be disappointed this year. At the same time, further education colleges are preparing for severe cuts in funding and youth charities such as the Prince's Trust are reporting declines in donations.

Charities are also facing a reduction in the level of government support, just when demand for their services is soaring - proof, if you needed any more, that Cameron's "big society" (BS) is guff. He has responded to criticism that his big idea is just a cover for cuts with yet more spin. "I was talking about social responsibility long before the cuts. Building a stronger, bigger society is something we should try to do, whether spending is going up or down." The British people - especially the young - know BS when they see it.

To prevent a generation from being lost, the government must provide more places in education and training (including apprenticeships) and more jobs. The best way to create jobs is to give a two-year holiday on National Insurance payments for anyone under 25 and to scrap the planned rise in April. On top of this, the FJF and EMA should be reinstated. After all, it's not as if the coalition is averse to U-turns.

David Blanchflower is the NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 21 February 2011 issue of the New Statesman, The offshore City

Show Hide image

Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.