There has been a good deal of debate recently about the problem of youth unemployment, which usually refers to those in the 16-24 age range. According to the most recent data release, there were 951,000 young unemployed, a rate of 20.2 per cent, which is calculated as the number of youngsters who are unemployed as a proportion of those in the labour force.
The Chancellor, in Treasury questions yesterday, and the Prime Minister, a few days earlier, have both suggested that rising youth unemployment has been a problem that has been experienced for some time. Both claim that we are all still seeking an explanation. We are not. The answer is very simple and has two quite different parts to it: one from the supply side for the years up to 2008 and the other from the demand side since then.
I once edited a book in which the major experts in the world presented articles on the youth labour market problem, Youth Employment and Joblessness in Advanced Countries (University of Chicago Press and NBER, 2000). This was the third in a series of books on the youth labour market published by the National Bureau of Economic Research. The evidence from those books — and lots of more recent work — is that the youth labour market is different.
(Note: youth unemployment is measured on the left hand axis and the youth share on the right)
First, youth unemployment rates tend to be higher than adult rates, with the ratio across countries usually in the range from two to three. Second, youth joblessness is especially cyclically 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 available the jobs, the higher the unemployment rate will be.
The first two explanations are referred to by economists as demand-side stories because they are driven by the level of aggregate demand. The third story is referred to as being from the supply side.
It turns out that, for the period 2000-2008, the main explanation for rising youth unemployment appears to be from the supply side. Between 2000 and 2008, the number of youngsters between 16 and 24 increased from approximately 6.26 million in January 2000 to 7.36 million in June 2009. It fell back slightly in October 2010 to 7.34 million. Of relevance, then, is the relative size of the youth cohort.
The blue line on the diagram (above) plots, by month, the size of the youth population compared with the overall population, which rose from 13.59 per cent to a high of 14.9 per cent between June and August 2008 and has fallen back to 14.7 per cent in the latest data.
The pink line plots the youth unemployment rate, which increased steadily from 2003 to 2008. The explanation for the rise in youth unemployment over that period appears to be that it was driven by the force of numbers. The growing size of the youth cohort meant that there were more youngsters chasing a pool of jobs that was not increasing fast enough. The supply of workers chasing these jobs was also impacted by the inflow of young workers, mostly men from the accession countries, especially Poland.
From 2008 onwards, the size of the cohort remains pretty steady and even starts to fall as the youth unemployment explodes. The story for the later period is that there is simply a lack of demand. And when demand collapsed, the workers from eastern Europe left.
Contrary to what the government claims, we are not in search of an explanation for youth unemployment. It’s pretty simple. Just look at the diagram.