Youth Unemployment

Lord Wood of Anfield Excerpts

Thursday 14th June 2012 Lords Chamber

[Lord Wood of Anfield]

My Lords, the current downturn has now lasted longer than not only the recession and slow recovery of the early Thatcher years but the great depression of the 1930s. In both these previous cases, GDP—national growth—had returned to its pre-recession level by the 50th month, just over four years after the onset of the decline. However, today, in June 2012, UK GDP is still more than 4% below the level at the beginning of 2008. As well as the short-term impact on living standards and jobs, this depression, which is what I think it is, will create numerous problems, as we all know, for public finances, living standards, skills and business prospects. But surely primary among the concerns that we all have for the legacy impact of this depression is the effect on youth unemployment.

There is a traditional pattern to the debate about unemployment. Those who prioritise economic efficiency tend to caricature those with a concern about the human cost and the social consequences of unemployment as utopian bleeding hearts who do not have the interests of a strong, dynamic economy to the fore. Meanwhile, those concerned with the unemployed and their life chances tend to caricature their opponents as heartless Dickensians putting the interests of business above the interests of working people and their families. If there is a choice between caricatures, noble Lords will not be surprised to hear that my own sympathies tend to the latter, but both views strangely converge on a separation between the economic dimension of unemployment and the social and personal dimension.

I do not believe that this separation makes sense because the evidence strongly confirms that prolonged periods of unemployment not only have severe and long-term consequences for the individuals affected but are very bad for our economy as well. Labour mobility, including occasional transitional phases of unemployment, is of course a necessary lubricant to structural change in a dynamic economy, but seeing large-scale and sustained unemployment, particularly among young people, as a necessary price for the rebalancing of the economy, raising productivity, containing inflation or incentivising greater effort is just plain wrong. It is an economic mistake, it is not supported by evidence, and it is not just prompted by a lack of compassion.

Other people in this debate have talked, and I am sure will talk, about the considerable human and social cost of youth unemployment. For example, there is now overwhelming evidence that prolonged spells of worklessness are linked to significant increases in rates of suicide, cancer and divorce. There is also a transmission effect across generations; we know that unemployment among adults has been shown to have an effect in reducing the earnings of their children when they enter the workforce later. These considerations alone should give us cause to prioritise youth unemployment more than I fear is being done at the moment, whether in good or bad economic times, but I would like to spend three or four minutes looking at the economic effects of unemployment, which are often cited, wrongly I think, in mitigation against the social and personal effects.

From a macroeconomic point of view, the current economic crisis is a curiosity on the unemployment front because the labour market performed relatively well during the initial contraction in 2008-09. In that period, the recession inflicted a fall in GDP of about 6%, which was far worse than that in the recessions of the 1980s and 1990s, with a full six quarters of falling output. However, whereas in the previous two recessions the fall in employment was broadly in line with the fall in GDP, in this recession, the fall in employment has been much less, at around 2%.

The worrying side of unemployment is this: although the rise in unemployment has been less than might have been expected initially, large-scale unemployment has persisted far longer than previous recessions would lead you to expect. In the 1990s, Britain came out of recession at the end of 1991 and unemployment started to fall six quarters later. However, in this downturn we came out of recession in autumn 2009, but nine quarters later unemployment had continued to rise, to 8.4%. This was even before Britain entered a double-dip recession.

Unemployment has risen among all age groups, especially in the past 18 months. This is the result not just of economic stagnation but of policy change. The youth labour market has performed particularly badly in the most recent downturn, rising from 14% to 20%, then stabilising in the middle of last year, before deteriorating further and rising to 22%.

What are the economic effects of this? One consequence of prolonged high levels of unemployment is an increase in the rate of structural unemployment in an economy. We know that shocks that increase unemployment affect the structural rate of unemployment more the longer they persist.

Secondly, far from promoting more efficient labour markets, workers with a history of unemployment—in young people’s case, with little or no history of employment—are often offered less secure jobs because they lose valuable work experience or skills while they are unemployed, or because their unemployment experience is seen by employers as a signal that they are not good enough or are low-productivity workers. Youth unemployment takes people off the ladder of skill and career progression, or away from means that they can never get on to it.

Thirdly, economic evidence suggests that unemployed workers may lower the wages that they think they can get as time passes and accept poorer-quality jobs that are more likely to be eliminated, and so are more likely to experience further unemployment. Repeat spells of unemployment go hand in hand with jobs that are low paid and unstable.

Fourthly, we know that entry into the working population at the start of a recession is more than just bad luck; the longer you spend unemployed or economically inactive in your youth, the greater the prospect of longer periods of unemployment later in life. On average, each one of the quarter of a million or so young people who have currently been unemployed for more than a year will spend around a further year in unemployment and a further year in economic inactivity in the near future.

Lastly, we also know that a wage effect casts a shadow into young people's futures. As well as reducing employment prospects, youth unemployment means lower future wages than you would otherwise expect. Research suggests that someone who has had a spell of unemployment of more than a year in their early years of work will have average pay at the age of 42 that is more than £7,000 less than that of someone who has not suffered unemployment.

These considerations destroy the idea that what may be painful for individuals is beneficial for our society or economy, that the short-term transition impact of unemployment may somehow be a necessary adjustment for long-term efficiency, and that what is suboptimal from a social point of view is optimal from an economic point of view. It is depressing to hear people argue that youth unemployment is down to young people’s reluctance to take jobs. That is a misunderstanding of the economics of the moment. I find it more depressing still to hear the argument that, when it comes to unemployment, there is a choice between what is in our collective economic interest and what is in the interests of the more vulnerable in our labour market. Unemployment is not medicine; it is a sign that something is going wrong.