Demystifying Youth Unemployment

Jorgo Chatzimarkakis , Mark Esposito, Terence Tse - August 2013


Speed Read
  • Official data on youth unemployment across the European Union shows disturbingly high rates, but these figures misrepresent the problem by not taking into account youth who are still in education.
  • Countries with low youth unemployment rates such as Germany and Singapore have been constantly improving their competitiveness creating sufficient quality jobs to absorb the educated workforce.
  • The problems are not the lack of skills, training graduates for jobs that ceased to exist, inflexible labour markets, a mismatch of opportunities and skills, a mix of cultural or other factors.
  • The economic loss from youth unemployment is high, estimated at €153 billion -or 1.2% of GDP in Europe in 2011.


The meeting in Rome on June 14, 2013 between the finance ministers of France, Italy, Germany and Spain on how to tackle youth unemployment ought to have taken place much earlier. So far, there have been relatively few efforts to tackle a major socio-economic problem that we are currently facing: the unemployment of those between the age 15 and 24. While this is certainly a cause for concern – according to the OECD[i], in 2012, more than half of the youth in Greece and Spain are unemployed – the implications and consequences are far-reaching. Even the McDonald’s index, which has been used a rough indicator of purchasing power, has indicated in 2012 that this age group is the most “troubled” customer segmentation, in which sales were dropping. The 15-24 phenomenon worries the likes of corporations selling to youth like McDonalds, in the same way in which it is creating serious worries to those countries that are suffering from the Eurozone crisis.

Let us look further afield. One in five of young people are jobless in France as well as in the UK; the EU average is 22.6 percent. In the US, youth unemployment hovers around 16 percent. Even in Hong Kong, supposedly one of the most dynamic economies in the world, the jobless rate among the youth stands at 11.6 percent[ii]. While this figure is not particularly high, it is certainly much higher than Singapore’s 6.7 percent, which is the lowest rate in the world.[iii] On the other hand, with 7.9 percent, Germany sticks out like a sore thumb among the EU countries. From Europe, to the numerous cradles of Arab springs, to Asia and Latin America, the youth are becoming vocally distressed. 

Unsurprisingly, these figures, especially those of Greece and Spain, are often used as attention-grabbing headlines. However, such statistics should be taken with a grain of salt because the methodology in deriving these figures is severely flawed, making the issue of youth unemployment appear to be far worse than it actually is[iv] or at least more misrepresented than ever.  By using a different approach that takes into account the number of youth who are still in education when calculating youth unemployment, the results would be 13 and 19 percent for Greece and Spain, respectively; jobless in the EU would in this case be only 8.7 percent. 
 


Losing competitiveness, losing job creation opportunities

Still, no matter how these unemployment figures are derived, they hardly make comforting news. So, why are so many young people out of jobs? We will offer two perspectives to this question. The first, trying to challenge the meta-dimension where the assumption is created. The second, by providing some examples on how some economies have been able to tackle the issue and why.

From a more systemic view of the problem, the core mechanism of employment, filtered through education, as instrumental to its access is an obsolete view. In the more “Taylorist insight into employment, education was a necessary step to acquire skills that could be used to gain access to professions. While this worked well during the first industrial revolution, incremental approaches were the required norms towards growth. At first it was randomly successful in the years after the World Wars, given the concept of “reconstruction” which required skilled labour. With the emergence of the technologies and the digital era, ICT (Information Communication Technologies) had provided access to new professions, created by the rise of the Internet and the integrated nodes of network.  Basically, from the beginning of the 20th century, through to its end, a number of successive decades found an historical way to adapt to new occurrences. Each new trend was being accompanied by an increasing demand for professional support, hence the model worked.

Today, the very same access of the previous decades is not longer guaranteed as we find ourselves facing an out-dated model, where the skills learned today are no longer fuelling professional paths. In many case it is the contrary. Many universities are creating graduates for jobs that ceased to exist years ago. Overqualified people, who have inevitably falsified the sense of required skills, creating gaps between education and real job opportunity, do many jobs exasperatedly. No matter how much we try to think of youth unemployment to be derivative of economic downturns, we ought to look at the flaws that are inferring failure at a systemic level, exacerbated by scarce capacity within the current model. 

While the above provides an overview, let us return to the current reality and see how we can address the question by current best practices. Perhaps the best way is by looking at how Germany and Singapore have obtained such current low rates of youth unemployment. A big part of the explanation is that both of these countries have been constantly improving their competitiveness. 

In contrast with Hong Kong, Singapore consistently ranks much higher on the World Economic Forum’s Global Competitiveness Index. This is so because Singapore has focused on activities that seek to promote innovation and productivity. It has a large supply of educated and skilled talent, built over the years, with the smart collaboration of foreign institutions that were garnering local capacity. That, combined with policies to encourage entrepreneurial activities and business creations, has allowed Singapore to create a continuous stream of new jobs that match the skills and aspirations of the country’s young people. In a recent article that we have written for The Business Times of Singapore[v], we have compared and contrasted Singapore with Hong Kong and even through this comparative analysis, the same conclusion was obtained. Singapore has been walking the talk of competitiveness for longer and more effectively than its fierce Asian competitor.

If we switch our sight to Europe, a big contributing factor to Germany’s competitiveness is its Mittelstand model. Over the past several decades, the country has thrived on its small and medium-sized enterprises, many of which are world leaders in niche markets. These firms, together with their giant counterparts, are constantly investing to renew their expertise in their respective fields to maintain their manufacturing and export prowess. The geographical allocation of activities and concentration of industries then, tend to be always hyper-localized, hence creating strong local and regional economies, able to compete successfully in global markets.

Contrast this to Spain or Greece. These countries have started losing the abilities to compete effectively with the rest of the world long before the financial crisis in 2008[vi]. Despite the fact that they had achieved stellar GDP growth rates between 2000 and 2007, most of the growth actually came from public spending and consumption – both financed through debt – and not necessarily from private productive investment. Back in 2012, we argued in our article “Global Competitiveness: Does Competitiveness build future or just GDP”[vii] that competitiveness builds future by investing in the future configuration of companies and markets, by providing access to a pristine innovation, which will lead to new products and markets. Spain and Greece have failed to do so, providing short term benefits to allegedly strong markets, which were not supported by proper investment and collapsed few years after the boom.

So could we assume that one of the problems is lack of skills? That would not be the case. After all, 39.1 percent of Spaniards aged 25-34 are university-educated – one of the highest rates in Europe and slightly above the OECD average. In Greece the figure is 30.9 percent and if we move our lens across several southern European economies, the statistics would point in the same direction. The problem then is less to do with skills but more with the economies not having been able to create sufficient quality jobs to absorb the educated workforce.  

A similar bleak story can also be observed in China, in which there are simply not enough degree-level jobs around to soak up the new graduates. At least 600,000 graduates from last year still have not found employment. Close to 7 million students will leave their universities this summer with most want to enter the workforce immediately[viii]. While China has undertaken a significant amount of investment, it cannot continue to throw money simply at expanding the capacity to manufacture goods. Its challenge is to deal with sustaining its growth – and indeed with the potential youth unemployment issue – through investing in those areas and industries that can take full advantage of young people’s skills and talents. After all, it would be paradoxically sad if a qualified Chinese worker had to accept jobs in manufacturing capacity, providing ceilings to the potential expansion of the Chinese economy and its desperate need for a more sophisticated local consumption.

 

Inflexible labour markets

Another reason for position shortages for young people is due to the fact that the employers are reluctant to hire them. Some of the EU countries have very rigid and inflexible labour markets, which have been inherited by past models of social welfare. This is another example of obsolete policies which do not longer reflect the reality of modern times. Regulations that are governing and protecting employees were designed in the spirit of factory jobs and union, that spread around the 60’s as a way to emancipate the labour force and industrial relations. Today, those same rules have become preventive and inhibitory given the current demographics. 

Spain, for instance, has one of the most extreme cases of what is called an “insider-outsider market” – in which temporary workers have few rights and are easy to fire, while incumbent workers are on permanent contracts and the cost of dismissal is prohibitively high[ix]. Worryingly, this is not only restricted to one European country; similar labour market structure can be found in France and Italy, which creates several problems. Given that it is difficult to terminate the employment of permanent staff, companies have much less incentive to recruit full-time employees. The result is that many young people are finding it rather difficult to get a permanent job, with no alternative but to end up settling for temporary (and often low paid) ones. This predicament for the youth is eloquently summarised by a new graduate when she says, “the state is effectively investing in the older generation instead of the new”.

Some people argue that youth unemployment should not be treated separately from “adult unemployment”. They argue that we should not place that much emphasis on such an issue given that the loss of the value produced by a young person is probably much lower. Moreover, young people can choose to pursue further education, thus adding to future earnings power, whereas continuing education is a much less viable alternative for their elders[x]. These arguments, however, are deeply flawed. Young labour is much better at offering something than their older counterparts: divergent thinking, creativity and eventually innovation. These days, value is ever more created through new designs and innovative ideas (lessons drawn by several companies in the Silicon Valley). This means that firms must continue to inject new and fresh thinking into their business activities, which are best obtained through getting young people to excel. Preventing brain drain – and therefore focusing on youth unemployment – is therefore key to maintaining the economic performance of a country. 

 

Choosing not to (do hard) work

Surely high youth unemployment is not just the result of the lack of job positions. It is also possible that many young people choose not to work. For example, about a quarter of the 290 million unemployed are south Asian women who do not work for cultural reasons. Many others prefer to engage in informal employments instead[xi], populating the number of those who choose to operate within informal boundaries and mandates.

Another reason could be that young people decide to put leisure ahead of hard work. It has been reported in Hong Kong that at a recent youth job fair, visitors queue up to enquire about the positions at a theme park that pays a monthly wage of HK$9,000 to HK$14,000 whereas there was little interest shown in a managerial position at a hotel restaurant that pays some HK$20,000 a month. The reason is simple: for the theme park jobs, they perceive – and prefer – leisure and working to be the same thing. In contrast, jobs in financial products sales, retail and restaurants, for example, are too tough and are not worth the effort[xii].

Cultural factors also play a role. In certain societies, various jobs especially the vocational ones, are perceived as lower in status. This is particularly true in those countries where artistic and vocation jobs do not have access to high paid jobs. People in rich countries tend to look down on manual work, however skilled, which propels the need for immigrant work, fostering a new set of potential problems that we will not address in this article.  Parents prefer to push their children towards careers in the professions and the public sector. A recent report shows that nearly two-thirds of youth surveyed said that vocational training was less valued by society. On the other hand, occupations that require a higher level of studies tend to carry more status. Indeed, of those who said they preferred the idea of vocational track, fewer than 40 percent actually enrolled in such courses. All of these despite 70 percent of the respondents actually view vocational track to be more helpful in getting a job and half said they find it more appealing than an academic path. Academic subjects, no matter how little it can help with job prospects, are considered superior to the practical vocational training. Of the 9 countries surveyed, only in Germany, did respondents hold the academic and vocational tracks in equal esteem[xiii].

 

Mismatch of skills and employers’ needs

Even though there are a large number of young and educated people available in the market, many companies have complained that they are unable to fill vacancies. A recent survey conducted in 9 countries points out that 43 percent of employers struggle to fill entry-level jobs because the candidates have inadequate skills[xiv]. In the UK, employers often complain the poor levels of English and mathematics that their young hires demonstrate. Indeed – surprising perhaps – young people even lack the adequate level of computer skills[xv]

So, why would there be a skill shortfall (despite the significant amount of funding spent in education)? A partial explanation is that employers, education providers and young people themselves live in parallel universes and have fundamentally different understandings of the same situation. The aforementioned 9-country survey points out that fewer than half of youth and employers believe that new graduates are adequately prepared for entry-level position, yet 72 percent of education providers believe new graduates are ready to work. The same disconnect exists between youth and education providers, with 39 percent of the latter believe the main reason students drop out is that the course of study is too difficult. Yet, only 9 percent of youth say this is the case (they are more apt to blame affordability). 

As business school professors, we may be able to offer some insight into this observation. We teach frameworks and concepts as well as use cases to illustrate their real-world applications. Yet, doing so, we do not always manage to assist employers in getting what they want. So, what else do they want? The answer: soft skills[xvi]. By these, we are not referring to business-related subjects such as organisational behaviour, inter-cultural management or even leadership. A recent poll of 500 chief executives and board level directors of businesses in the UK reveals that knowledge and awareness of the wider world is more important than degree classification for employees[xvii]. The same outcome came from a report, recently published by Duke Corporate Education, on a survey of 40 CEOs in different industries worldwide. Although the codification of the survey might differ a bit, it tells a similar story: inability to cope with large scale complex problems, requiring successive approximation and confidence in uncertainty were the predominant outcome. Abilities in communication, time-management, self-motivation, team-working, customer-handling and problem-solving are, among others, soft skills demanded by employers[xviii].    

We believe that the wide-spread use of technologies in the classroom has also played a role in the skill shortfall as young people can become easily distracted from their learning process. Granted, professors also play their part in inhibiting their learning process. A recent study that looks at the boredom among university students in lectures has found that 59 percent of them find their lectures boring half the time and 30 percent find most or all of their lectures to be boring. What is interesting is that the most important cause is the use of PowerPoint slides, which have now become the standard teaching tool. To overcome such boredom, students may instead divert their attention to surfing the web (a popular choice: facebooking) and texting. Furthermore, we suspect that the use of communication technologies have caused them to be inward looking – their own circle of friends through social network media – and miss out on the need to keep abreast with the current developments around the world[xix].  

 

A looming crisis

Youth unemployment is a major economic problem that has to be addressed urgently. In addition to social issues and increasing psychological discomforts, the monetary cost of youth unemployment can be rather high. One estimate suggests that the economic loss due to the disengagement of young people from the labour market was €153 billion, which is equal to 1.2% of GDP in Europe in 2011[xx]. Another earlier study estimates that in the UK, in 2012 youth unemployment would cost the exchequer £4.8 billion – more than the budget for further education for 16- to- 19-year-olds in England – and cost the economy £10.7 billion in lost output. More worryingly, it will ratchet up further future costs of £2.9 billion per year (equivalent to the entire annual budget for job centres) and £6.3 billion per annum to the economy in lost output[xxi]. In other words, it is not just the young people who are losing out if they cannot find employment. It is the whole society at large that really suffers.

 



[i] G20 Labour Ministers must focus on young jobseekers (2012) http://www.oecd.org/newsroom/g20labourministersmustfocusonyoungjobseekers.htm

[ii] Third Quarter Economic Report 2012 (2012) http://www.hkeconomy.gov.hk/en/pdf/er_12q3_ch5.pdf

[iii] Singapore's youth unemployment rate one of the world's lowest: Tan Chuan-Jin (2013) Strait Times, May 28, http://www.straitstimes.com/breaking-news/singapore/story/singapores-youth-unemployment-rate-one-the-worlds-lowest-tan-chuan-jin

[iv] Youth employment is bad but not as bad as we’re told (2012), Financial Times, June 24, http://www.ft.com/cms/s/0/5cc9db3e-bbbc-11e1-9436-00144feabdc0.html#axzz2WSiWLApI

[v] Esposito, M. And Tse, T. (2013) ‘Promoting a Singaporean “Kaizen”’, Business Times, June 28

[vi] This is an important observation as many people think that the plights in Spain and Greece is due to the Eurozone crisis or the heavy debt.

[vii] Tse, T. and Esposito, M. (2012) ‘Global dilemmas: Does competitiveness build future or just GDP?’, Singapore Management Review, 34(2), 1-7

[viii] Top of the class? Graduate unemployment worries Chinese leaders (2013) Week in China, June 14, p8.

[x] Europe’s Youth Unemployment Non-Problem (2013) http://www.project-syndicate.org/commentary/the-mirage-of-high-youth-unemployment-in-europe-by-daniel-gros

[xi] Why is youth unemployment so high? (2013) http://www.economist.com/blogs/economist-explains/2013/05/economist-explains-why-youth-unemployment-so-high

[xiii] Education to employment: Designing a system that works (2012), McKinsey and Company, http://mckinseyonsociety.com/downloads/reports/Education/Education-to-Employment_FINAL.pdf

[xiv] Ibid.

[xv] Poor Computer Skills To Blame For Youth Unemployment, Says Prince's Trust (2013) Huffington Post, March 12, http://www.huffingtonpost.co.uk/2013/03/12/poor-computer-skills-youth-unemployment_n_2858220.html

[xvi] Beck, John (2013) Management education needs a real world mindset, FT.com, June 9, 

[xvii] The global skills gap: Preparing young people for the global economy (2011), Think Global and British Council, http://clients.squareeye.net/uploads/dea/documents/BusinessPoll_online_TG.pdf

[xviii] Lost in transition? The changing labour market and young people not in employment, education or training (2012), The Work Foundation, http://www.theworkfoundation.com/DownloadPublication/Report/310_lost_in_transition%20%282%29.pdf

[xix] An anecdotal note: we are often surprised how little business schools students know about what is happening in the business world.

[xx] Economic cost of Europe’s youth not in employment, education or training estimated at over €150 billion (2012), Eurofound, October 22, http://www.eurofound.europa.eu/press/releases/2012/121022.htm

[xxi] Youth unemployment: the crisis we cannot afford (2012), Acevo, http://www.bristol.ac.uk/cmpo/publications/other/youthunemployment.pdf