Stopping a youth unemployment epidemic in the post-Covid recession

Julia Behan

July 14, 2020

In these unprecedented times, companies are facing economic hardship. The furlough scheme cannot and should not continue indefinitely. But inevitably, it will be employees with less experience and lower skills who are most likely to be let go from struggling businesses. This group, naturally, consists largely of young people.

The problem facing today’s youth is greater than just short-run unemployment. According to a report by economist Bart Cockx, “it takes about ten years for young cohorts that enter the labour market during a downturn to catch up to cohorts that did not.”

The fall in demand for labour will force even some of the brightest young people into lower-skill jobs. This, in turn, means that they will forgo “valuable human capital accumulation and [they] will have invested instead in task-specific competencies”. The jobs in which they hone their skills and are able to progress and start a career are no longer available.

Once the demand for labour recovers, this generation will no longer be qualified for the jobs they could have normally acquired. These jobs will, however, be available for the upcoming batch of bright young people. This leaves the recession generation permanently behind, as will be reflected in the sustained lower wages.

The Covid-19 crisis has cut short training. In the case of one-year courses such as the PGCE or GDL, this means a drastic reduction in face-to-face learning. For courses like the PGCE, though students may have learnt the theory behind teaching, they will have missed out on practical elements of the course. Employers will, therefore, be more reluctant to hire this year’s graduates through no fault of their own, a stigma that will follow 2020 graduates for years to come.

The pandemic means tightening purse strings and weathering the storm for many. The issue of economic hardship for young people is not just a question of suffering now, it is that they may fall behind in the long term.

Cockx finds a sustained loss in earnings equivalent to 9 per cent initially (according to studies run in Canada) while the loss halves within five years and finally fades to zero, or close to zero, only after ten years. This was reflected in studies in the US, where the loss in earnings was 10 per cent initially, four per cent after three years and at or around zero after ten years.

Lower-educated people entering into the workforce during a recession face “immediate and important negative effects on wages and earnings.” For them, there is less flexibility in switching to a lower-paid job if they are already at the lower end of the spectrum.

So, in such a high stakes time for youth employment, what can the government do? It should allow young people to compete. Increased regulation in the labour market aimed at helping young people often harms those it is aimed at protecting.

The lesson we see time and time again, as exemplified by Italy’s sustained high rates of youth unemployment, is that a rigid, regulated labour market augments the problem. The more onerous it is to employ people naturally, the fewer jobs there are. The lower-skilled – that is, young people – inevitably lose out.

The government must remove burdensome regulations to help offset this impact. Young people need to be enterprising and make themselves as appealing to employers as possible. They need to be able to work whenever. Relaxing Sunday trading laws would allow young people to work inconvenient or undesirable hours, meaning that they are able to get their foot in the door.

Restrictions on firing workers deter employers from hiring less experienced workers in the first place as the risk becomes too high. Relaxing current regulations, such as by extending firms’ ability to fire employees at will beyond the first two years, mitigates the risk of hiring someone who is not fit for the job.

Employees can hire workers without the trepidation of being stuck with ineffective workers, or in the knowledge that it will not be too costly if business reduces, at a time that they may want to reduce operations or costs.

Zero-hour contracts are naturally responsive to the demands of employers and employees. Protecting zero-hour contracts allows employers to take on workers without the constraints of a typical nine to five routine. It allows employers to employ workers when there is work to be done and allows employees to pursue other employment or training at a schedule that suits them.

Another way in which employees can be made more desirable is by abolishing the minimum wage, or at least temporarily reducing it. While firms have less money to offer and workers have fewer employment opportunities, it makes sense to remove the burden of a minimum wage.

If employees are willing to work for less than the minimum set by the government and employees are willing to hire them, why shouldn’t they be allowed to work? Those earning well above minimum wage won’t be affected and for those who are, it could be the very thing that keeps them from being let go.

Reducing or abolishing the minimum wage not only allows young people the experience of employment but it allows them to get on the payroll of a company, putting them in a stronger position when the firm recovers.

Similarly, government regulation in the form of auto-enrolment in the pension scheme and occupational licensing harms young people. Auto-enrolment in the pension scheme increases the cost of hiring new workers and this disproportionately affects young entrants to the labour market.

Occupational licensing places a burden on individuals to undergo training before being qualified for certain types of employment. While this may sound sensible for some jobs, for many it is just another layer of bureaucracy.

Removing this regulation will allow young people take up employment when and where it is needed, rather than having to wait a period of time to qualify for a job for which there may no longer be such a demand.

Cockx points out that “in rigid labour markets, while low-educated entrants are better shielded in the short term, both low- and high-educated workers never make up their earnings losses.” So, while these policies may not have an instant attraction, allowing flexibility in the labour market is the right thing to do, in both the short and long terms.


Written by Julia Behan

Julia Behan is a Research Associate at the Adam Smith Institute.


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