Whatever tomorrow’s figures say, youth unemployment is emerging as the principal weak flank of George Osborne’s economic strategy.
Source: Labour Force Survey (click on chart to see expanded version)
Source: Labour Force Survey (click on chart to see expanded version)

Youth unemployment is set to dominate coverage of tomorrow’s labour market statistics from ONS. It is widely expected that the number of unemployed people aged 16-24 will reach the psychologically important one million mark. Whatever tomorrow’s figures say, youth unemployment is emerging as the principal weak flank of George Osborne’s economic strategy.

In order to head off the inevitable criticism government has been trying out a couple of misdirection strategies this week. On Monday, the prime minister’s spokesman was quoted as saying ‘youth unemployment had been rising since 2004, blaming a “structural problem” in the jobs market.’ http://www.heraldscotland.com/mobile/news/politics/cameron-warns-eu-as-b... Yesterday, employment minister Chris Grayling attempted to head off any reported rise in long-term youth unemployment by claiming that the previous government ‘hid the real extent of youth unemployment’ by moving young people off Jobseekers’ Allowance on to New Deal provision after six months. http://www.telegraph.co.uk/finance/jobs/8889502/Youth-unemployment-on-th...

Neither of these attempts to reframe the issue of youth unemployment is remotely plausible. There are certainly long-term labour market problems affecting a substantial minority of young people, but they play no role in explaining the surge in unemployment we saw in 2008/9 and its continued stability at this high level. And Labour’s New Deal policy had no direct effect on the standard measure of unemployment using the International Labour Organisation definition, which is based on people’s labour market position, not on what benefits they are receiving. (Whether it affected it indirectly by getting more people into employment is a different matter.)

As an aid to navigating what promises to be a storm of obfuscation tomorrow, we have pulled together consistent data on unemployment for under-25’s and 25-64 year olds since 1992. It is important to bear in mind that unemployment rates for younger people are an interpretative minefield, because they are affected by participation in education. The unemployment rate is the percentage of people who are in the labour market who are unemployed, not the percentage of the population unemployed. Thus an unemployment rate of 20% does not mean that ‘one in five young people is unemployed’ as is frequently asserted .When educational participation increases, this reduces the number of younger people in the labour market and can therefore push the unemployment rate up. This makes comparisons of unemployment rates over time particularly treacherous, as educational participation for over-16’s has increased.

In the chart at the top of this article we show unemployment rates for under-25’s and 25-64 year olds from 1992 to the summer of 2011, but to get over the consistency problem we also show the percentage of all young people who are unemployed (the unemployment/population ratio). The unemployment rate for under-25’s has been considerably higher since 2008 than at any previous point in this data, at 20% or more. But this gives an exaggerated picture due to the rise in full-time education. The unemployment/population ratio on the other hand is at a similar point to the unemployment peak following the last recession, at 13.5%. So youth unemployment has been very high since the recession, but not really unprecedentedly high, contrary to what is sometimes asserted. (Numbers unemployed are higher though, because there are more young people.)

What of the prime minister’s suggestion that ‘structural problems’ dating back to 2004 are behind the current level of young people’s unemployment? It is true that there was a rise in unemployment for under-25’s from 2004 to 2007, but there was also a somewhat less marked rise for other age groups, indicating more general labour market factors were at work. Youth unemployment then fell between 2007 and mid-2008, so it would be inaccurate to state, as the prime minister’s spokesman is reported to have said , that ‘youth unemployment has been rising since 2004’. And in any case, the mid-decade increase was minor compared to the surge in the unemployment rate at the end of 2008, as the chart clearly shows. This is not to downplay evidence of a worsening situation for young people pre-recession, but to put it in context.

There are some unpalatable messages in this time series. The chart shows a striking difference in the impact of recession for younger people compared to older age groups. Yes, unemployment for the young is about the same as at the earlier unemployment peak of 1992/3, but it should be a lot lower. Unemployment for those aged 25-64 is just under 6 per cent, compared to just over 9 per cent in 1992.3.

Is this disparity due to a ‘structural’ problem affecting young people? That is hardly plausible. There was no sudden shift in the qualifications levels or employability of young people in late 2008, but there was a major collapse in labour demand. The obvious explanation for the heavier impact on young people is that the fall in demand hit those who were trying to establish themselves in the labour market harder than those who were already in employment. In response to the downturn many employers and workers seem to have converged on a strategy of wage moderation and reductions in hours worked in return for job retention, with the effect on incomes cushioned for many workers by in-work tax credits. While this may have stemmed the rise in aggregate unemployment, it meant that the impact of the fall in demand was very concentrated among those coming on to the labour market.

Casting around for ‘structural’ explanations for the surge in unemployment among younger people, as the prime minister appears to be doing, is just a way of evading the obvious explanatory factor: constrained labour demand. Having adopted a fiscal strategy which will continue to drain demand from the economy for years to come, it is easy to see why the government should want to promote just about any alternative explanation, but saying it won’t make it so.

In truth, whether tomorrow’s figures show youth unemployment at a million or not is of little enough economic or statistical significance: unemployment for the under-25’s might well be over a milion already given the margins of error on these estimates. (As of the last release, the estimate was 991,000.) The main message coming from ONS’s labour market statistics for the last two years has been that unemployment rates have been flatlining: the labour market is still stagnating as we approach the third anniversary of the onset of recession. This message gets more critical every time it is repeated, but it rarely gets heard as politicians and commentators pore over the detail of the statistics in search of good or bad ‘news’. So it may be best to ignore the headlines on tomorrow’s labour market statistics and concentrate on what hasn’t changed. When it comes to unemployment, and youth unemployment in particular, no news would be very bad news.