Youth unemployment is still a cause for concern

Have politicians and labour market economists been misled about youth unemployment by the way it is measured? One of the unemployment worries since the start of the recession has been the rise in the youth unemployment rate. Between the first quarter of 2008 and the first quarter of 2011, the unemployment rate for 18 – 24 year olds rose 5.5 percentage points and that for 16 -17 year olds by 13.3 points.

A report (pdf) on “Explaining the relationship between unemployment rates and inactivity in young people” published today by the Office for National Statistics suggests that the unemployment rate may overstate the problem.

There’s always been a worry that using the unemployment rate to measure youth unemployment is problematic, mainly because of the rising number of young people staying on in full-time education:

• For labour market statistics, everyone is classified as ‘economically active’ or ‘economically inactive’. If you’re economically active, you’re either in employment or unemployed, which means that you’re looking for work and able to start work at reasonable notice;

• Some people in full-time education are economically active – many students have paid jobs nowadays and some who haven’t are looking for work and able to start quickly. But it’s still true that people in full-time education are less likely to be economically active than the rest of the population;

• So the rise in education participation means that the number of young people who are economically inactive is bigger than it would have been otherwise and the number that are economically active is smaller;

• The unemployment rate is produced by dividing the number of unemployed people by the number of economically active people;

• So the youth unemployment rate would tend to go up – even if the number of unemployed young people remained the same it would be divided by a smaller number.

This would be a worry about using the unemployment rate in discussions about what was happening to any group that was shifting to (or from) economic inactivity. These days it’s young people who are most affected.

Unfortunately, we can’t really use the unemployment level (the number unemployed) instead, because the overall number of young people has been shifting over the past twenty years:

A hundred thousand unemployed young people in 1999 obviously means something different from the same number today. ONS deal with this by looking at the “unemployed proportion” - the proportion of the total number of young people who are unemployed.

The interesting result is that the increase in youth unemployment during the recession was significantly less sharp when measured this way:

If we concentrate on the unemployment rate, the current figures are clearly worse than in the early 90s, whereas the unemployed proportion results in a level that is much the same.

Coming out of the recession, the gap between the unemployed proportion and the unemployment rate was larger than it had been before. This is because the proportion of young people who are inactive rose during the recession – largely because the percentage staying on in education (which has been rising since 1997) rose at an even faster rate during the recession.

Does this mean that we shouldn’t take youth unemployment so seriously?

No. For one thing, even when we measure unemployed proportions instead of unemployment rates, young people have still been especially hard hit since the start of the recession:

In any case, the most important reason to be concerned about youth unemployment isn’t really its size. We know (pdf) that youth unemployment, especially if it is long-term, is especially bad for physical and psychological health, that having been unemployed in youth harms people’s earnings even decades later and that it has huge social costs such as higher crime rates.

Any increase in youth unemployment, however measured, is a cause for concern.