Long-term effects of youth unemployment

Today’s figures show that there are 1.04 million 18-24 year-olds who are unemployed - more than one-in-five of those in the workforce. Even if we leave aside the waste and unhappiness this is causing - and we damned well shouldn’t - this has long-term effects.

One of these is that an early spell of joblessness has long-lasting effects upon one’s future earnings and employability. One survey says:

Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes. For the young a spell of unemployment does not end with that spell; it raises the probability of being unemployed in later years and has a wage penalty.

For example, one study (pdf) found that men who had been unemployed for more than six months before the age of 23 earned an average of 7% less than others even at the age of 42; this controls for educational qualifications.

But there’s something else. Experiences in our formative years shape our attitudes to risk. Ulrike Malmendier says (pdf):

Economic events experienced over the course of one’s life have a more significant impact on individuals’ risk taking than historical facts learned from summary information in books and other sources.

So, for example, people who had seen bad equity returns in their youth own fewer equities than others even decades later.

This rings true for me personally; I am very risk-averse, I suspect in part because my early adult years were times of mass and rising unemployment.  Among my (limited) circle, people of my age are less likely to gamble than those older or younger than me.

If this is right, today’s youth unemployment could reduce risk-taking for years. It means we’ll have fewer shareholders and entrepreneurs than we otherwise would even in many years’ time.

If that sounds bad, there might be a silver lining here.

It could that one pleasant legacy of the 1930s depression was a favourable unemployment-inflation trade-off in the 1950s and early 60s. This was because workers who remembered the depression were scared of unemployment and so did not press for large wage gains even though they were in a strong labour market. The upshot was that inflation stayed low. However, as workers who remembered the 30s retired and were replaced by workers who had known only full employment, risk aversion and the fear of unemployment receded and so wage militancy rose.

It might be, therefore, that in 20 or so years time, we’ll enjoy low inflation if we get an economic boom because today’s joblessness might permanently reduce wage militancy (or an inclination to get into debt).

This, I suspect, is the best that can be said in favour of present economic policy.

Comments

[JustAnotherTaxpayer]

Not to detract from the (good) point, but it is useful to provide context:

307K of the 1m are in full time education.

The lowest rate of 16-24yr unemployment (ex-students) we've seen in the UK recently is around 12% - this what we were at in 2000-2004; arguably that is around the "natural" rate.

The rate noticeably spiked up 2005-2007. It would be interesting to know what caused that.

http://timetric.com/index/unemployment-16-24-not-edu-all-lfs/

Wage militancy by public sector unions over the last three years have been pretty sick. They should have lapped up the 3% pay cuts from higher pension contributions as a preferable trade-off against higher unemployment. Should they not be damned for this failure?

[Account Deleted]

I think the link between moderate pay demands in the 50s/60s and fear of unemployment is tenuous. There is a far more empirically sound correlation with the width of trousers legs.

The drainpipes of the 50s and early 60s gave way first to flares in the late 60s and then bell bottoms in early 70s as inflation and wage militancy grew. The fashion for Oxford bags in the mid-70s coincided with the highpoint of inflation in 1975.

The decline of inflation in the late 70s and 80s, and the pummeling of the unions, started with the return of thinner trews, care of Punk.

Our current problems (with the growth of personal debt substituting for wage growth) started in the early 90s, which saw the introduction of the pseudo-flare known as boot cut.

There has been a strong counter-trend to skinny jeans again since the mid-00s, a visible concomitant to deleveraging anxiety.

I rest my case.

[Chris Purnell]

You seem to be forgetting the impact of the Second World War. There was a distinct possibility that your capital assets could be swept away along with your life why look for more risk? Also the massive dislocation caused by Evacuation and National Service helped to create a warm feeling for security: personal and financial.

[Ralph Musgrave]

Chris, Re the “pleasant legacy of the 1930s”, I’ve been on about that for decades. You are the first person I’ve come across to spot that point.

[George Hallam]

"workers who remembered the depression were scared of unemployment and so did not press for large wage gains even though they were in a strong labour market. The upshot was that inflation stayed low. However, as workers who remembered the 30s retired and were replaced by workers who had known only full employment, risk aversion and the fear of unemployment receded and so wage militancy rose."

This is a beautiful theory. It's only defect is that it doesn’t fit the facts.

There was quite a bit of militancy during the war.

Militancy was rising from the mid-1960's onwards.

At that time most men worked right up until the were 65. So the only people retiring were those born in the early 1900's.

However, that still left substantial numbers of workers who "remembered the 30s".

Anyone born between 1910 and 1914 would be in their 20s during the worst years of the depression and yet would not have been up for retirement before 1975.

Up until 1944(?) most people entered the labour market at 14. So people born as late as 1920 could claim to "remember the 30s" yet they would have been under 50 when there was a surge of unofficial strikes and occupations in 1969-70.

Try this for an alternative explanation.

The war-time compromise/post-war consensus delivered massive gains right up until the mid-1960s. The rise in militancy was a response to inflation cutting real wages.

[MacroAgro]

Wanker.

[Leo]

To what extent is this relationship causal. Are people who are unemployed actually harmed (apart from fiscally obviously) by unemployment. Or is it just that people who are worse workers are more likely to be unemployed?

[alastair harris]

couldn't agree more. Time to scrap the minimum wage policy and reform the welfare nannyism that makes unemployment pay.

[Keith]

George Hallam is probably correct. I was under the impression that many economists both right wing and left wing in their political views hold that workers do not cause inflation but rather try to maintain real income in response to inflation. The past experience of workers and their subjective tendency to millitancy is irrelevant. In the same way firms are always trying to make bigger profits; yet they cannot raise prices to do so unless demand and competition allow them to do so. It is far more likely that the too tight monetary policy of the Gold standard produced the depression and low inflation of 1929 -36 and the lax Vietnam war monetary expansion of the sixties produced Inflation, transmitted world wide from the USA via the Bretton woods currency fix. Add in the over dependence of the world economy on cheap oil from the middle east creating the possibility of a "corner" in oil re 1973. Blame The Jew and Arab and LBJ; plus Nixon and his Fed chair. As Chris likes to say we should look for structural explanations for social and economic events not moralistic explanations based on occult psychological mechanisms.