Youth unemployment is one of Europe’s most glaring problems. Opponents of austerity point to the swelling ranks of unemployed young (15 to 25 years of age) people in Europe’s periphery as proof that fiscal tightening can no longer be tolerated. The Financial Times notes that youth unemployment rates have reached 51 per cent in Greece and Spain, 36 per cent in Italy and Portugal, and 30 per cent in Ireland, and warns "is it plausible that people will put up with this indefinitely? No” (Wolf 2012).
The seriousness of the problem cannot be underestimated, and the speed at which young people have been thrown out of the labour market is frightening. But equally frightening is how long Europe has lived with high youth unemployment. Sadly, in several countries the rise in youth unemployment looks largely like a reversion to the mean after unsustainable credit growth spurred a bubble in fixed-term jobs.
Figure 1. Youth unemployment rates
Implausible as it sounds, Italian voters have put up with an average youth unemployment rate of 30 per cent for the last 40 years; Spanish voters with a rate of 32 per cent. Italy experienced "strong” economic growth during 1994-2000, with GDP rising at an annual average of 2 per cent. During this boom period, the youth unemployment rate still averaged 33 per cent. In other words, one young person in three was unemployed when the economy was at its strongest. The rate never dropped below 20 per cent.
Figure 2. Italy: Youth unemployment and GDP growth
Spain’s economy grew at an average of 3.6 per cent between 1995 and 2007. During this impressive run, the youth unemployment rate averaged 28 per cent; it was below 20 per cent for just three years, with a "best performance” of 18 per cent in 2006.
Figure 3. Spain: Youth unemployment and GDP growth
The IMF (Morsy 2011) has recently pointed out that the unemployment rate of young people in advanced countries has historically been higher than those of older age groups, partly because they have fewer contacts and less job-search experience. But it also noted that in some countries, structural problems clearly put young people at a much more significant disadvantage. Germany’s youth also have a higher unemployment rate than older generations, but their rate is just over 8 per cent.
Austerity hurts, but it’s the underlying structural problems that are the real issue – rigid and distorted labour markets and education systems plagued by falling standards and a growing misalignment with the demand for skills of a rapidly changing and very competitive global economy (Garcia, J R, 2011, "Youth unemployment in Spain: causes and solutions”, BBVA Working Paper 11/31, September). Germany’s better coordination between the school system and industry, including via its apprenticeship programmes, pays off.
Formal and informal social safety nets attenuate the extent of the problem. Family networks in Italy and Spain, for example, play an important role in providing accommodation and financial support to young unemployed people. Another question is how many of those who are registered as unemployed might be working in the informal sector. But the negative social and economic impact remains severe. Most depressingly, this ‘wasted youth’ problem translates into a deterioration of the human capital stock, depressing productivity and economic growth for years to come.
It is important to ensure that fiscal adjustment and structural reforms are socially sustainable; to the extent that there is room to mitigate the impact of austerity on growth and employment, this should of course be done – although in some countries the room is limited, or needs to be found by tackling wasteful public expenditures. But it is equally important to recognise where the key structural problems are and to address them. The ambition cannot be simply to go back to the good old days of 30 per cent youth unemployment.
Marco Annunziata is chief economist at General Electric Co. Originally published on www.VoxEU.org. Reproduced with permission.