Saturday, November 22, 2014

Income Inequality and Youth Unemployment

CAMBRIDGE – With Thomas Piketty’s controversial book Capital in the Twenty-First Century topping several bestseller lists, income inequality – which has been on the rise since the 1970s – is once again capturing global attention. Debate surrounding the subject has covered many of the trend’s repercussions, including decreased social cohesion, growing slums, exploitation of labor, and weakened middle classes. But one effect has received relatively little attention: youth unemployment and underemployment.

Since the global economic crisis, youth unemployment has soared worldwide. In the developed world, 18% of people aged 16-24 are jobless. While the youth unemployment rate in Germany remains a relatively low 9%, it stands at 16% in the United States, 20% in the United Kingdom, and above 50% in Spain and Greece. The Middle East and North Africa also have very high youth-unemployment rates, estimated at 28% and 24%, respectively. By contrast, only 10% of young people in East Asia, and 9% in South Asia, are unemployed.

But policymakers have done relatively little to address the problem. The world now risks creating what the International Labor Organization has called a “lost generation,” with global youth unemployment expected to reach 13% by 2018.

There is no single factor driving this trend. In China, for example, youth unemployment is rooted in the dominance of the manufacturing sector, which provides far more job opportunities for high-school graduates than university-educated workers.

Youth unemployment can also stem from a market mismatch. In a recent survey of nine European Union countries, 72% of the educators who responded reported that new graduates are qualified to meet prospective employers’ needs, though 43% of employers reported that candidates do not possess the required skills.

But, whatever the main factor underpinning high youth unemployment, income inequality undoubtedly exacerbates the problem. Simply put, many jobs – particularly the most lucrative ones – are available almost exclusively to young people from wealthy backgrounds.

In the UK, for example, only 7% percent of children attend private schools. But roughly half of the country’s chief executives, and two-thirds of its doctors, have been privately educated. This trend is expected to persist, with the next generation of doctors likely to be born into families that rank among the wealthiest 20% of the population.

There are several possible reasons for this pattern. For starters, the highest-status positions require the most prestigious educational background – and that costs money. Moreover, many internships – a prerequisite for the most attractive jobs – are unpaid, making them unfeasible for graduates whose families cannot afford to support them.

But money is not the only requirement. In many cases, sought-after jobs and internships – and even admission to top educational institutions – are far more accessible to those who are within the employers’ personal or professional network. When the job market rewards whom you know more than what you know, young people with well-connected parents have an obvious advantage.

Inherently biased recruitment and hiring practices exacerbate this inequality further. While companies may, in theory, recognize the value of bringing together talent from a variety of backgrounds, they tend to recruit candidates with a familiar set of skills, experiences, and qualifications. Even if someone with a different educational background or work experience manages to get face time with those responsible for hiring, they must overcome the perception that they are a riskier choice.

The fact that academic results are among the top hiring criteria skews outcomes further. People who had the privilege of receiving private education are likely to have attended more reputable universities. The small proportion of students from poorer backgrounds who manage to gain admission and secure scholarships to top institutions often have lower grades, especially toward the beginning of their university education, owing to their inferior preparation.

In fact, financial constraints prevent many capable students from attending any university at all, owing to their need to earn an income that only full-time employment can provide. As a result, their earning capacity is severely constrained, regardless of their talent or work ethic.

In order to create a level playing field, employers should re-think their recruitment strategies and consider applicants based on a broader range of criteria. Businesses can only benefit from the fresh perspectives that a more diverse candidate pool offers.

With financial status serving as the key determinant of opportunities, young people from poorer backgrounds are becoming increasingly discouraged – a situation that can lead to social unrest. Unless all young people have legitimate prospects of improving their social and economic status, the gap between rich and poor will continue to widen, creating a vicious cycle that will be increasingly difficult to escape.

The good news is that efforts to alleviate youth unemployment will reduce income inequality, and vice versa. The society that emerges will be more stable, unified, and prosperous – an outcome in which everyone, rich or poor, has a stake.

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    1. Commentedjesi wagle

      Definitely as said by authors ‘‘efforts to alleviate youth unemployment will reduce income inequality’’. Similarly
      I have published a article on philanthropy and it has been proved that ‘real philanthropy’ could also help to reduced inequality. Here is the excerpt -

      According to a Oxfam’s recent study, the 85 richest people in the world have accumulated the same wealth as the bottom 3.5 billion. One in eight people go to bed hungry every night, while 1.4 billion adults are overweight. Top CEOs were remarkably successful in maintaining their high pay. The ratio between earnings of a CEO and a worker is 243 to 1 as of 2010. Much of the inequality that exists today is a result of government policy, both what the government does and what it doesn’t do (Stiglitz).
      Between 2001 and 2011, the number of non-profit sector increased 25 percent. Their growth rate now exceeds that of both the business and government sectors. It’s a massive business, with approximately $316 billion given away in 2012 in the United States alone’’, But on the contrary inequality is increasing. (Buffett, NY Times, 2013). Philanthropy was treated as a source of ‘tax exemption’ and self-business promotion strategy rather than reducing inequality. So some short of improvement on philanthropy is also expected.

      Strong desire on philanthropy

      Because of need of quick reform philanthropy is being viewed as a potential tool to reduce inequality. Former US President and founder of Clinton Foundation Bill Clinton wrote in Finance and Development that ‘‘We need to find new ways to extend the circle of opportunity…with systems, infrastructure, and networks that enable growth…it enhances the stability of societies, and equally important, it shifts the work of the international aid community from philanthropy to partnerships.’’ In his recent article, World Bank President Jim Yong Kim argued ‘‘how the rich live, is now out… And all of us — all 7 billion of us — face an impending disaster from climate change if we do not act today with a plan equal to the challenge.’’ Nemat Shafik, Deputy Managing Director of IMF, highlighted that income inequality has widened, chronic unemployment and pervasive underemployment have escalated, populations are growing unevenly and climate change is worsening, and further she said that ‘’By 2050, the global economy must provide food and jobs for more than 9 billion people, 85 percent of whom will live in what are now developing countries.A new agenda needs to be truly global in scope, relevant to all in its goals, and realistic in how it assigns responsibilities—to advanced, emerging market, and developing economies. Philanthropy could be a truly global agenda.’’ Because of inequality, Stiglitz says that ‘‘the darkest sides of the market economy that came to the light were the large and growing inequality, … we can achieve our fundamental values, with more opportunity, higher total income, a stronger democracy and higher living standard … by political decisions’’. The CEO of Unilever Paul Polman wrote that ‘‘The capitalist threat to capitalism…Addressing the failures of modern capitalism will require strong leadership and extensive cooperation between businesses, governments, and NGOs.’’ ProjectSyndicate). Jim O’Neill forecasts BRICs would be the most powerful bloc by 2050. (Wagle)

      Hence, richest are the output of the state. Now they have their own responsibility. Ignoring their role is neither feasible nor acceptable so as globalization. They do charity work optionally to fulfill their own interest. But what need to be done is private sector need to investment in welfare state as well, not only for their business motive. Certain per cent of profit must go to welfare fund. Weak must be protected not only by the state but private sector is also equally responsible. The contribution to the society will help to increase purchasing power of low income consumer. Increasing purchasing power means consumer society can play effective role in the market as consumer, private and government are parts of triangular shaped relation in liberal economy.
      Read more in detail:

    2. CommentedRobert Snashall

      Article starts well and then just descends into uselessness.
      So your plan for fixing this problem is for businesses to rethink their hiring strategies? Why haven't they already rethought them, and what's going to change their mind. They're not going to wake up one morning and go "wait a second, there's a lot of bloody wealthy people in this office, how's about we go and hire some poor people as well just to balance it out a bit". Take finance for example, they want to hire rich people because they will be better able to relate to their rich clients, will get on better with the other rich employees, will refer their rich friends to the firm.
      Society has an inexorable tendency to move towards a plutocratic social structure, it has been the norm for 6000 years, but took a brief break from it in the last 100 years. The old institutions in place to prevent the reversion to this structure are outdated due to globalization and technology and must be updated accordingly. A lot of new laws must be put in place to prevent this blatant nepotism, unpaid internships, poor government schools, deindustrialisation and so on.

        CommentedVelko Simeonov

        Reading you comment was more worthwile, than reading the article. By the way the entire article can be summed up in couple of words; money attracts money, which in turn attract even more money.

    3. CommentedZsolt Hermann

      As the article rightfully points out we cannot discuss individual aspects of the crisis independently as each facet of the crisis is tightly interconnected.
      Trying to solve separate elements of the crisis cannot lead to resolution.

      But in order to solve such an interconnected crisis in an inter-dependent, integral system we have to find the common nominator, the root cause of all the "illnesses".

      And the main problem is that humanity has been stubbornly building an artificial, unnatural bubble, disconnected from the general laws and principles of the vast natural system we evolved from and still exist in.

      A constant quantitative growth paradigm, excessive, exploitative overproduction, over-consumption, ruthless competition for luxuries/excesses beyond necessities does not have right to exist in a closely balanced, finite natural system that is built on homeostasis.

      We have been talking a lot about exhausting natural resources but what we have already exhausted are the human resources. Inequality, unemployment, intolerable debt, depression, drug and other substance abuse, the breakdown of the classical family model are all sign of this facet of the crisis.

      There are no individual, partial solutions for a global, integral system crisis.
      We have to build a completely new system, with a new operating "software", with new, consciously self-changing human beings that are adapted to the laws and principles of the natural system that surrounds us.

        CommentedRobert Snashall

        While I agree with your main argument that the focus on growth is ridiculous, but I fail to understand any of your suggestions.
        From what I gather one of your solutions is to be at peace with life and reject the pursuit of material possessions. I grew up living near a lot of the deprived communities that have exceptionally high unemployment and if you were to tell any of them that this was the solution to their problems, they would probably punch you. When your community has mass unemployment, social structures decay, people change, the next generation suffers. It is tragic. Huge work has to be done and that might even mean destroying the free-trade policies, to bring back the jobs to these communities.
        It isn't some fucking mindset or the wrong belief system that's making these communities decay. It's poverty.