Friday, November 28, 2014

The Mirage of Youth Unemployment

PARIS – Economists worldwide need better ways to measure economic activity. Relying on GDP growth rates to assess economic health, almost all of them missed the warning signs of the 2008 financial crisis, including an $8 trillion real-estate bubble in the United States, as well as property bubbles in Spain, Ireland, and the United Kingdom. Together with households, financial institutions, investors, and governments, economists were swept up in the financial euphoria that led to excessive risk-taking and severe over-leveraging of banks and households. Even the eurozone’s macroeconomic imbalances largely went unnoticed.

Unemployment estimates also are surprisingly misleading – a serious problem, considering that, together with GDP indicators, unemployment drives so much economic-policy debate. Outrageously high youth unemployment – supposedly near 50% in Spain and Greece, and more than 20% in the eurozone as a whole – makes headlines daily. But these numbers result from flawed methodology, making the situation appear far worse than it is.

The problem stems from how unemployment is measured: The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals in the labor force. So if the labor force comprises 200 workers, and 20 are unemployed, the unemployment rate is 10%.

But the millions of young people who attend university or vocational training programs are not considered part of the labor force, because they are neither working nor looking for a job. In calculating youth unemployment, therefore, the same number of unemployed individuals is divided by a much smaller number, to reflect the smaller labor force, which makes the unemployment rate look a lot higher.

In the example above, let us say that 150 of the 200 workers become full-time university students. Only 50 individuals remain in the labor force. Although the number of unemployed people remains at 20, the unemployment rate quadruples, to 40%. So the perverse result of this way of counting the unemployed is that the more young people who pursue additional education or training, the higher the youth unemployment rate rises.

While standard measures exaggerate youth unemployment, they likely understate adult unemployment, because those who have given up their job search are not counted among the unemployed. As the Great Recession drives up the number of such “discouraged workers,” adult unemployment rates appear to fall – presenting a distorted picture of reality.

Fortunately, there is a better methodology: The youth unemployment ratio – the number of unemployed youth relative to the total population aged 16-24 – is a far more meaningful indicator than the youth unemployment rate. Eurostat, the European Union’s statistical agency, calculates youth unemployment using both methodologies, but only the flawed indicator is widely reported, despite major discrepancies. For example, Spain’s 48.9% youth unemployment rate implies significantly worse conditions for young people than its 19% youth unemployment ratio. Likewise, Greece’s rate is 49.3%, but its ratio is only 13%. And the eurozone-wide rate of 20.8% far exceeds the 8.7% ratio.

To be sure, a youth unemployment ratio of 13% or 19% is not grounds for complacency. But, while the eurozone’s youth unemployment rate has increased since 2009, its ratio has remained the same (though both significantly exceed pre-2008 levels).

During the 2006 French student protests, France’s 22% youth unemployment rate appeared to compare unfavorably to rates of 11%, 12%, and 13% in the United Kingdom, the US, and Germany, respectively. But the Financial Times showed that only 7.8% of French under-25’s were unemployed – about the same ratio as in the other three countries. France simply had a higher percentage of young people who were full-time students.

Failing to account for the millions of young people either attending university or in vocational training programs undermines the unemployment rate’s credibility. And, while some young people use higher education to escape a rocky job market, their choice to build new skills should not negatively impact perceptions of their country’s economic health.

Policymakers do, of course, need to address the problem of youth unemployment; but they must also acknowledge that the problem is not as serious as the headlines indicate. Unfortunately, these distorted results have become conventional wisdom – even for respected economists like the Nobel laureate Paul Krugman, who recently invoked the flawed “50% youth unemployment” figure.

Thus, four years after the crisis erupted, methods for measuring and assessing economic health remain alarmingly inadequate. As any pilot knows, flying without radar or accurate weather forecasts is likely to end in a crash.

Read more from our "Imperfect Indicators?" Focal Point.

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    1. CommentedGianpiero de Pascalis

      Original point of view but far distant from reality. Very shortly:
      1. perhaps we should add to the numerator all those thousands of young individuals there were obliged to leave their country because of the lack of work opportunity at home. Such a major issue with great social cost which is overlooked by the ratio.

      2. what about underemployment? I mean those who hold a degree or even a phD in law, finance, politic science that are forced to work in call centers or even as pizza boy? That happens so often and is again overlooked by the ratio.

      3. including students in the denominator is very misleading too. Are they considered as if they were employed? Perhaps once they finished their studies their chances to get a job is better measured by what is here defined as the FLAWED ratio.

      4. even those who are employed are often relying on family support to live off their life. Low salary, overtime working, precarious conditions in general must be addressed by a set of active policies. We already lost state’ support, are we also losing the economist’s one?

      This is a dramatic period for the so called NO FUTURE generation I would suggest to use less statistic and to get down in the streets, talk with people and understand what the REAL problems we are facing are.

    2. CommentedHerm E

      Agreed that the youth unemployment number can be misleading, but it seems your example exaggerates how misleading. First, your example assumes (perhaps only to make the point more clear) no reduction in the number of youth unemployed once others cease looking for work, but as a practical matter I suspect that would be untrue and thus the difference between the rate and ratio should be less extreme in practice. Also, while you acknowledge the point, your analysis strikes me as too dimissive of the how job market prospects truly affect the number of young people seeking to "build new skills". As college and post-graduate admissions numbers reflect, lack of jobs is a huge driver of college admissions, which is to say that a lot of these people would prefer not to go to school, which explains increased frustration and anger despite a ratio that is unmoved since 2009.

      When you consider the issues concerning debt now associated with higher education, this isn't exactly a trivial aspect of the youth issue.

    3. CommentedTom Walker

      Although I would agree that the raw unemployment rate gives a misleading impression, Mr. Hill's solution is also unsatisfactory because it ignores the effect of exit from the labor force of youth because of dim job prospects. Ultimately any "measurement" of unemployment is going to be misleading because the nature of unemployment changes from period to period. This is especially true when government policy targets headline statistics and "solves" problems by fiddling with the dials. Let's face it, the entire conceptual apparatus in which GDP growth and unemployment rates predominate is broken beyond repair. Rearranging the statistical deck chairs won't keep the sinking ship afloat.

    4. CommentedZsolt Hermann

      As one of the comments suggest, statistics and numbers are open for interpretation and politicians, decision makers, people influencing public opinion can use and twist them any way they like.
      Even more confusing is that we still examine everything in isolation, talking about Greek or Spanish problems, soft landing or hard landing in China, American elections and real estate bubble, but we still do not want to put a comprehensive picture together to see if the vector of our global development is going in the right direction or not.
      All our individual, local problems originate from two sources.
      1. Although we talk about a global world, global economy incessantly, in our planning, attitude and action we still behave as we existed isolated without direct connections to each other.
      Despite the totally interdependent nature of today's human network we still only make calculations on self interest without any consideration for the well being of the whole.
      2. In terms of the economy, more and more experts from all fields conclude that it is impossible to maintain the constant quantitative growth model as it has exhausted all of its principle foundations from markets to labor, from financial support to social tolerance, not to mention natural resources.
      If we truly want to solve the crisis and build a sustainable future we have to start looking at and understanding the whole picture instead of picking the individual details that suit our own argument.

        CommentedMark Pitts

        Five billion people remain in poverty. Without significant future economic growth, they have no hope.

    5. CommentedThomas Haynie

      Problems are rarely as significant as headlines make them out to be. If the same metric is used universally then is it really an issue? You understand that it’s a little high but what we are usually concerned wit his the relative comparisons and the rates of change anyway. Assuming the country’s economic structure will set some natural rate of unemployment then fixating on the exact number isn’t so productive from a policy stand point is it? The important questions become more about are adding jobs or losing jobs? How does it compare to our peers. Then again a little more accuracy is usually a good thing in any endeavor.

    6. CommentedJ. C. the very ends it´s just a percentage... the interpretation depends on what you use for comparison...

    7. CommentedFrank O'Callaghan

      An eye opener of an article. Without a clear picture there are inevitable mistakes to be made. Does this explain why Europe has not exploded in flames?

      The situation is further calmed by the social provision in Europe's model. We should hear more from Steven Hill.