Measuring Youth Unemployment

The problem of youth unemployment has rightly been highlighted as one of the major issues facing European countries today.  The newspapers have fastened on the shocking statistic that the unemployment rate among Spaniards and Greeks aged 15 – 25 is about 50 per cent, while the rate for the EU as a whole is about 20 per cent.  These are alarming numbers, but they are also somewhat misleading.

As Stephen Hill pointed out in a piece in the Financial Times on June 24th, the unemployment rate may not be the best measure of labour market conditions among young people who have opportunities to stay in the educational and training systems rather than entering a depressed labour market.  For this reason, an alternative measure, the unemployment ratio, has gained currency.

The conventional unemployment rate is  the numbers ‘unemployed’ as a proportion of the ‘labour force’.  The ‘labour force’ is the sum of the employed and unemployed.  The ‘unemployed’ are those actively seeking work, but not at work. (For young people it is of interest to break unemployment down into those ‘looking for first regular job’ and those who are ‘unemployed having lost or given up previous job’.)

The problem with using the  unemployment rate to measure labour market conditions among young people is that the denominator does not include those who are in the educational system or on full-time training courses.  During a recession, the higher the proportion of a youth cohort that stays on in school or college or in training, the smaller the labour force and the higher the unemployment rate. This is perverse.

By using the whole cohort as the denominator, the unemployment ratio avoids this pitfall and it may be argued that it therefore provides a clearer picture of hardship being caused by the lack of employment. (Of course this is subject to the reservation that increased educational participation may involve putting square pegs in round holes, with some young people taking courses in which they have no interest.)

The limitations of the unemployment rate as a measure of labour market conditions among the youth population is acknowledged by Eurostat, who now publish both the ratio and the rate for the population aged 15-24.  (Their recent figures for Ireland for 2011 are low and may not reflect the latest Census returns.)

The distinction between the unemployment rate and ratio certainly matters.  Data in the recently-released 2011 Census of Population volume This is Ireland Part 2 show the population classified by ‘principal economic status’. These reveal an unemployment rate of 38.7 per cent among the population aged 15-24 compared with an unemployment ratio of 14.2 per cent. While the ratio of 14.2 per cent gives no grounds for complacency, it is less alarming than the headline rate of almost 40 per cent.

It is perhaps even more important to note that the unemployment ratio has not risen as dramatically as the unemployment rate since the onset of the recession in 2008. The Figure displays the three concepts based on the 2006 and 2011 Census data.

(The Table at the end provides more details.)

Whereas the unemployment rate rose by 140% the ratio rose by 90%.  Thus, the rate tends to overstate both the level of unemployment among young people and the rate at which it has risen.

It may, however, be objected that the unemployment ratio includes all those who are not in the labour force in the denominator but excludes discouraged workers and similar forms of disguised unemployment from the numerator.  This bias would certainly be significant among older workers, who are more likely to cease looking for work and to drop out of the labour force because no jobs are available.  Its effect on the youth data, however, is smaller because labour force categories other than ‘employed’, ‘student, and ‘unemployed’ are relatively unimportant among the young.  In 2011 less than 2 per cent of population aged 15- 24 are classified as ‘looking after home/family’!

None the less, to take account of ‘dsicouraged workers’ it is worth looking at another concept that has gained some currency .  This is the NEET ratio. It refers to the proportion of the population that is Not in Employment, Education or Training.  To calculate this ratio for Ireland I have assumed that those in ‘(full-time) training’ are classified as ‘students’ in the Census.  The resulting ratio must, by definition, fall between the unemployment ratio and the unemployment rate.  From the Figure we can see that it lies closer to the unemployment ratio. Moreover, it has risen less rapidly than either the unemployment rate or ratio.   In 2011 the NEET ratio was ‘only’ 65 per cent above it 2006 level.

It is striking that the widely-used unemployment rate is so much higher, and has risen so much more, than the alternative – and arguably better – measures of the situation in the youth labour market.

The reason why the unemployment rate overstates both the level and rise in Irish youth unemployment is the high level of educational participation and its marked increase over the past five years. The proportion of the 15-24 year-old population in the educational system rose from 50.1 per cent in 2006 to 60.5 per cent in 2011.  While not all of the additional years of schooling will be as productive as we would wish, being in the educational system is less wasteful than being unemployed.  This aspect of the adjustment to the present crisis is concealed by the conventional youth unemployment rate.

None the less, we cannot lose sight of the collapse of employment among the youth population.  In 2006 39.5 per cent of the population aged 15-24 was in employment.  By 2011 this percentage had fallen to 22.5.  Among those aged 20-24 the rate declined from 60.0 to 39.0.  While the youth unemployment crisis may not be as severe as suggested by the headline youth unemployment rate, it is a crisis.

Summit Statement

The short statement from from the European Council summit held last night/this morning can be read here.  Some of the points of note:

  1. “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.”
  2. “The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.”
  3. “We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.”

UPDATE: I have provided some initial reaction to the summit here.

Systemic Banking Crises Database: An Update

A new IMF Working Paper by Luc Laeven and Fabián Valencia can be read here.  The authors look at the costliest banking crises in terms of fiscal costs, public debt and output losses.  The paragraph beginning on the bottom of page 19 is noteworthy.

Iceland and Ireland also feature among the ten costliest banking crises in terms of overall increase in public debt, with public debt in both cases increasing by more than 70 percent of GDP within four years. In terms of output losses, the ongoing crises in Ireland and Latvia are among the ten costliest banking crises since the 1970s, with output losses exceeding 100 percent in both cases. Ireland holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top-ten of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression. And the crisis in Ireland is still ongoing.

Krugman and Layard on a manifesto for economic sense

Paul Krugman and Richard Layard put forward a case for a coherent and evidence based approach to the crisis. Essentially they argue that a strategy of focusing on the reduction of public debt levels exclusively in order to regain market confidence makes no sense, and has been falsified empirically. They also argue that structural imbalances shouldn’t prevent the use of discretionary fiscal policy for stabilization purposes when it is available.

This chart of the drop in domestic demand from the recent Nevin Institute quarterly report (page 4) is particularly striking as a motivating factor in discussing Krugman and Layard’s piece.

Final Domestic Demand

Krugman and Layard have a manifesto you can sign up to (I did).

There are lots of things in this piece I agree with, but two big ones are:

1. Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).
2. The confidence argument and its attendant strategy is completely wrong headed at this juncture, Ireland in particular shouldn’t be held up by anyone as the role model for austerity, either in the 1980s or today.

There are also aspects I don’t see as pertinent to the Irish case.

Krugman and Layard write:

A second argument against expanding demand is that output is in fact constrained on the supply side – by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations.

But in Ireland, in the IT sector for example, and especially in really high end tech jobs like online video gaming and such, they can’t get people. (Obviously in other sectors like services and construction their argument holds.) There are other examples but I think in a small open economy like Ireland this argument isn’t that important.

The key question from an Irish point of view is: to what extent is the Krugman-Layard prescription possible in a country with so little fiscal room for maneuver? Translating the argument down a bit, if Ireland is somewhere between Greece and Spain in terms of it’s problems, even if Enda Kenny et al bought the Krugman/Layard prescription lock stock and two smoking barrels, given where we are right now, are our options severely limited in any event? I’d welcome your thoughts on this.