The rise in joblessness among young people began long before the recession - Barbara Petrongolo and John Van Reenen consider potential explanations.unemployment compensation, job search, youth, recession

Barbara Petrongolo

John Van Reenen

English

Research Papers in Economics

CentrePiece Summer 2011
2
T
he UK economy has
experienced the
worst recession since
the war in terms of
loss of output, yet
the overall
unemployment rate
is 8%, lower than the peak of the 
1980s and 1990s recessions. Youth
unemployment, however, has risen
dramatically, and because of the ‘scarring’
effects of joblessness on an individual’s later
life, has become a key policy concern. But
to tackle the problem, it is important to
understand how youth unemployment
typically responds to a cyclical downturn
and why, this time, it started to rise well
before the recession began.
Figure 1 shows the unemployment
rates for the working age population
(people aged 16 to 64) and for three
subgroups – prime age (25-49), young 
(18-24) and teenagers (16-17). The prime
age group follows the general pattern of
the aggregate labour market, but it is 
clear that the young are much more
sensitive to the state of the business cycle.
The unemployment rate is higher for the
younger groups and the magnitude of this
disadvantage widens during a recession.
This is unsurprising as employers will be
reluctant to lose more experienced workers
who have firm-specific skills and greater
redundancy costs. So the burden of
adjustment typically falls on low-wage
workers such as young people. Minorities
and the less educated also tend to fare
worse during downturns.
The fact that teenagers do not appear
to have experienced the same fall in
unemployment after the 1990s recession as
older groups can be explained by important
concealed ‘selection effects’ as increasing
numbers of teenagers without jobs stay in
education. Indeed, if instead of focusing on
unemployment figures we use information
on the proportion of young people who are
‘not in employment, education or training’
(NEETs), the trend for 18-24 year olds is
very similar to the trend in unemployment,
while there has been a decline in the 16-17
year olds NEET rate.
Has the latest recession hit young
people much worse than in the past?
Figure 1 shows that the unemployment
rate for the young has increased by more
(in absolute terms) than the
unemployment rate for older groups since
the onset of the recession. Moreover,
there has been a significant fall in hours
worked by young people compared with
older groups, while wages have flattened
or fallen for younger workers. Both of
these facts indicate that young people are
faring worse during the downturn than
other groups.
But it could be said that this has been
the general pattern in all recessions. The
Joblessness among the UK’s younger generation is
currently at very high levels, but the rise in youth
unemployment began in 2004, well before the
onset of recession. Barbara Petrongolo and 
John Van Reenen consider potential explanations.
Youth 
unemployment
40%
30%
20%
10%
0
2010 2005 2000 1995 1990 1985 1980 1975
Age 16-17
Age 18-24
Age 25-49
Age 16-64
Source: Labour Force Survey (annual data 1975-91, quarterly data 1992-2010)
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Figure 1:
Unemployment rates by age group, 1975-2010CentrePiece Summer 2011
3
unemployment rate for young people is
about the same as at its 1990s peak and
better than the 1980s peak, despite the
fall in GDP being deeper. (The higher
absolute number of young unemployed is
due to the larger labour force and so is
not really a relevant comparison.) The
growth in youth unemployment relative to
prime age unemployment in this recession
looks no worse than in previous
recessions. In fact, if anything, it looks
slightly better. 
So the data do not suggest that there
is a special problem of youth
unemployment in this recession compared
with past experience. The fact that young
people suffer more during downturns is
quite consistent with what has happened
in previous recessions in the UK and
elsewhere. A bigger problem is what was
happening before the recession. 
Figure 1 shows that prime age
unemployment has been falling
dramatically since the early 1990s, and
then rose again in 2008. Youth
unemployment had also been falling since
the early 1990s, and by 2004 it had
dropped to about 9%, below its 1989
level. But then it started rising in 2004,
several years in advance of the recession.
So there seems to be a component of
the differential between adult and youth
unemployment that is not explained purely
by the stronger impact of cyclical
downturns on young people. Despite
several forces that may be related to the
poor performance of the youth labour
market in recent years, the bulk of the rise
in youth unemployment in the period
2004-08 remains largely unexplained.
What might be behind this increase? We
look at six possible culprits.
Rising migration
As the rise in youth unemployment dates
back to 2004, the year of the European
Union’s enlargement to take in eight
Central and Eastern European countries
(plus Cyprus and Malta), it would be
natural to think that the increase in youth
unemployment is related to stronger
competition from immigrant labour. 
The UK has experienced a record
increase in immigration in the past few
years. The proportion of foreign-born
population was below 6% in the early
1990s, but is currently about 10%. In
London, this proportion rose from 28% to
the current level of around 40%. Those
immigrants who are less skilled than
natives will be closer substitutes for
inexperienced young people and may hurt
young people more than adults. 
Some simple evidence on this can be
provided by looking at the correlation
between youth unemployment and the
migration rate across UK regions over
time, controlling for the business cycle.
Evidence shows that a one percentage
point increase in the proportion of
foreign-born in the working age
population is associated with an 
increase in youth unemployment of 
0.43 percentage points, holding the state
of the business cycle constant.
So it might be concluded that foreign
migration harms the job prospects of
young people. But this result is largely
driven by differences between London and
the rest of the country, as the capital
experienced particularly high rates of
immigration and a relatively higher
increase in unemployment. Excluding
London from the sample, the correlation
between youth unemployment and the
migration rate is basically zero.
It could be argued that the simple
correlation underestimates the impact of
migration, as immigrants will go to areas
where the labour market is strong. But we
suspect that other factors may explain this
correlation. Consistent with research
showing that immigrants do not seem to
have large harmful effects on the labour
market outcomes of natives overall (for
example, Card, 2005), there is no
compelling evidence of a strong causal
impact of higher migration on youth
unemployment. 
Changing structure of
welfare-to-work benefits
The poor showing of the youth labour
market since 2004 is particularly
disappointing given the considerable
policy reform to the Employment Service
(especially for young people) in the last
two decades. Jobseeker’s Allowance (JSA)
was introduced in 1996 as the main form
of unemployment benefit and greatly
increased the job search requirements for
receiving benefits. Although it appeared to
reduce the claimant count, few of those
leaving seemed to find sustainable 
jobs: not only did JSA not seem to
improve the overall employment rate
significantly (Manning, 2009), it may 
even have reduced it for the young
(Petrongolo, 2009).
While the claimant count and
unemployment as measured by the Labour
Force Survey (LFS) were very close until
October 1996 for people over 18, LFS
unemployment (which includes people
who report that they are looking for a job
but not finding one) remained well above
the claimant count in the post-JSA period.
Thus there is evidence of increasing
Compared with the 1980s and
1990s recessions, young people
have not done particularly badly
in the latest recessionnumbers of workers who left the
unemployment register but did not find
jobs. About half of the 18-24 LFS
unemployed do not claim JSA
(compared with a third of 25-49 year
olds). When dropping out of the
welfare system, individuals may become
more detached from the labour market
and spend less effort on job search. 
The second policy, the New Deal for
Young People, was introduced in 1998
with the aim of improving the incentives
for young workers to find jobs. All 18-
24 year olds on JSA for six months
received help with job search from a
dedicated personal adviser. So there was
some ‘carrot’ of job search assistance as
well as a tougher ‘stick’ of stricter
monitoring. This seemed to be
successful, rigorous evaluations showing
that job finding rates increased by
about 20% as a result of the policy
(Blundell et al, 2004; De Giorgi, 2005).
But this success was possibly
undermined when around 2004, the
Employment Service was given
incentives to focus less on young
people on JSA and relatively more on
other groups, such as lone parents and
those on incapacity benefits. Although
there is no rigorous evaluation of this
change, the timing does suggest that
this may have been a cause of the 
rise in youth unemployment before 
the recession.
A further problem is that the
increasing numbers of LFS unemployed
who are not claiming JSA separate them
from any direct effect of the New Deal
and the Employment Service in general.
There is no way for the state to give
direct help to young unemployed
people who have little contact with the
job finding agencies. An extreme
example of this is 16-17 year olds who
are not eligible for JSA so will not need
to have any direct contact with the
Employment Service.
The minimum wage
Is the National Minimum Wage another
cause of increased youth unemployment?
Although its extension in October 2004 to
cover 16-17 year olds who are not
apprentices did coincide with a strong
increase in their unemployment rate,
research has generally found few effects
of the wage floor on jobs (Machin et al,
2003; Stewart, 2004a, 2004b). For
example, the 2003 increase in the
minimum wage had insignificant
employment effects for all demographic
groups including young people (Dickens
and Draca, 2005).
Furthermore, if minimum wages were
to blame, we would expect a positive jobs
effect on teenage apprentices, who were
exempt from the 2004 legislation. In fact
the job rates of 16-17 year olds fell from
15% in early 2003 to 13% in early 2007,
casting doubt on the minimum wage
explanation.
Cohort size
Increases in the size of the youth cohort
can increase competition for jobs and, by
placing downward pressure on wages,
make employment less attractive. In fact,
the share of 18-24 year olds in the
working age population fell through to
2000, but then rose from 13% to 14.6%
by 2009. This roughly coincides with the
fall and rise of unemployment.
Our analysis shows that this 1.6
percentage point increase in cohort size
could have increased male youth
unemployment by about a quarter of a
percentage point. So this is unlikely to be
the major cause of the increase.
Falling demand for low-
skilled workers
There has been a large increase in UK
wage inequality over the last three
decades. The wage premium for being
educated has risen despite a huge increase
in the supply of college-educated workers,
which implies that there has been an
increase in the demand for skills.
This is probably due to new ‘skill-
biased’ technologies, but trade with less
developed countries like China and India
may also play some role in reducing
demand for unskilled workers. There are
similar rises in the relative demand for
skills in the United States and other
countries (Machin and Van Reenen, 2008).
A rise in demand for human capital
may disproportionately hurt the young
because they have less experience. But this
explanation is not so persuasive for
explaining the post-2004 changes, as
youth unemployment was falling in the
period 1992-2004 (and for parts of the
1980s) even in the face of this rising
demand for skill. Thus, although skill-
biased technical change has a lot to do
with longer-run trends in wage inequality,
it is not a good explanation for the rise in
youth unemployment after 2004.
Education and school-to-
work transitions
Another possible explanation is that the
quality of education for the type of young
people likely to be unemployed may have
declined. Although standards as a whole
appear to be rising, it is possible that
targets have led schools to neglect some
of the ‘hard to reach’, who may end up
unemployed. For example, an evaluation
of the Excellence in Cities programme in
disadvantaged areas finds that the policy
had a relatively high impact on high ability
pupils in poor schools, but it did not help
low ability pupils, who may have higher
unemployment risk in the future (Machin
et al, 2010). 
Similarly, the publication of league
tables gives schools incentives to focus on
pupils at the margin of achieving the
headline indicator (the percentage with
five or more A*-Cs at GCSE) but few
incentives to focus on those near the
bottom of the distribution (Wilson et al,
CentrePiece Summer 2011
4
The unemployment rate is
higher for younger age groups
and this disadvantage typically
widens during a recession2006). It is thus important that education
policies do not neglect the bottom of the
ability distribution, which is often hard to
reach. More generally, improving the
careers guidance service for school leavers
could be a way of improving the position
of young people.
Conclusions
The UK labour market has held up
relatively well so far, given the depth of
the latest recession. Young people,
however, have fared much worse than
other groups with larger increases in
unemployment and bigger falls in hours
and wages. Unfortunately, this is to be
expected as young people always suffer
worst during downturns. 
More puzzling, however, is the fact
that youth unemployment and NEET rates
were already bad going into the recession,
having been rising since 2004. The
evidence gathered to date does not
provide a firm answer to why, after 
over a decade of steady improvement,
youth unemployment started rising in the
mid-2000s.
With youth unemployment currently
around 18%, policy actions will be key to
reducing the threat of large numbers of
young people facing long-term
unemployment and the lifetime scars that
leaves. In particular, it is important to
maintain strong welfare-to-work policies
that keep young people attached to the
labour market, and to ease the transition
from school to work with apprenticeship
programmes targeted at low-achieving
groups that are typically ‘harder to reach’.
But there is no evidence that caps on
immigrant flows or a reduction in the
minimum wage would have a strong bite
on the youth labour market. 
CentrePiece Summer 2011
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Stephen Machin and John Van Reenen (2008)
‘Changes in Wage Inequality’, in Bruce
Weinberg and Christopher Taber (eds) New
Palgrave Dictionary of Economics,
Palgrave Macmillan
Alan Manning (2009) ‘You Can’t Always Get
What You Want:The Impact of the UK
Jobseeker’s Allowance’, Labour Economics
16: 230-50
Barbara Petrongolo (2009) ‘What are the
Long-term Effects of UI? Evidence from the
UK JSA Reform’, Journal of Public
Economics 93: 1234-53
Mark Stewart (2004a) ‘The Impact of the
Introduction of the UK Minimum Wage on the
Employment Probabilities of Low-wage
Workers’, Journal of the European Economic
Association 2: 67-97
Mark Stewart (2004b) ‘The Employment
Effects of the National Minimum Wage’,
Economic Journal 114: C110-16
Deborah Wilson, Bronwyn Croxson and Adele
Atkinson (2006) ‘What Gets Measured Gets
Done’, Policy Studies 27(2): 153-71
Further reading
Richard Blundell, Monica Costa Dias, Costas
Meghir and John Van Reenen (2004)
‘Evaluating the Employment Impact of a
Mandatory Job Search Assistance
Programme’, Journal of the European
Economic Association 2(4): 569-606 
David Card (2005) ‘Is the New Immigration
Really So Bad?’, Economic Journal 115:
F300-23
Richard Dickens and Mirko Draca (2005) 
‘The Employment Effects of the October 2003
Increase in the National Minimum Wage’,
CEP Discussion Paper No. 693
(http://cep.lse.ac.uk/pubs/download/
dp0693.pdf)
Giacomo De Giorgi (2005) ‘The New Deal for
Young People Five Years On’, Fiscal Studies
26(3): 371-83
Stephen Machin,Alan Manning and Lupin
Rahman (2003) ‘Where the Minimum Wage
Bites Hard: Introduction of Minimum Wages
to a Low Wage Sector’, Journal of the
European Economic Association 1: 1-154
Stephen Machin, Sandra McNally and Costas
Meghir (2010) ‘Resources and Standards in
Urban Schools’, mimeo
Immigration, the minimum
wage and changing demand
for skills do not seem to be to
blame for the rise in youth
unemployment
Barbara Petrongolo is a professor of
economics at Queen Mary, University of
London, and a research associate in 
CEP’s labour markets programme.
John Van Reenen is director of CEP .
Images: University of Portsmouth Debt Wall
www.flickr.com/photos/upsuportsmouth/tags/wallofdebt/

Youth unemployment

http://cep.lse.ac.uk/pubs/download/cp338.pdf

Youth unemployment

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