The two of us recently wrote an article for the Guardian which drew attention to the potential difficulties facing young people entering the labour market in 2020. We argued that governments in the UK should be urgently developing policies to mitigate “labour market scarring”.
Young people entering the labour market during a downturn are more likely to experience future unemployment and/or low wages throughout their working life – this is what we mean by scarring. Those who start on the wrong labour market trajectory have lower levels of lifetime income than those who join when the economy is doing well – either because they have more frequent spells of unemployment and/or because their wages are lower than those who joined when the economy was thriving.
Showing that scarring exists is tricky. You need information on income and employment throughout individuals’ working lives. You also need to be able to isolate the effects of time of entry to the labour market from the many other factors which influence labour market experience. The UK is particularly well placed for such research because it has surveys which track individuals’ labour market experiences over their lifetimes.
We wrote some papers (see here here and here) on these issues during the 2008-09 recession. Alongside other research from the US and UK, we helped build the case that labour market entrants should be given extra support during a recession. Without this evidence, there would be no case for differentiating policy support between those already in the labour market and new entrants.
Youth on the edge
With overall unemployment at a record low at the beginning of 2020, some may have imagined that youth unemployment was no longer a problem in Scotland. Figure 1, which charts the movement of youth unemployment and overall unemployment since 2008 shows that this was not true. In 2011, youth unemployment in Scotland was over 25%. It fell more rapidly than overall employment as the recovery progressed. Those at the edge of the labour market tend to do better during recoveries and worse during recessions.
The last observation on Figure 1, which is for January to March 2020 and only includes one week of pandemic effects, shows that youth unemployment was already rising once again. One more current, but imperfect, measure of youth unemployment is the claimant count for Job Seekers Allowance. It more than doubled between March and April 2020, from 610 to 1585. The data we have is not up-to-date but it is clear that youth unemployment is rising fast. The need for policy response in Scotland is therefore urgent.
The increase in unemployment comes on top of a secular decline in the prospects of the young. Unlike previous generations, it seems unlikely that their living standards will be better than those of their parents. In the last decade, low wages have made the housing market unattainable for most young people. Their jobs have become more precarious, and due to the costs of higher education, many start their working life heavily indebted. Finally, Brexit will take away the opportunity to live and work elsewhere in the European Union, privileges that they value much more than their parents or grandparents.
The shape of this recession has also been particularly harmful to the prospects of young people. It has hit hardest those sectors in which young people often gain their first work experience. Hospitality, tourism and retail have all experienced a torrid time since lockdown. And, because of the continuing emphasis on social distancing, these sectors may be the last to recover. So that vital first step into employability for many young people will be absent.
Policies aimed at the young could focus on job creation, policies to extend education and/or training and policies that improve access to vacancies. This is equivalent to saying that policy should stimulate demand, reduce supply, or reduce frictions in the labour market. The problem with the latter course is that there aren’t enough vacancies to significantly reduce unemployment.
The latest vacancies data from Adzuna (see Figure 2 above) show that there were fewer than 20,000 vacancies across Scotland for all age groups in April. The Scottish workforce is around 2.8 million. This implies one vacancy for every 139 workers. The number of available vacancies halved between March and April 2020 so there is no likelihood of any early recovery on this front.
So what to do? It is important to break down the issue into its components. There are around 50,000 young people in each single-year age group in Scotland. They enter the labour market at different times. There are typically around 20,000 graduates, 13,500 who have gone through further education, and about 12,000 who are employed or in voluntary work/activity agreements. The remainder are unemployed looking for work, unemployed not looking for work, or their whereabouts are unknown. The size of this group has fallen dramatically from 6,900 in 2009-10 to 2,800 in 2017-18 as the labour market improved.
Thus, in normal circumstances we would expect around 50,000 young people to join the Scottish labour market in 2020 –some graduates, some with college qualifications and some school leavers. At the other end of the age range, there are 63,000 people aged 65 living in Scotland in 2020. Other things being equal, there would be a small contraction of the Scottish workforce this year. If demand in the economy were maintained, young people would find it relatively easy to find employment since employers would be chasing fewer workers. But other things are certainly not equal during the time of coronavirus. UK GDP fell by 20.4% in April 2020, the largest single-month fall on record. So labour market prospects are grim.
The UK government has introduced the Coronavirus Jobs Retention Scheme (CJRS). 628,000 jobs in Scotland have been furloughed under this scheme. In addition, the self-employment income support scheme (SEISS) has received applications from 146,000 people in Scotland. Together with 112,000 unemployed, this implies that 32% of the Scottish workforce is currently not working. How many will return to work is unclear. The fall in labour demand will be sensitive to sector of employment. So should we look to government to boost demand by creating or subsidising jobs for the young because their traditional routes to employment are no longer viable?
The labour market crisis that we now confront has no recent parallels. In the UK, we can look back to the early 1980s and the development of schemes such as the Youth Opportunity Programme (YOP) which began in 1978 and the Youth Training Scheme (YTS) which began in 1983. The labour market for young people was so weak that one in three of all school leavers was entering YOP in 1981. Perhaps we now face a similar situation spread across all exits from education, not just school leavers.
Training for what?
YOP and YTS were based on the proposition that UK PLC underinvests in training. Employers tend to view training as a cost rather than a benefit. The UK spends less than other advanced countries on enhancing the skills of its workforce. Public support for training could therefore not only maintain demand in the economy, but also increase productivity. However, designing an effective intervention scheme is not straightforward.
What is the best balance of private and public sector training? What incentives are needed to ensure that young people participate? Can firms recoup their investment in workers? And, fundamentally, what are the kinds of skills that Scotland most needs to ensure economic recovery?
Over the years Skills Development Scotland has developed expertise around these issues. Future skills will include a balance of soft skills to support the service sector and more technical skills to address the challenges of the fourth industrial revolution. Given its understanding of the issues there is a strong case for enhancing the budget of Skills Development Scotland, which in 2020-21 amounts to only £224 million – in contrast, the NHS budget is £13,762m. Unfortunately, without intervention, the skills budget will be threatened by the failure of the UK government to put in place a replacement for the European Structural and Investment Funds. Some of this funding was channelled into skills development through the European Social Fund.
Another historic parallel for the crisis now faced by the labour market is Roosevelt’s New Deal in the USA. His favourite policy was the Civilian Conservation Corps (CCC). It hired young, unmarried men to work on conservation and development of natural resources in rural areas. During its nine years of operation, 3m young men, mainly aged 18-25 passed through the CCC. Most of the jobs were manual. It was credited with improving the employability, wellbeing and fitness of participants. The participants also planted 3bn trees.
Could Scotland put together its own version of the CCC focussed on contributing to the net zero target for carbon dioxide emissions and so avoid the creation of another “lost generation”, scarred by long spells of unemployment? The last few weeks have shown that, with resource and focus, it is possible to produce outcomes that six months ago would have been thought impossible – witness the creation of NHS Louisa Jordan in Glasgow.
Scottish universities could play a central role in this. They have the technical expertise to help with the more complex issues associated with climate science. They also have spare capacity, in terms of accommodation, classrooms and staff, given the decline in the numbers of overseas students along with a fall in domestic numbers as incoming students defer until the pandemic has passed. This would also help to partially fill a funding hole they are facing.
If the same kind of energy from both private and public sector can be aligned with the enthusiasm of the young to save the planet, then significant progress towards net zero could be achieved as well as reducing the harm that this recession will do to the young.
There is no shortage of issues to address in Scotland – tree planting, reducing transport’s dependence on internal combustion, domestic heating conversion, renewable energy, restoring biodiversity, carbon capture and storage etc. Hopefully, the UK government could be persuaded to set aside funding for such schemes in the forthcoming Comprehensive Spending Review. The time to do this is right now.