The August release of the Australian Bureau of Statistics’ (ABS) labour market data estimated that of the 2,085,201 strong labour force of people aged 15-24 in Australia, 13.4% of them are unemployed, and another 17.1% are underemployed. Put together, these two figures essentially mean that 30.5% – or approximately 636,000 – of the young Australians in the workforce are suffering inadequate labour market outcomes.
Figure 1 below shows the youth unemployment and underemployment rates over the last six and a half years. What is immediately evident is the effect the Global Financial Crisis (GFC) has had on labour market conditions for young Australians. In August 2008 – one month before the collapse of Lehmann Brothers, and two months before the Rudd Government’s first stimulus package – the youth unemployment rate was at a relatively low level of 7.6%, and the underemployment rate was 11.4%. In the eight months that followed both these figures skyrocketed to 12.2% and 14.5%.
As alarming as these numbers may first appear, they do not necessarily indicate that labour market conditions for the young are a stand-alone problem. The current situation may simply be symptomatic of a deterioration of overall labour market conditions.
A lower overall unemployment rate is often used as a comparison in an attempt to dramatize a higher youth rate. This should be a more cautious exercise than is often the case. The youth rates are invariably going to exceed the overall rates because the labour market is always going to be harsher for young people as they transition from education to employment. If it is accepted that there will naturally be a discrepancy, the youth figures are only a problem insofar as a soft labour market is a problem for everyone. In this respect, treating it as its own issue would be unnecessary.
Figure 2 below shows the overall unemployment and underemployment rates over the same time frame as Figure 1. Unsurprisingly, it can be observed that the overall rates move in much the same fashion at the youth rates, albeit remaining consistently lower. Similar effects from the GFC can be observed.
Professor Jeff Borland, of The University of Melbourne, has shown firstly; that the general rise in unemployment since the GFC can be explained almost entirely by slower economic growth, and secondly; that the associated hiring slow-down has meant that young individuals have fared particularly poorly. Longer periods of below-trend growth translate to longer individual periods of inadequate employment, and this in turn leads to disillusionment and the depreciation of on-the-job skills, which further reduces the likelihood of finding work. Therefore, stronger economic growth should be the obvious and immediate priority.
However, there is another question of interest. Accepting that the young will always be disproportionately affected during downturns is evidently sound, but we should inquire into the relative magnitude of the discrepancies, and what that means for young people and the economy. Figure 3 below illustrates the ratios of the youth unemployment and underemployment rates to the overall rates. A longer time frame is used than previous charts, and the notable aspect is the long-run trend. Both ratios have been growing steadily for the past 20 years, meaning the relative magnitude of youth exposure to the economic cycle is growing.
As proposed earlier, young workers are disproportionately underutilised because they are transitioning from education to employment. For a given level of effort, success in job-seeking is primarily a function of applicants’ education and experience. Young people are often lacking in the latter, and thus rely heavily on the former.
It follows that a likely explanation for the trends illustrated in Figure 3 is that a growing degree of mismatch exists between the skills of the labour supply in question, and the skills demanded by employers. This narrative fits in with the broader structural shift apparent in the Australian economy – industries characterised by low-skilled labour are diminishing as the economy shifts towards one driven by higher-skilled services.
Therefore, targeting the skills of young job-seekers is the most direct means of enhancing the probability of success in the labour market. Broadly speaking, this corresponds to the obvious connection between the transition toward a high-skill economy and education. However, education is best thought of as the overarching theme toward improving outcomes for young job-seekers, and there are more specific policy approaches that can help young people enter into employment.
Writing for The Conversation, Professor Jeff Borland outlines the characteristics of effective programs to help young and under-skilled individuals enter into employment. The connecting of training and job placements by not-for-profits and willing employers is a proven model. Young people face stronger incentives to work toward gaining skills when training is directly linked to paid work, and employers are much happier to take risks on inexperienced and lesser skilled workers if external organisations are available to do the heavy lifting on training. Importantly, Professor Borland also notes rigorous evaluation of programs is important to ensure funding is directed to the most effective schemes, and furthermore, that decentralised programs benefit from less bureaucracy and greater flexibility. Moving away from centralised, punitive, and ineffective models like work-for-the-dole, and toward those described above would be a positive step. And further considerations should be given to how we can invest in education to ensure young entrants into the labour market can keep pace with the shifting demands of the modern Australian economy.
As explained earlier, the fact that the youth rates seem high relative to the overall rates simply reflects the reality that young people are more exposed to the economic cycle. It is not cause for alarm in itself, and as economic growth returns to trend, conditions will improve for young people seeking work. However, the growth in the magnitude of this exposure means that strong labour demand may not be enough to prevent the continued long-term unemployment of a substantial amount of youth. Different policy considerations on top of stronger economic growth should make for rich discussion at ESSA Q&A.