23 February 2021

Why the Government should be wary of targeting youth unemployment

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The latest official data on the UK labour market were mostly reassuring, but younger workers have still borne the brunt of the job losses during the pandemic. How big a concern is this? And what, if anything, should be done about it?

Let’s begin with the headline numbers. The latest increase in unemployment, to 5.1% in the three months to December, is obviously not good news. However, this rate is still much lower than many had feared just a few months ago. Indeed, the single-month estimate for December (also 5.1%) was only a tick below the number in October (5.2%).

What’s more, the timelier PAYE data suggest that payroll employment actually rose in January for the second month running. This is consistent with the evidence from business surveys that the labour market has stabilised, despite the renewed lockdown, and may already be recovering.

For example, the latest survey from the Chartered Institute of Personnel and Development (CIPD) found that employment intentions were the highest since the pandemic began. Online job ads have also resumed their upward trend, and some digging by the BBC has found that relatively few firms gave formal notice of potential redundancies in January.

Of course, all these figures are flattered by the furlough scheme, which is currently protecting up to 6 million jobs. It would make sense for the Chancellor to extend this scheme in next week’s Budget (and he surely will), at least for as long as substantial Covid restrictions remain in place.

In the meantime, many people have drawn attention to the fact that younger workers have been hit disproportionately hard. Over the last year, people aged 16-24 have seen by far the biggest falls in employment. HMRC data also show that they are more likely to be on furlough.

This has understandably led to calls for more support for young workers, either in the form of subsidies for employers to take on under-25s, or additional training. However, this approach makes me uneasy.

For a start, it may be misdiagnosing the problem. In some cases, it may be less experienced workers who are first to be let go. But, in general, young people have not being penalised during the pandemic simply on the basis of their age.

Instead, their jobs are at higher risk because they are more likely to work in sectors (like hospitality, entertainment, and non-essential retail) which have been hit hardest by the lockdown. Correspondingly, the large majority of young people on furlough, or currently unemployed, should then be among the first to return to work.

The exodus of (mainly younger) EU citizens could also help improve the employment prospects for young Brits, without the need for the Government to do any more.

Second, there is a danger that if you do target more support at young people, then other groups who are no less deserving end up losing out. This is the main downside of government subsidies such as the ‘Kickstart Scheme’, which provides funding to employers to create job placements for 16- to 24-year-olds on Universal Credit.

It is not immediately obvious why we should care more about somebody in their late teens or early twenties, perhaps still living with their parents, than somebody in their late twenties who may have more bills and family responsibilities.

There may also be at least as strong a case for supporting older workers, notably those aged 50-64 (the second worst hit group), who might actually be at more risk of permanent exclusion from the labour force. Unfortunately, this age group does not grab quite the same attention as the spectre of youth unemployment.

Third, if you are serious about helping young people back into work, it is important not to saddle employers with extra costs. In particular, there is a compelling economic case for some form of age differentiation in minimum wages.

It’s not just free-market think tanks who say this (though I do recommend ‘The Case Against Raising the Minimum Wage’, published by the Centre for Policy Studies). The OECD, in its latest Economic Survey of the UK, noted that:

“The minimum wage has risen rapidly to one of the highest levels in the OECD. While past rises had a negligible impact on employment, a further sharp rise in the minimum wage now could have harmful impacts on youth and low-qualified workers.”

The OECD went on to say that in-work benefits and tax credits “are more effective tools to support low-income households as they can be targeted without harming employment”. Amen to that.

What’s more, as the Low Pay Commission (LPC) explained in 2016:

The basic reason for lower minimum wages for younger workers is to protect employment. The existing age structure of the minimum wage was designed by the Government in light of evidence that younger workers are more at risk of being priced out of jobs than older workers, with worse consequences if they end up unemployed.”

Unfortunately, politics seems to be trumping economics, and there is a continual bidding war. This government is pressing ahead with the plan to extend the full ‘national living wage’ to those aged 23-24. Thankfully the Treasury has at least listened to the LPC’s recommendation that there should be smaller increases for those aged under 23, for now.

Others are altogether less cautious. Labour’s current policy is to raise the Living Wage to £10 an hour and extend to the under-18s. This might well be popular, but that doesn’t make it right. It would increase the minimum cost of employing someone aged between 18-20 by about a half, and more than double the cost of employing someone aged 16 or 17. The consequences for youth unemployment should be obvious.

In short, the Government should be wary of focusing too much on youth unemployment at the expense of other groups. At the very least, it should avoid policies which would actually hurt the very people that they are supposed to help.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.