Youth joblessness is stubbornly high through much of the developed world – and that underutilized capital will take a big bite out of long-term economic growth in many countries.
The most extreme case is Ireland, where about 30 per cent of young people are without work. A new paper by senior economist Martin Schwerdtfeger of Toronto-Dominion Bank estimates the impact of that joblessness will amount to about 12 per cent of GDP over the next two decades. Spain and Greece come next, with lower – but still "significant" impacts at more than 6 per cent.
Prior economic research has shown that people who see spells of joblessness early in their careers tend to see persistently lower wages for years afterward – an effect known as "scarring." This research examined the long-term impact among people who have a spell of youth unemployment, and used those estimates to look at the potential total earnings losses in Europe, the U.S. and Canada.
Although the analysis captures only part of the losses stemming from high youth joblessness, "the earnings impact alone suggests a significant economic toll," Mr. Schwerdtfeger noted.
Young Europeans were hardest hit by the recession and, with nearly a quarter of them unemployed, a recovery in their labour markets has yet to take root. It's hardly a uniform picture though – youth unemployment is lower in northern European countries such as Finland and Germany and they will see little impact on growth.
Canada is no Spain or Greece. But high youth unemployment will slice a chunk off economic activity here as well – about 1.3 per cent over the next 18 years, TD figures. Its youth unemployment rate is 14.1 per cent, almost double the national average. The jobless rate has hovered around the 14 per cent mark for the past two years.
In dollar terms, the earnings loss from the rise in Canadian youth unemployment is the equivalent of $10.7-billion, and the loss due to scarring equates to $12.4-billion, he said.
What should be done to reintegrate young people into the work force? TD cites research showing men who upgraded their education between the ages of 23 and 33 tended to see wage improvements of 11 per cent, suggesting public policy should be geared to training and encouraging access to education. They can also catch up on their earnings by moving to higher-paying firms, which in cases means relocating.
"Economic research suggests that training, educational upgrading, and labour mobility reduce the scarring effect caused by youth unemployment," Mr. Schwerdtfeger wrote. "Their facilitation should be at the top of the to-do-list of policy makers if they want to reduce the long term costs of youth unemployment."