Hardly a day goes by without a new headline screaming about the scandal of youth unemployment, which has been pinned at the outrageous levels of 50 percent in Spain and Greece and above 20 percent in the eurozone.
There’s just one problem – those numbers are derived from a flawed methodology, which misrepresents the true level of unemployment among young people, making it look far worse than it is. Indeed, the same methodology is also used to measure adult unemployment rates and probably underestimates that figure. The way we estimate unemployment is giving us a skewed view of reality.
The problem is as follows: the adult jobless rate is calculated as the percentage of unemployed workers divided into the number of total workers in the labour force. So if you have 20 jobless workers and 200 workers in the labour force, the unemployment rate is 10 per cent.
But when it comes to youth, those attending university or job-training full-time are not considered part of the labour force because they are neither working nor looking for a job. With millions of students removed from the labour force, that makes the denominator in the equation much smaller and, with the numerator staying the same, the unemployment rate looks higher.
In the example above, let’s say that of the 200 workers, 150 enter a university. They would no longer be counted as part of the labour force, so even though the number of young people actually out of work has not changed, the unemployment rate has quadrupled to 40 per cent.
For adult unemployment, the same methodology probably understates the true level. Since it only includes adults in the labour force, those who have quit searching are not counted. The number of such “discouraged workers” has climbed higher than normal, so unemployment looks lower than it really is.
There is much debate in economic literature about the correct way to measure unemployment, which boils down to what should be included in the numerator and the denominator. Fortunately, there is a better methodology to use when calculating youth unemployment, and that is to compare the number of unemployed youth to the total population of young people under 24.
This is called the youth unemployment “ratio” (rather than the “rate”), and Eurostat, the data-gathering arm of the EU, calculates youth joblessness using both methodologies. Only the flawed result is widely reported, however (link to the Eurozone chart).
Yet the differences between the two can be enormous. For example, the youth unemployment rate for Spain is 48.9 per cent, but the youth unemployment ratio is only 19 per cent. The youth unemployment rate in Greece is 49.3 per cent; its youth unemployment ratio is only 13 per cent. In both Ireland and Italy, the rate is 30.5 per cent, but the ratio is only 11.7 per cent and 8 per cent, respectively. For the eurozone, the youth unemployment rate is 20.8 per cent but the ratio only 8.7 per cent.
These are vast differences, arising just from a change in methodology. Which methodology is best? Not accounting for the large number of young people attending school or in training makes little sense. Perversely, the more education or training young people receive, the higher their unemployment rate.
Of course, some young people may be in school because it is a safe haven from a rocky job market (though being in school or getting more training is not such a bad place to be during a down economy). And a youth unemployment ratio of 13 per cent or 19 per cent in Greece and Spain is nothing to feel complacent about. Yet, while the eurozone’s youth unemployment rate has increased since 2009, the youth unemployment ratio has stayed the same (though both measures are well above pre-2008 levels).
This flawed methodology was applied during the French student protests in March 2006, when youth unemployment rates were widely reported at 22 per cent, compared with 11, 12 and 13 per cent in the UK, US and Germany. But the Financial Times found that only 7.8 per cent of all under-25s were out of work in France, similar to the level in the other three nations. It turned out that France had a much greater percentage of young people attending university full-time who were not part of the labour force.
Joblessness among young people certainly needs to be addressed, but the situation is not nearly as dire as the headlines suggest. Unfortunately, these distorted results have been reported widely and have become conventional wisdom – cited even by economists who should know better, such as Nobel Prize winners Paul Krugman and Joseph Stiglitz.
One thing we have learnt from the economic crisis is that we need better ways of measuring economies. That includes a better way of estimating the unemployment levels that drive so much policy discussion and public debate.
Posted: Saturday, 30 June 2012