Seanad debates

Thursday, 8 November 2012

Youth Unemployment and Public Policy: Address by Professor Christopher Pissarides

 

11:20 am

Photo of Denis O'DonovanDenis O'Donovan (Fianna Fail)
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On my own behalf and that of my fellow Senators, I welcome Professor Christopher Pissarides, economist and Nobel laureate, to the House. This newly elected Seanad is determined to modernise its procedures and actively engage with civic society. To begin this process we have changed Standing Orders to allow persons and representatives of public and civic life to address Seanad Éireann. Today our guest, Professor Pissarides, will address Members on unemployment and public policy. Professor Pissarides is the school professor of economics and political science at the London School of Economics. He is an elected fellow of the British Academy and has published widely on macro-economics and the theory of labour markets. In 2005, he became the first European economist to win the IZA Prize in Labour Economics and in 2010 he won the Nobel Prize in Economic Sciences for his analysis of markets with search frictions, in particular, the economics of unemployment, especially job flows and the effects of being out of work. He specialises in the economics of unemployment, labour market theory, labour market policy and more recently he has written about growth and structural change. His book, Equilibrium Unemployment Theory, now in its second edition, is a standard reference in the economics of unemployment.

All Members will agree a key issue for us is how we will tackle the scourge of unemployment, how we will create jobs, from where they will come and how we produce the right conditions for job creation. These are areas that Professor Pissarides has covered and on which he has written extensively. Accordingly, it is an opportune time for Professor Pissarides to address Seanad Éireann on unemployment and public policy.

Economics has an important role to play in informing Government policy in a wide variety of areas not only in employment but also education, the environment, infrastructure, health and agriculture. Nevertheless, Professor Pissarides, I imagine you are perfectly aware and do not need reminding that politicians and economists can make strange bedfellows. We do not always see eye-to-eye or find ourselves in agreement, and politicians may not always wish to hear what economists say to us. I am reminded of the words of the American writer and economist Thomas Sowell, who said:


The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.
Given your distinguished record and achievements I sincerely hope that your words to the House today will not be disregarded and we look forward to a thought provoking and enlightening exchange. It is a great honour and privilege to invite you to address Seanad Éireann. You are now entitled to address the House.

11:25 am

Professor Christopher Pissarides:

I am pleased to be here and to have this opportunity to talk to the House about youth unemployment. I have chosen the topic of youth unemployment because of the severity of the problem, especially in the current recession. It is also a topic close to my work of the past 30 or 40 years. Unfortunately young workers are affected most in any recession and the current recession is no exception. By its nature, youth unemployment is usually approximately two and a half times higher than adult unemployment. Effectively this means if adult unemployment goes up from 5% to 10% in a recession, then youth unemployment goes up from 12% to a staggering 24%. That is a serious problem. In countries such as Greece and Spain half of young workers are unemployed. Ireland, Portugal and the Slovak Republic come next with approximately one third of young workers out of work. Something must be done about this situation to avoid a lost generation with negative implications for economic growth and employment for many years to come.

Young workers are at an age when they are uncertain of their skills and future prospects in the labour market. They need to experiment to discover their true potential. They should be able to take jobs, try them out and leave them if they find they cannot make best use of their talents. The best labour markets, therefore, are those which enable young workers to try different jobs and settle down to those they can do best. A good match with the employer and job needs is essential if the young worker is to find job satisfaction and lead a happy professional and social life. Usually the two go together and reinforce each other.

In this scenario some unemployment is inevitable as young workers change jobs and look for what they are best at. However, were one to ask a young worker about his or her worst fear in the labour market, he or she would say the fear of job loss and unemployment. How can we reconcile the views of the economist, who maintains that no modern labour market can operate without some unemployment, with those of the worker, who says that unemployment is his or her worst fear? How can we reduce the costs and fear of unemployment in a modern society?

Young workers fear unemployment when they have no other choice in the labour market, when they apply for jobs but get rejection after rejection and when they sit out for a long stretch of time without any prospect of finding a job. Long duration unemployment, sometimes exceeding one year or more, is terrible for the young person. The poverty that unemployment causes is also terrible. These are features of a recession. In good times, workers take advantage of the natural protection that a well functioning labour market provides when a series of job offers is forthcoming. In bad times this protection is lost, jobs are not forthcoming and long-term unemployment is a real fear. This is when governments must step in and offset the poor outcomes of the market not necessarily with providing a job outlet for the worker, but by providing alternatives to idle unemployment and no hope of a job in the foreseeable future. In recessions markets fail to protect their participants, be it workers or employers. Governments should take action in their place. In recessions such as the one we are experiencing now we are faced with market failure not personal failure. Getting on one's bike will not lead one anywhere. Policy should be carefully directed to those who have been unemployed for a long time to avoid the problems of long-term unemployment.

Long-term unemployment disenfranchises young people and de-skills them. They lose their will to seek new job opportunities and the ability to perform even if they are offered a job. The implications of long-term unemployment are felt for many years to come. Those who have suffered it have slower career progressions, lower wages and a higher risk of unemployment in adult life. It is as bad as a criminal record which these people carry with them in whatever else they try to do. We know from studies of life satisfaction that long-term unemployment is among the greatest negative events in one's life, alongside death in the family and family break-up. It is important for governments to contain unemployment but not to be over-protective to the extent that young people are not given the initiative to experiment and learn. Governments need to create the environment in which the young unemployed can help themselves more. This might necessitate measures to encourage more job creation targeted towards the young unemployed or more training.

I will go through some of the most important means available to the government to help the young in a recession. The first important tool in the hand of the government is education and training beyond secondary school. Better educated workers are more productive and run a lower risk of unemployment. They are more adaptable to the needs of the market, a necessary attribute in light of the risks associated with the opening up of our economies and the rise of global competition.

The days when we could predict with certainty the needs of industry have long gone. Today's European economy is a service economy that relies on digital technology. We need to make our service economy more competitive and we need to export services to earn the necessary foreign exchange to buy manufacturing goods produced elsewhere. No modern post-industrialist society can rely only on industry for the production of exports. It must be competitive in services as well. Education is necessary in this process. It gives the necessary skills to young people to work with new technologies, unleash their entrepreneurial potential and compete in the global economy. We hear many stories of new technology companies growing out of the ingenious discoveries of young people. Some years ago Apple and Google did not exist but today they are household names. The vast majority of these companies are American. We need to develop entrepreneurship in Europe to compete with the Americans in new technology. We are still good at discovering new things, but not as good at taking advantage of them and creating jobs for our young people.

In normal times governments subsidise higher education because of the benefits to the individual society. The European Union estimates the return of higher education to be approximately 12%, a good investment when compared with the alternatives. On average, countries in the European Union spend approximately 5% of gross national product on supporting education and training. In times of economic recession the rate of return for education is even higher than 12% because the main cost of education is the withdrawal of a potentially productive worker from the labour market. However, in recession this cost is lower because, by its nature, a recession reduces the value of the worker's output when employed and increases the chances that the worker will remain unemployed and unproductive otherwise. The logical conclusion is that in a recession the government should spend more on education and subsidise more young people to pursue further education and training than in normal times.

This recommendation goes against the austerity measures that are compounding the current recession in Europe. The austerity measures may be needed for the survival of the euro, but they are counterproductive for the domestic economy and unemployment. A good deal more can be done for job creation and unemployment even within the current austerity climate. Education spending is one such area. Places could be expanded in established colleges and universities, even at the risk of lower entry criteria and some overcrowding.

If we are to learn something from this devastating recession, it is that more support should be given to colleges that offer shorter and more practical training courses, because courses of this nature keep young workers occupied during the recession and leave them better qualified to take advantage of new job opportunities.

How else can young people be helped in this recession? The best help that anyone can be given in a recession is through job creation. In this context, we have given too much weight to fiscal austerity and not enough to job creation. Even the IMF is now acknowledging that it has underestimated the multiplier benefits of public investment projects. Infrastructure projects have a significant potential for job creation. Although they initially cost public money, they eventually pay for themselves through the jobs they create. Austerity is currently measured by comparing revenues and expenditures in the same year. This is not good practice for investment projects. The very nature of investment is that spending usually takes place in the current year while the payoffs are in future years. Investment projects such as infrastructure and educational spending should be excluded from the annual fiscal budget and funded from other sources. If it is feared that governments will take advantage of exclusions to reclassify an overly high fraction of public expenditure as public investment, the European Investment Bank should be allowed to define investment spending and recurrent spending. In countries that have no access to markets because of downgrades and prohibitively high interest rates, the European Commission should part-fund investment projects from the structural budget. If necessary, it should use money from other budgets, even the European Financial Stability Facility, because investment financed in this manner can help countries to come out of recession faster and with less reliance on the EFSF. If such investment projects took place, structural reforms would be easier to implement because there would be less resistance to them, and recovery and debt repayment would be faster.

Education and job creation incentives are the most effective measures for the young unemployed but governments can implement other measures to help them. There are also certain measures that should not be implemented. Governments can help the inexperienced young to learn about the labour market and how to look for work. This training can take place in secondary schools, which need to update their curriculums regularly to meet the needs of modern labour markets. Unfortunately this is not always the case, with employers often complaining that young workers do not receive enough general training at school to prepare them for the types of job that are available in modern labour markets. Employers could be more directly involved in curriculum selection. If this fails, a welfare-to-work programme could still take care of that kind of training.

Given that young workers need to try different jobs, a flexible labour market with a lot of job-changing and labour mobility is best for them. Policies that restrict labour turnover are not good for young workers. For example, the strict job protection for adult jobs that was in place in Spain at the beginning of this recession can go a long way towards explaining the high unemployment rate in that country. A minimum wage that is set too high is also not good because it discourages job creation, although reasonable levels for the young, such as approximately one third or somewhat more of the adult median wage, can be good for employment because they remove uncertainty from the minds of young people about jobs and fair pay.

Young unemployed workers need to be independent, and we should help them to avoid poverty with an appropriately designed unemployment insurance system. In principle, however, job subsidies that offer work experience are better than unconditional unemployment compensation. There are many ways of subsidising jobs for young people, especially those who have been unemployed for a long time. Sweden has successfully tried a scheme which subsidised the hiring of unemployed workers as replacements for workers on maternity or other kinds of leave. Other schemes might include start-up grants for self-employed people or wage subsidies. The authorities can pass the unemployment compensation to an employer who hires an unemployed worker and pays a wage that is higher than the compensation. As the employer and the employee both pay national insurance contributions, eventually this subsidisation is cheaper than supporting unemployment through transfers. In addition, the young unemployed individual can get work experience. This is what German studies have found when a similar scheme was tried in that country.

I conclude by repeating my main message. In a recession, unemployment can be a devastating experience for young people. Governments need to step in with measures that offset the negative effects of the state of the market through additional education and training, public investment projects and other measures directly addressed to the long-term unemployed.