Economists don’t know how to measure youth joblessness.
One thing we have learned from the economic crisis is that we need better ways of measuring economies, at both national and global levels. The economics profession missed an $8 trillion housing bubble in the United States, as well as housing bubbles in Spain, Ireland and the UK; it failed to recognize the severe over-leveraging of banks and households, or the macroeconomic imbalances within the eurozone; it failed to recognize that the global financial system had been turned into a gambling casino where taxpayer money would be needed to bail out bankster excess; it has become over-reliant on measurements like growth rates as the primary indicator of economic health; and economists around the world, even Nobel Prize winners, were caught flat-footed by the global economic collapse.
The performance of the economics profession has been like a master chef who not only burned the meal but burned down the entire restaurant. Yet the chef never lost his job; instead he is still in the kitchen, cooking up mostly the same meal, no wiser for the wear.
The economics profession also is surprisingly bumbling when it comes to estimating unemployment levels, which adds greatly to the macroeconomic confusion since unemployment drives so much policy discussion and public debate today. For example, hardly a day goes by without a new headline screaming about the scandal of joblessness among young people, which has been pinned at the outrageous levels of nearly 50% in Spain and Greece and over 20% in the eurozone.
There’s just one problem – those numbers are derived from a flawed methodology. And that methodology misrepresents the true level of unemployment among young people, making it look far worse than it is. The resulting distorted figures have been reported widely and have become “conventional wisdom.” Indeed, the distorted numbers have been routinely used on the Social Europe Journal website, which has published a series of articles on youth unemployment as part of a joint project with the Friedrich-Ebert-Stiftung.
Here’s the problem with the methodology. The adult jobless rate is calculated as the percentage of unemployed workers divided into the number of total workers in the labor force. So if you have 200 workers in the labor force, and 20 of those are unemployed, the unemployment rate is 10 per cent.
But when it comes to youth, the millions of young people who are attending university or job-training are not considered part of the labor force because they are neither working nor looking for a job. With so many students removed from the labor force, that makes the denominator in the equation much smaller and, with the numerator staying the same, the unemployment rate looks much, much 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 labor 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!
In other words, the same methodology used for calculating adult unemployment gives a distorted picture when used for calculating youth unemployment, because it does not account for the many young people who are in school or in training, and therefore are not counted as part of the labor force. These youth are “invisible” to unemployment statisticians. That’s quite a large oversight.
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. During the Great Recession, the number of such “discouraged workers” has climbed higher than normal, so unemployment looks lower than it really is.
In short, the way we estimate unemployment is giving us a skewed view of reality. There is much debate in the 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. Yet the differences between the two can be enormous.
For example, the youth unemployment rate for Spain is 48.9%, but the youth unemployment ratio is only 19%. The youth unemployment rate in Greece is 49.3%; its youth unemployment ratio is only 13%. In Ireland and Italy, the youth unemployment rate is 30.5% for both states, but the ratio is only 11.7% and 8% respectively. For the eurozone as a whole, the youth unemployment rate is 20.8% but the unemployment ratio is only 8.7%. That’s not that much higher than the youth ratio for Germany and the Netherlands at 4.5% and 5.3% (you can see the results from the two methodologies in this Eurostat chart, with an explanation of the methodologies here from the Eurostat website; scroll down to “Youth unemployment trends”).
Those are vast differences, arising from nothing more than a change in methodology.
So which is the best methodology to use? I would submit that not accounting for the millions of young people attending school or in training makes little sense and undermines the credibility of that methodology. Perversely, the more education or training received by young people, the higher the national unemployment rate for youth. That tells you something is drastically wrong with the traditional methodology.
Of course, some young people are 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).
Unfortunately, this is not the first time this flawed methodology has resulted in scandalous levels of youth unemployment being misreported. During the French student protests in March 2006, youth unemployment rates were widely reported at 22%, compared with 11, 12 and 13% in the UK, US and Germany. But the Financial Times chief statistician did an analysis and showed that only 7.8 percent of all under-25s were out of work in France, similar to the level in the other three nations. The official numbers were misleading because France had a much greater percentage of young people attending university full-time who were not considered part of the labour force.
These artificially inflated results have been reported widely by the media, and have entered the public discourse as conventional wisdom, i.e. “50% youth unemployment.” Even economists who should know better, like Nobel Prize winners Joseph Stiglitz and Paul Krugman, have invoked recently the flawed 50% figure, Krugman in his New York Times column. And as mentioned above, the Social Europe Journal website has published many articles that have used the distorted numbers.
It is surprising that economists would flub something so basic. If we can’t count on economists to handle such a simple measurement as unemployment, it’s hard to imagine how we can trust their diagnoses regarding the far more complex macroeconomy.
That is truly worrisome. Joblessness among young people certainly needs to be addressed, but it’s also clear that the situation is not nearly as dire as the headlines are making it out to be. It is nothing less than alarming that, four years after the economic collapse, we are still not much better at measuring and assessing economic health. We are like pilots flying blind without radar.