In the early 1800’s, the countries that failed to realize the beginning of the new industrial era were the ones that failed to secure decent jobs, especially for their youth, and decent standards of living for their people in the long-run. These countries have continued to invest in hand production rather than machines, and they have also continued to provide their youth with outdated skills instead of a set of completely new and different skills that serves the new era. This is very true today.

Dr. Mohamad Abou Hamia

Dr. Mohamad Abou Hamia

The developed economies (and apparently developing economies) are experiencing persistent economic challenges that conventional policies are not able to solve. Fiscal and monetary authorities have desperately exhausted all possible means to initiate growth and job creation in advanced economies for several years. The Failure of conventional economic policies might be justified by the fact that we are living in a new economy where they are no longer effective and completely new policies are needed.

Youth unemployment demonstrates a clear example of a persistent economic challenge that support this argument. This article will first demonstrate the facts and the numbers of youth unemployment in developed countries. Second, it will analyze the conventional policies that failed to address this growing problem. Finally, it will provide some insights to understand the problem from a new perspective in line with the new knowledge economy.

Not only developing countries are suffering from youth unemployment, but also the wealthy developed economies. According to the World Development Indicators database, the 2014 youth unemployment rate in the Eurozone was the second highest in the world – only behind the Middle East and North Africa (MENA) region (27.6 vs 31.7). Compared to 1991, the Eurozone rates increased by around 9.5%, while the MENA rates increased by around 4% in 2014. Adding the non-European OECD countries to the Eurozone, the average youth unemployment in the sample (39 countries) would increase from 16.2% to 21.2% or 5% between 1991 and 2014, which still surpasses the 4% increase in the MENA region. Hence, the youth unemployment rate has emerged as a serious economic problem in wealthy countries over the last two decades.

In 2014, youth unemployment rates were excessively high – above 40% in Spain, Greece, Croatia and Italy. On the other hand, they didn’t exceed 10% in Japan, Germany, Norway, Switzerland and Austria. Taking the world youth unemployment rate of 14% as a benchmark (the same as the US and Malta rates), the youth unemployment rates exceeded this benchmark in 26 out of the 39 countries, or 67% of the sample, indicating that the problem is not restricted to a few countries in the sample.

Figure 2 shows the average youth unemployment rates in the sample from 1991 to 2014 compared to the global rates at the same time. The figure shows that the 2008 crisis might have an impact on the youth labor market, but the youth unemployment rates have been above the world average rates since 1991, another indication that the developed countries in this sample have been having a difficult time creating jobs for their youths long before the 2008 crisis. It is also interesting to track the change in youth unemployment rate in individual countries in this sample, which is shown in figure three.

Figure 3 represents a scatter plot with 1991 youth unemployment rates on the vertical axis and the 2014 rates on the horizontal axis. The two axes intersect in the global 1991 and 2014 youth unemployment rates (13.04% in 1991 and 13.99% in 2014) that are taken as benchmarks for the two periods. Accordingly, the different countries in this sample are scattered in four regions and can be grouped into four categories according to their youth unemployment rates in 1991 and 2014.

The first group of countries had their youth unemployment rates above the global average in 1991 and stayed above the 2014 average. This group includes 19 out of the 39 countries in the sample (or 49%), namely, Belgium, Bulgaria, Chile, Croatia, Cyprus, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, New Zealand, Poland, Romania, Slovakia, Spain and Unit Kingdom. It is important to note that the youth unemployment rates in Greece, Spain, Cyprus and Italy declined remarkably by 30.3%, 28.1, 16% and 15.7% respectively in 2014 compared to 1991.

The Second group includes six countries (with rates at around 15%): Czech Republic, Estonia, Luxembourg, Portugal, Slovenia and Sweden. The youth unemployment rates in these countries were below the global average in 1991 and declined further in 2014. The biggest decline was recorded in Portugal (by 27.8%). Only, three countries (7.7% of the sample) managed to lower the youth unemployment rates below the global average after having above-average rates in 1991. These counties are Australia, Canada and Israel. The last group managed to keep their youth unemployment rates below the global average rates during the two periods. These countries constitute 23.1% of the sample: Austria, Denmark, Germany, Iceland, Japan, South Korea, the Netherlands, Norway and Switzerland.

The economic costs of the youth unemployment are high and cannot be overlooked. With less employed youth, the national savings, the economic growth and the overall productivity will decline. Budget deficits are expected to grow as governments have to increase their social welfare spending, while receiving less taxes. Funding pensions and health care of the elderly and retirees will be a real challenge and the dependency ratio is expected to increase.  As for the social costs, youth unemployment can lead to lost opportunities and skills, loss of confidence, social exclusion, reduced levels of happiness, mental health problems, higher rates of crime and violence, abuse of alcohol and drugs… etc.

International organizations and individual governments have provided some justifications for high youth unemployment rates and recommended different remedies, which can be summarized in the following four points: First, it is believed that entrepreneurs in general, specifically youths, are receiving insufficient financial support to start SMEs that are believed the major engines of job creation. It is widely recommended that easing SMEs’ access to finance would help lower youth unemployment rates. Second,  early school dropout rates  are said to be one of the main reasons for high youth unemployment rates. This is a major incentive for vocational education and training.

Third, it is also believed that the education systems are failing to provide youth with the needed skills and knowledge for their job markets. This is another reason why several governments have  recommended vocational training –  to address skills mismatches and to ease the school-to-work transition for young people joining the labor force. Finally, it is believed that many young people are not actively seeking jobs because of low wages and insufficient employment benefits. Several governments have recommended applying international labor standards to youths as an incentive to seek more jobs.

The above policies have been advocated for several years without clear success to lower youth unemployment rates. The above policies have been generally ineffective because policy makers around the world (not only in rich countries) are still playing by the rules from 200 years ago. They are either not recognizing that we are living in a new era that requires new rules or they lack the needed vision of how to bring the world into the new era. It is obvious that governments are committing major mistakes that might explain the impotent policies to create sustained jobs and economic growth. First, countries around the world are still pouring their resources into sectors that used to be central in creating jobs and economic growth but now are becoming obsolete. The new era requires major investments and spending in knowledge creation and innovation and much less investment in capital formation. What is happening today is the opposite. The world investment in capital formation is close to 22% of world GDP, while investing in R&D does not exceed 5% of GDP in any country.

Second, governments are still investing in education, which is needed to play a central role in the new economy. However, their mistake is that education should be radically transformed to fit the new era as the traditional education as we know it today will not serve society in the future. Today’s education systems should be providing information that is not only found in schools and campuses, but rather everywhere anytime. The new required education systems should address students’ creativity and critical thinking to transform the available knowledge and information at their fingertips into new products, new innovations, and new knowledge.

Third, the role of the government and the private sector to promote economic growth should be re-considered in the new era. Governments pave the way for the private sector to play an active role in economic activities through regulatory policies, addressing market failures and conducting fiscal and monetary policies to smooth the fluctuation of business cycles. In the new knowledge economy, investing in knowledge is something new to the private sector, which is still considered risky and expensive. Many countries still lack the regulations and the laws needed to guarantee the private sector the efficient returns on investment. In some other countries, the existing laws and regulations might be hindering the diffusion of knowledge throughout the economy. Governments should be moving to the center of the new economy to address the failure of the private sector and to invest properly and adequately in knowledge, to demonstrate the potential returns on investing in knowledge as a means to engage the private sector and to address the new regulatory and governance issues needed in the new economy.

In this new era, knowledge is becoming an integral part of production. Countries that invest in knowledge and use it to produce goods and services would increase their global competitiveness and would create sustainable jobs for their youth. Countries that fail to realize that we are living in a new era and are reluctant to invest in knowledge due to high costs and risks are very similar to the countries that continued to invest in hand production in the early 1800’s.

Disclaimer: the opinions/contents expressed in this article are those of the author and do not necessarily reflect the views of the United Nations.

About the author:

Dr. Mohamad Abou Hamia is Knowledge Economy Advisor at the United Nations and a former expert in The Graduate Institute of International Development Studies

 

Republished with the author’s permission. Read the article in its original form on LinkedIn.

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