INCOME INEQUALITY AND YOUTH UNEMPLOYMENT / PROJECT SYNDICATE

Income Inequality and Youth Unemployment

Mark Esposito, Terence Tse

JUN 25, 2014
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CAMBRIDGE – With Thomas Piketty’s controversial book Capital in the Twenty-First Century topping several bestseller lists, income inequality – which has been on the rise since the 1970s – is once again capturing global attention. Debate surrounding the subject has covered many of the trend’s repercussions, including decreased social cohesion, growing slums, exploitation of labor, and weakened middle classes. But one effect has received relatively little attention: youth unemployment and underemployment.

Since the global economic crisis, youth unemployment has soared worldwide. In the developed world, 18% of people aged 16-24 are jobless. While the youth unemployment rate in Germany remains a relatively low 9%, it stands at 16% in the United States, 20% in the United Kingdom, and above 50% in Spain and Greece. 

The Middle East and North Africa also have very high youth-unemployment rates, estimated at 28% and 24%, respectively. By contrast, only 10% of young people in East Asia, and 9% in South Asia, are unemployed.

But policymakers have done relatively little to address the problem. The world now risks creating what the International Labor Organization has called a “lost generation,” with global youth unemployment expected to reach 13% by 2018.

There is no single factor driving this trend. In China, for example, youth unemployment is rooted in the dominance of the manufacturing sector, which provides far more job opportunities for high-school graduates than university-educated workers.

Youth unemployment can also stem from a market mismatch. In a recent survey of nine European Union countries, 72% of the educators who responded reported that new graduates are qualified to meet prospective employers’ needs, though 43% of employers reported that candidates do not possess the required skills.

But, whatever the main factor underpinning high youth unemployment, income inequality undoubtedly exacerbates the problem. Simply put, many jobs – particularly the most lucrative ones – are available almost exclusively to young people from wealthy backgrounds.

In the UK, for example, only 7% percent of children attend private schools. But roughly half of the country’s chief executives, and two-thirds of its doctors, have been privately educated. This trend is expected to persist, with the next generation of doctors likely to be born into families that rank among the wealthiest 20% of the population.

There are several possible reasons for this pattern. For starters, the highest-status positions require the most prestigious educational background – and that costs money. Moreover, many internships – a prerequisite for the most attractive jobs – are unpaid, making them unfeasible for graduates whose families cannot afford to support them.

But money is not the only requirement. In many cases, sought-after jobs and internships – and even admission to top educational institutions – are far more accessible to those who are within the employers’ personal or professional network. When the job market rewards whom you know more than what you know, young people with well-connected parents have an obvious advantage.

Inherently biased recruitment and hiring practices exacerbate this inequality further. While companies may, in theory, recognize the value of bringing together talent from a variety of backgrounds, they tend to recruit candidates with a familiar set of skills, experiences, and qualifications. Even if someone with a different educational background or work experience manages to get face time with those responsible for hiring, they must overcome the perception that they are a riskier choice.

The fact that academic results are among the top hiring criteria skews outcomes further. People who had the privilege of receiving private education are likely to have attended more reputable universities. The small proportion of students from poorer backgrounds who manage to gain admission and secure scholarships to top institutions often have lower grades, especially toward the beginning of their university education, owing to their inferior preparation.

In fact, financial constraints prevent many capable students from attending any university at all, owing to their need to earn an income that only full-time employment can provide. As a result, their earning capacity is severely constrained, regardless of their talent or work ethic.

In order to create a level playing field, employers should re-think their recruitment strategies and consider applicants based on a broader range of criteria. Businesses can only benefit from the fresh perspectives that a more diverse candidate pool offers.

With financial status serving as the key determinant of opportunities, young people from poorer backgrounds are becoming increasingly discouraged – a situation that can lead to social unrest. 

Unless all young people have legitimate prospects of improving their social and economic status, the gap between rich and poor will continue to widen, creating a vicious cycle that will be increasingly difficult to escape.

The good news is that efforts to alleviate youth unemployment will reduce income inequality, and vice versa. The society that emerges will be more stable, unified, and prosperous – an outcome in which everyone, rich or poor, has a stake.

Mark Esposito is a member of the teaching faculty at Harvard University Extension School, an associate professor of business & economics at Grenoble Graduate School of Business in France, and a senior associate at the University of Cambridge-CISL in the UK. He has advised the President of the European Parliament, Martin Schulz on the systemic nature of the EU crisis and serves as cross-theme contributor to the World Economic Forum’s reports on Innovation Driven Entrepreneurship in Europe.

Terence Tse, an associate professor of finance at ESCP Europe, is the head of competitiveness studies at the i7 Institute for Innovation and Competitiveness.