Monday, December 24, 2012

The global youth unemployment crisis

The co-existence of large youth unemployment rates and labor market shortages, symptomatic of labor markets across the world, is a classic market failure. Econ 101 teaches us that job seekers and education service providers would respond to the market signals generated by employers and acquire the skills required to clear the labor market. But in the real world, there is apparently a massive co-ordination failure between employers, education providers, and job-seeking youth.

The McKinsey and Company have a timely report (pdf here) on this issue, where they examined more than 100 education-to-employment initiatives in 25 countries and surveyed employers, youth, and education providers from nine countries, including India. It points to a twin global crisis - "high levels of youth unemployment and a shortage of people with critical job skills". It writes,
In the OECD countries, more than one in eight of all 15- to 24-year-olds are not in employment, education, or training (NEET). Around the world, the ILO estimates that 75 million young people are unemployed. Including estimates of underemployed youth would potentially triple this number... Across the nine countries, 43% of employers surveyed agreed that they could find enough skilled entry-level workers... The McKinsey Global Institute estimates that by 2020 there will be a global shortfall of 85 million high- and middle-skilled workers.

As the report points out, the massive pool of unemployed youth represents not just a gigantic pool of untapped talent; it is also a source of social unrest and individual despair. It writes,
If young people who have worked hard to graduate from school and university cannot secure  decent jobs and the sense of respect that comes with them, society will have to be prepared for outbreaks of anger or even violence. The evidence is in the protests that have recently occurred in Chile, Egypt, Greece, Italy, South Africa, Spain, and the United States (to name but a few countries). The gap between the haves and the have-nots in the OECD is at a 30-year high, with income among the top 10 percent nine times higher than that of the bottom 10 percent.
The report argues that the biggest problem with bridging the labor market mismatch is the lack of data on "the skills required for employment or on the performance of specific education providers in delivering those skills". It writes,

Clearly, employers need to work with education providers so that students learn the skills they need to succeed at work, and governments also have a crucial role to play. But there is little clarity on which practices and interventions work and which can be scaled up. Most skills initiatives today serve a few hundred or perhaps a few thousand young people; we must be thinking in terms of millions. Why don’t we know what works (and what does not) in moving young people from school to employment? Because there is little hard data on the issue... This deficiency makes it difficult to even begin to understand which skills are required for employment, what practices are the most promising in training youth to become productive citizens and employees, and how to identify the programs that do this best.

Building a reliable and upto date database is easier said that done, especially given the dynamic nature of the job skills requirements. However, any meaningful effort to address this has to involve greater co-ordination between employers and post-secondary education service providers. The market mechanism may ultimately respond by forcing employers who face severe labor shortages to work more closely with education providers. However, a more promising approach will be for governments to play an important role in bridging this information gap and become the market facilitator.

The survey finds that the best education-to-employment programs across the world are characterized by close relationship between employers and education providers - the former helps design the curricula and students spend nearly half their training on a job site. Further, employers commit to hire youth before they are enrolled in a program to build their skills.

Though the report briefly touches on the issue of employers uninterested in investing in skills development, except specialized skills, for not being able to capture its full value. They realize that employees would benefit more and trained employees are more likely to move elsewhere in search of better opportunities. In other words, the social value of the skills training exceeds its private value for the employer. In fact, the social gains go beyond even the private gains to the individual employee. It contributes towards mitigating labor market frictions which constrains investment and keeps large numbers of people unemployed.

This does give skills training the nature of a public good, as much as education in general. It is therefore appropriate that governments finance, atleast partially, the cost of such post-secondary education-to-employment training. Some state governments in India have tried to address this through placement-linked jobs training programs, whereby government pays private institutions for short-term skills development trainings to unemployed youth in return for guaranteeing them employment. However, in the absence of close relationship between the training agencies and employers these programs, which are mostly short-term and academic inputs focused, have been largely failures. But they provide important pointers on the way forward.

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