Governments should use their fiscal capacity to ensure our youth always can find a job

In my monthly labour market updates for Australia, I always examine the teenage labour market. Not much media coverage is given to that cohort in this context. But as our societies age and require our younger workers to be more productive than their parents to maintain material living standards (even though we should be reappraising what is an environmentally feasible benchmark to maintain), how we deal with school-to-work transitions, vocational training, university education is a major issue. The fact that governments all around the world have been prepared to impose massive costs on the younger generation as they obsessively pursue fiscal surpluses is one of the scandals of the period and will have long-term consequences for society. Recent Australian research evidence, which is consistent with outcomes from similar international studies, provides strong evidence to support the case that governments should always ensure there are enough jobs for our young population and that fiscal austerity undermines that requirement. Running fiscal deficits doesn’t undermine our children’s futures. Starving them of job opportunities at crucial transition points in their lives definitely undermines their future. We should understand that and stop listening to economists who say otherwise.

In the 2016 edition of the OECD publication – Society at a Glance 2016 – we learned that:

Fifteen percent of the OECD youth population were not in employment, education or training (NEET) in 2015 – about 40 million young people. More than two-thirds of them were not actively looking for work. The total gross income that could have been generated by NEETs in 2014 is estimated to have been between USD 360-605 billion, or 0.9-1.5% of OECD-wide GDP. Job and income uncertainty can keep young people from reaching other traditional markers of adulthood, leaving them disenchanted and discouraged. It can also have serious long-term effects on health, fertility and crime, and eventually endanger social cohesion.

The adults in charge clearly didn’t think this was a problem as they continued to obsess over their quest for the holy surplus, which starved their economies of the spending necessary to maintain jobs for all and to properly fund education and training.

The adults claimed this was necessary to avoid burdening their children with higher future tax obligations as a result of the debt that would be required to run higher deficits.

So, apparently, the adults were being virtuous – looking out for their kids’ long-term interests.

Except they were lying and, in general, the adults making the decisions were not the parents of the kids enduring the destructive consequences of the policy folly.

They were lying because there is no future ‘tax burden’ on the next generation that can be passed on from an earlier generation unless the future generation choose higher taxes through the political process.

And the debt the governments were issuing now was not even required for fiscal deficits to provide net spending to the economy. The adults had chosen to issue this debt to favour certain segments of the financial community – corporate welfare.

As an aside, I note some commentary about how progressives (particularly Modern Monetary Theory (MMT) economists) should not be making a case for zero interest rates and a cessation of debt-issuance.

Apparently, this will hurt low-income savers who depends on the yields and the safety of government debt (presumably via their superannuation funds or other investment vehicles) for their future retirements.

And if they do not have risk-free government debt to invest in then they will be forced to put their savings into riskier corporate assets which exposes them to grief.

Well that is fairly narrow thinking.

It assumes that there would be no other change in institutional structure in the economy.

I have long argued that the currency-issuer should set up a national saving bank which would provide risk free investment capacity to workers who saved and would pay a public ‘pension’ contribution to match the saving. The details would have to be worked out but it might be something like a $-for-$ matching contribution which would provide secure investment to ensure a reasonable retirement fund was built up.

No public debt is required for the government to introduce such a scheme.

Anyway, back to the OECD Report.

They found that:

1. “Almost one out of every ten jobs held by workers under 30 were destroyed between 2007 and 2014. In Spain, Greece and Ireland, the number of employed youth halved.”

2. “Young people who had left school at lower-secondary level bore the brunt of these job losses.”

3. “the recovery has been too weak to significantly improve young people’s prospects in many countries.”

4. “One-fifth of all young people, however, spent more than one year as NEETs – for them disengagement from work and education is not a transient experience, but a lasting state.”

5. “one in six 25-to-34 year-olds still do not have an upper-secondary qualification, particularly young men.”

The point is that the GFC was a devastating incursion into the long-term prospects for our youth.

The following graph shows the employment history for teenagers in Australia since February 2008, the low-point unemployment month before the GFC.

Between February 2008 and August 2020:

1. 134.3 thousand full-time teenage (net) jobs have been lost. There was a short-period where full-time employment started to rise (2017) but that recovery stalled and went south as the federal government tightened fiscal policy even further as it tried to record a token fiscal surplus.

2. 2 thousand part-time teenage (net) jobs have been lost.

3. Making a total of 136.4 thousand net jobs lost.

4. And an increasing proportion of the remaining job opportunities are in the casualised, gig economy where the prospects of a guaranteed precarious future is an understatement.

5. Around 6 per cent of Australian teenagers are classified as NEET (Source).

It is clear that the GFC and the aftermath, cruelled by the austerity bias, has impacted dis-proportionally on youth.

The pandemic will worsen that situation.

Economists like me who research labour markets have identified so-called ‘scarring effects’ of prolonged unemployment.

These ‘scars’ are multidimensional:

1. They reduce a persons life-time earnings.

2. They introduce a range of pathologies – including increased incidence of mental and physical health problems, increased family breakdowns, increased participation in the judicial system, increased incidence of substance abuse, and more.

3. They increase chance of life-time job instability – cycling in and out of unemployment.

4. Children who grow up in a household where the adults are long-term unemployed inherit the disadvantages their parents face and take them into their own adult lives.

5. Teenagers locked out of the labour market because there are insufficient jobs available, face disrupted transitions from school-to-work, reduced chances to accumulate job-specific skills, disruption to their chances to accumulate experience, and all the other pathologies that adults endure.

So if governments starve the economy of necessary spending – for whatever reason – they create problems that endure for generations.

They often talk of V-shaped events where an economy nose-dives and comes back fairly quickly – maybe a two-quarter recession – but ignore the fact that it takes a long time for those who lose jobs or are about to enter the labour market when the recession begins to recover to get back into work.

This is why governments should always use their financial capacity to generate jobs when there is a shortage of employment based on non-government spending.

Supply-side measures that have characterised the neoliberal period as governments have penny-pinched to chase surpluses guarantee that disadvantaged groups will endure prolonged unemployment.

It is one of the scandals of our time.

A recent report from researchers at the Australian Treasury (July 20, 2020) – The career effects of labour market conditions at entry – provides interesting evidence to reinforce the argument I have been making for years that governments should use their fiscal capacity to prevent recessions and protect the jobs of young people (who are among the first to go when there is a downturn).

In relation to the period since the GFC, the Treasury paper explores:

… the prospect that the crisis may have induced scarring effects, for example through poor initial firm-worker matching and the atrophying of skills … empirical studies spanning North America, Japan and Europe have demonstrated that poor early labour market experience, particularly entering into the labour market during a downturn, can reduce earnings for up to ten years after graduation …

They conjecture that the “sharp rise in unemployment associated with COVID-19 may have long-lasting effects, even as cyclical conditions pick up and the influence of the virus subsides.”

Their research task is to explore:

… the effects of labour market conditions at graduation upon an individual’s work-life over the following decade.

So they trace “individual wages of most graduates from 1991 to 2017” and then:

… estimate how local labour market conditions at the time of graduation shape the subsequent earnings and employment profiles of workers.

They employ a range of controls (other things that might influence graduate earnings aside from local labour market conditions).

Their conclusions, which mirror international research results, are:

1. “a 5 percentage point rise in the state youth unemployment rate – a typical contractionary episode in our data – is associated with a decline in earnings of 8 per cent in the initial year and 31⁄2 per cent after five years, before fading to around zero ten years on.”

In other words, when the youth unemployment rises by 5 points – the new graduates seeking work face reduced probability of success, and if they do find work, they lose significant earnings relative to what they might have enjoyed if youth unemployment was lower.

That income losses accumulates for ten years, which means their life-time earnings are significantly damaged, and all the negative impacts of that situation flow on.

2. “shocks which hit workers at the start of their careers are more important than those that hit later.”

In other words, if the transition from school-to-work is disrupted it is more damaging than employment disruptions occur later in a person’s working life.

It is a very crucial period in a person’s life and a number of things occur at that point. That is why it is imperative that government policy ensures there are as few a disruptions as possible.

Chasing a fiscal surplus while teenagers are unable to make those transitions is the act of irresponsible vandals.

The government can always create jobs and can always ensure teenagers have sufficient job opportunities at all time.

It is a political choice to cause these disruptions in the young peoples’ lives and cause them life-long disadvantage.

3. The researchers say that their findings: “highlights the potential role for timely and effective macroeconomic stabilisation policies which, by supporting a rapid recovery in the labour market, can reduce any scarring purely associated with a more drawn-out recovery.”

The most effective macroeconomic stabilisation policy is to use fiscal policy to create work when there is a shortage of jobs based on non-government spending.

The cardinal rule of macroeconomics is spending equals income equals output which drives employment.

When there is mass unemployment there is a shortage of spending.

Announcing elaborate training programs and all the other supply-side initiatives that governments hide behind as they try to convince us they are doing things do not help increase spending.

4. The research finds that “the careers of more advantaged individuals are less likely to be disrupted by adverse labour market shocks.”

So children who go to the top universities do better relative to other university graduates.

5. Upward mobility is disrupted when unemployment is high – “Individuals that graduate in weaker economic times initially exhibit lower job switching rates” and “Graduates that enter during a weaker economic environment tend to join (or remain at) lower productivity firms”.

Which means that university students who have part-time jobs in the gig economy tend to retain those jobs once they graduate when there are reduced opportunities to enter a desired full-time jobs based on their degree studies.

So the skills they acquire in university education are not used for some period ahead if there are insufficient jobs when the student graduates.

They find that women suffer worse outcomes in this respect relative to males.

A high pressure economy allows for upward mobility while a low pressure economy (with mass unemployment) stifles the dynamic efficiencies that come from upward mobility.

I wrote about this in this blog post – Okun’s Law survives 50 years – trouble for the neo-liberals (January 22, 2013).

6. The research also bears on the shift to neoliberalism. They find “these scarring effects are more prominent and permanent for individuals who graduated in the post-2000 period.”

Why is that?

The reasons are several, but two important factors have been, first, the obsession with fiscal surpluses has maintained elevated and persistent mass unemployment since the 1991 recession.

Second, the rise of the precarious work opportunities in the gig economy, which have locked graduates into low productivity, casual jobs because they are unable to get full-time work in their field of study. Cycle back to the first factor!

Conclusion

Research such as this, which is consistent with similar studies in “North America, Japan, United Kingdom and Europe”, provides strong evidence to support the case against fiscal austerity.

Running fiscal deficits doesn’t undermine our children’s futures.

Starving them of job opportunities at crucial transition points in their lives definitely undermines their future.

We should understand that and stop listening to economists who say otherwise.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.