The labor market is not good for young people today. The under-25 unemployment rate is more than double the national average and remains well above pre-recession levels.
High youth unemployment rates are not new. Since 1948, youth unemployment has averaged 2.7 times the prime-age unemployment rate, but this ratio tends to fluctuate over business cycles.
A weak labor market is bad news for both the economy and social mobility. There are long-term effects on an individual’s income: if at age 22 he is unemployed for six months, his wages the following year will be reduced by 8%, reducing his future earnings by approximately $22,000 over the next 10 years. These earnings losses are likely the product of lost work experience, declining labor market skills, and the negative signals that unemployment sends to employers.
The most disadvantaged people are hit hardest by youth unemployment.
Because youth unemployment tends to be concentrated among the more disadvantaged, the ‘scarring’ effects of early career unemployment also affect social mobility. Young people who do not pursue post-secondary education have higher unemployment rates and are more vulnerable to economic downturns than those who attend university. Even more concerning, British research shows that the earnings penalty from youth unemployment is greater for individuals with lower skills. After all, the risks and penalties of youth unemployment are likely to be greatest among those with already poor economic prospects, so a downturn in the youth labor market could exacerbate the opportunity gap.
Two strategies to improve the youth labor market
In our Strategy to Support Low-Income Households, we will prioritize returning to full employment among the many policies needed to improve the economic prospects of struggling workers. argued that it should. Two strategies are particularly suitable for tackling youth unemployment.
- Expand the Earned Income Tax Credit (EITC) for childless young adult workers, as proposed by the President. The EITC is a wage subsidy for low-income workers that encourages work and reduces poverty. However, this credit is primarily aimed at workers with children. Low-wage workers without children receive little or no benefit from the program. Additionally, EITC eligibility for childless workers is limited to ages 25 and older, meaning young people transitioning into the labor market cannot benefit from the credit’s powerful work incentives.
- Strengthen connections between community colleges and the local labor market. When the economy is down, community college enrollment surges as young people forego bleak job prospects for more schooling. In general, building human capital is a wise move. However, many community colleges are known for having low completion rates. The biggest increase in revenue comes from completions, not registrations. Additionally, the economic value of a community college education is geographically limited to local labor markets, as employers tend to hire locally for low- and medium-skill occupations that require less than a bachelor’s degree. Greater collaboration between community colleges and local businesses could help unemployed youth who enroll in community colleges to make the most of their time in the classroom.