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Avoiding a Lost Generation

Thu, 15 Mar 2012 17:09:32 GMT

By Nemat Shafik

Young people were innocent bystanders in the global financial crisis, but they may well end up paying the heaviest price for the policy mistakes that have led us to where we are today.

Young people will have to pay the taxes to service the debts accumulated in recent years.

Moreover, the global economy is threatened by continued strains in the euro area, and unemployment is still climbing in several countries, in particular in Europe. Young people (those aged 15 to 24) are the most affected, and youth unemployment has reached record levels in a number of countries.

If the right policies are not put into place, there is a risk not only of a lost decade in terms of growth but also of a lost generation.

Consider this. In Spain and Greece, nearly half of all young people cannot find jobs. In the Middle East, young people account for 40 percent or more of all unemployed people in Jordan, Lebanon, Morocco, and Tunisia and nearly 60 percent in Syria and Egypt. And in the United States, which traditionally has had a strong job creation record, more than 18 percent of all young job seekers cannot find employment.

Legacy of loss

Youth unemployment has long-term consequences for economic growth because of the loss or degradation of human capital. But it also has many other consequences, both for the individuals affected and for society as a whole.

Among those consequences are

  • Increased costs to the economy: Youth unemployment results in higher unemployment insurance and other benefit payments, lost income tax revenues, and wasted productive capacity.
  • Brain drain: Youth unemployment often leads to increased emigration, which is clearly happening in Ireland and Iceland and has been a long-standing feature of many Middle Eastern countries. Many crisis-hit economies have a tradition of emigration when the economy undergoes a serious downturn.
  • Higher crime rates: Increased unemployment has been linked to higher crime rates.
  • Lower lifetime earnings: Youth unemployment leaves a “wage scar” in the form of lower earnings that can last into middle age. The longer the period of unemployment, the bigger the effect.
  • Lower life expectancy: Unemployment more generally has been linked to lower life expectancy, a higher incidence of heart attacks later in life, and even higher rates of suicide.

Road map to jobs

The biggest contribution the IMF can make to reducing youth unemployment is helping its member countries foster macroeconomic stability and restore economic growth. It is only when the economy recovers that people will start to find jobs again.

To get the world economy back to where it creates rather than destroys jobs, a number of steps should be taken.

In advanced economies like the United States and Europe, there is a problem of inadequate demand. More needs to be done to energize growth and employment.

Many countries in Europe also face obstacles to hiring young people that are of a more long-standing structural nature.

As part of its policy dialogue with member countries, the IMF is recommending measures to reduce labor market segmentation, lower barriers to competition (especially in the service sector), implement growth-friendly tax reforms, and increase efforts in education and research and development.

Emerging economies are another story. They have been growing strongly, and some—at least until recently—were even at risk of overheating. Some of these countries—mainly those running large external surpluses—could contribute to solving the global and youth unemployment problem by boosting domestic demand and purchasing more goods produced elsewhere, including in advanced economies.

Low-income countries weathered the crisis pretty well after 2008, but in the process used a lot of their government resources. They now need to rebuild their fiscal buffers, so they can sustain employment and redirect spending toward high-priority areas such as health, education, and infrastructure, even if the global environment deteriorates.

Access to credit is another important factor in job creation. That is why it is important to recapitalize banks and more broadly restore confidence, so that financial institutions can get back to the business of lending and contributing to growth.

In developing economies, many banks are lending, but the loans do not reach large segments of the population, particularly young people and would-be entrepreneurs.

Call to action

For millions of young people around the world, a lot is at stake in 2012. If we do not succeed in putting the world economy back on the path to recovery, futures will be blighted, and more dreams will be stolen. To solve the problems of youth unemployment, restoring global growth is crucial, as are policies to support job creation and credit. None of this can be achieved without global cooperation.­

Read more at F&D magazine.

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