The youth unemployment bomb

By Peter Coy

In Tunisia, the young people who helped bring down a dictator are called hittistes-French-Arabic slang for those who lean against the wall. Their counterparts in Egypt, who on Feb. 1 forced President Hosni Mubarak to say he won’t seek reelection, are the shabab atileen, unemployed youths. The hittistes and shabab have brothers and sisters across the globe. In Britain, they are NEETs-“not in education, employment, or training.” In Japan, they are freeters: an amalgam of the English word freelance and the German word Arbeiter, or worker. Spaniards call them mileuristas, meaning they earn no more than 1,000 euros a month. In the U.S., they’re “boomerang” kids who move back home after college because they can’t find work. Even fast-growing China, where labor shortages are more common than surpluses, has its “ant tribe”-recent college graduates who crowd together in cheap flats on the fringes of big cities because they can’t find well-paying work.

In each of these nations, an economy that can’t generate enough jobs to absorb its young people has created a lost generation of the disaffected, unemployed, or underemployed-including growing numbers of recent college graduates for whom the post-crash economy has little to offer. Tunisia’s Jasmine Revolution was not the first time these alienated men and women have made themselves heard. Last year, British students outraged by proposed tuition increases-at a moment when a college education is no guarantee of prosperity-attacked the Conservative Party’s headquarters in London and pummeled a limousine carrying Prince Charles and his wife, Camilla Bowles. Scuffles with police have repeatedly broken out at student demonstrations across Continental Europe. And last March in Oakland, Calif., students protesting tuition hikes walked onto Interstate 880, shutting it down for an hour in both directions.

More common is the quiet desperation of a generation in “waithood,” suspended short of fully employed adulthood. At 26, Sandy Brown of Brooklyn, N.Y., is a college graduate and a mother of two who hasn’t worked in seven months. “I used to be a manager at a Duane Reade [drugstore] in Manhattan, but they laid me off. I’ve looked for work everywhere and I can’t find nothing,” she says. “It’s like I got my diploma for nothing.”

While the details differ from one nation to the next, the common element is failure-not just of young people to find a place in society, but of society itself to harness the energy, intelligence, and enthusiasm of the next generation. Here’s what makes it extra-worrisome: The world is aging. In many countries the young are being crushed by a gerontocracy of older workers who appear determined to cling to the better jobs as long as possible and then, when they do retire, demand impossibly rich private and public pensions that the younger generation will be forced to shoulder.

In short, the fissure between young and old is deepening. “The older generations have eaten the future of the younger ones,” former Italian Prime Minister Giuliano Amato told Corriere della Sera. In Britain, Employment Minister Chris Grayling has called chronic unemployment a “ticking time bomb.” Jeffrey A. Joerres, chief executive officer of Manpower (MAN), a temporary-services firm with offices in 82 countries and territories, adds, “Youth unemployment will clearly be the epidemic of this next decade unless we get on it right away. You can’t throw in the towel on this.”

The highest rates of youth unemployment are found in the Middle East and North Africa, at roughly 24 percent each, according to the International Labor Organization. Most of the rest of the world is in the high teens-except for South and East Asia, the only regions with single-­digit youth unemployment. Young people are nearly three times as likely as adults to be unemployed.

Last year the ILO caught a glimmer of hope. Poring over the data from 56 countries, researchers estimated that the number of unemployed 15- to 24-year-olds in those nations fell in 2010 by about 2 million, to just under 78 million. “At first we thought this was a good thing,” says Steven Kapsos, an ILO economist. “It looked like youth were faring better in the labor market. But then what we started to realize was that labor force participation rates were plunging. Young people were just dropping out.”

Youth unemployment is tempting to dismiss. The young tend to have fewer obligations, after all, and plenty of time to save for retirement. They have the health and strength to enjoy their leisure. “I spend many hours a day playing soccer with my friends,” says Musa Salhi, an 18-year-old Madrid resident who studied to be an electrician but hasn’t worked in over a year. Even as fighters on horses and camels galloped through Cairo’s Liberation Square on Feb. 2 and the U.N. estimated that 300 people had died in a week of clashes, the world’s investors continued to perceive the consequences as largely local. The Standard & Poor’s 500-stock index rose 1 percent in the week following the first mass protests on Jan. 25. Crude oil prices rose less than 4 percent over the period.

But the failure to launch has serious consequences for society-as Egypt’s Mubarak and Tunisia’s overthrown President, Zine al-Abidine Ben Ali, discovered. So did Iranian President Mahmoud Ahmadinejad, who in 2009 dispatched baton-wielding police against youths protesting his disputed reelection. “Educated youth have been in the vanguard of rebellions against authority certainly since the French Revolution and in some cases even earlier,” says Jack A. Goldstone, a sociologist at George Mason University School of Public Policy. In December the French government released a report on the ­nation’s Sensitive Urban Zones, also known as banlieues, which said that the young men in the neighborhoods find it “extremely difficult” to integrate into the economic mainstream. The heavily Muslim banlieues exploded into rioting in 2005; last year a series of violent attacks there brought police face to face with youths brandishing AK-47s.

A demographic bulge is contributing to the tensions in North Africa and the Middle East, where people aged 15-29 make up the largest share of the population ever, according to multiple demographic sources. The Egyptian pyramid that matters now is the one representing the population’s age structure-wide at the young bottom, narrow at the old top. Fifteen- to 29-year-olds account for 34 percent of the population in Iran, 30 percent in Jordan, and 29 percent in Egypt and Morocco. (The U.S. figure is 21 percent.) That share will shrink because the baby boom of two decades ago was followed by a baby bust. For now, though, it’s corrosive.

In a nation with a healthy economy, a burst of new talent on the scene spurs growth. But the sclerotic and autocratic states of the Middle East are ill-equipped to take advantage of this demographic dividend. Sitting at the fringes of a protest in Cairo’s Liberation Square on Jan. 29 and wearing a bright yellow head scarf, Soad Mohammed Ali says she hasn’t found work since graduating from Cairo University with a law degree-nearly 10 years ago. She says the only offer of government work she has received is cleaning jobs at $40 a month. At age 30, Ali says, “I am old now.”

For the young jobless, enforced leisure can be agony. Musa Salhi, the Spanish soccer player, says, “I feel bored all the time, especially in the mornings. My parents really need and want me to start working.” In Belfast, Northern Ireland, 19-year-old Declan Ma­­guire says he applied for 15 jobs in the past three weeks and heard nothing back. “I would consider emigrating, but I don’t even have the money to do that. It is so demoralizing.”

For decades, Mubarak coped with Egypt’s youth unemployment problem by expanding college enrollments. That strategy couldn’t last forever. This past March, scholars Ragui Assaad and Samantha Constant of the Middle East Youth Initiative, a venture of Brookings Institution and the Dubai School of Government, put it bluntly: “In Egypt, educated young people who spend years searching for formal employment, mostly in the public sector, are now forgoing this prospect as the supply of government jobs dries up. Formal private sector employment-quite limited in the first place-is not growing fast enough. … Hence, young people are left with either precarious informal wage employment or expected to simply create a job for themselves in Egypt’s vast informal economy.”

Mubarak gave no sign of knowing how explosive the situation was, but his ministers did state repeatedly that Egypt needed rapid growth to soak up new job-­seekers. The country started getting some things right in 2004, when Mubarak appointed a business-­minded government under Prime Minister Ahmed Nazif. The nation lowered corporate taxes and import tariffs, privatized telecom, and expanded exports. The economy grew 7 percent annually from 2006 through 2008, dipped below 5 percent in 2009, and was on track for over 5 percent growth this past year, according to the International Monetary Fund.

That was good and bad. While growth is essential for easing social tensions in the long term, it can exacerbate them in the short term in a country such as Egypt. That’s because, former Finance Minister Youssef Boutros-Ghali told BusinessWeek several years ago, the first fruits of growth go to those who are ­already wealthy.

The lack of democracy in Egypt and elsewhere in the Middle East-Israel being the exception-makes ­matters worse. Goldstone, of George Mason, says Mubarak is running afoul of the “paradox of autocracy,” a phrase coined by the late University of California at San Diego sociologist Timothy L. McDaniel. “Any authoritarian ruler who wants to modernize his country has to educate the workforce,” Goldstone says. “But when you educate the workforce you also create people who are not so willing to follow authority. Thus you create this threat of rebellion and disorder.” Democracies are “much better at managing large numbers of highly educated people,” Goldstone notes. Spain’s youth unemployment is even higher than Egypt’s, but young Spaniards aren’t trying to overthrow the government.

Even so, rich democracies ignore youth unemployment at their peril. In the 34 industrialized nations in the Organization for Economic Cooperation and Development, at least 16.7 million young people are not employed, in school, or in training, and about 10 million of those aren’t even looking, the OECD said in December 2010. In the most-developed nations, the job market has split between high-paying jobs that many workers aren’t qualified for and low-paying jobs that they can’t live on, says Harry J. Holzer, a public policy professor at Georgetown University and co-author of a new book, Where Are All the Good Jobs Going? Many of the jobs that once paid good wages to high school graduates have been automated or outsourced.

The spike in youth unemployment should ease in the West as the after-effects of the 2008 financial crisis diminish. Eventually, growth will resume in the U.S., Europe, Japan, and other nations. The retirement of the baby boomers will increase demand for younger workers. “I believe the tables will turn. Employers will be lining up” for younger workers, says Philip J. Jennings, general secretary of UNI Global Union, an international federation of labor unions with 20 million members.

That’s cold comfort to the young people who are out of work now. The short term has become distressingly long. Although the recession ended in the summer of 2009, youth unemployment remains near its cyclical peak. In the U.S., 18 percent of 16- to 24-year-olds were unemployed in December 2010, according to the Labor Dept., a year and a half after the recession technically ended. For blacks of the same age it was 27 percent. What keeps the numbers from being even higher is that many teens have simply given up. Some are sitting on couches. Others are in school, which can be a dead end itself. The percentage of American 16- to 19-year-olds who are employed has fallen to below 26 percent, a record low.

What’s more, when jobs do come back, employers might choose to reach past today’s unemployed, who may appear to be damaged goods, and pick from the next crop of fresh-faced grads. Starting one’s career during a recession can have long-term negative consequences. Lisa B. Kahn, an economist at the Yale School of Management, estimates that for white, male college students in the U.S., a 1 percentage point increase in the unemployment rate at the time of graduation causes an initial wage loss of 6 percent to 7 percent-and even after 15 years the recession graduates earn about 2.5 percent less than they would have if they had not come out of school during a downturn. There’s a psychological impact as well. “Individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions,” conclude Paola Giuliano of UCLA’s Anderson School of Management and Antonio Spilimbergo of the International Monetary Fund in a 2009 study. Downturns, the study suggests, breed self-doubting liberals.

The coincidence of protests in Egypt and record youth unemployment elsewhere has caught the attention of the world’s most powerful capitalists and ­diplomats. At this year’s World Economic Forum in Davos, Switzerland, held while Cairo was in chaos, the hallways buzzed with can-do talk about improving ­employment opportunities for the young. Even before the latest whiff of grapeshot, the U.N. declared the year beginning last August as the International Year of Youth. In December the Blackstone Group (BX) and CNBC held a conference in London with top experts to discuss solutions to youth unemployment. Companies from AT&T (T) to Accenture (ACN) to Siemens (SI) are working on ways to prepare high school and college students for the working world.

The only surefire cure for youth unemployment, however, is strong, sustained economic growth that generates so much demand for labor that employers have no choice but to hire the young. Economists have been breaking their teeth on that goal for decades. “If we knew how to get growth right we’d win the Nobel Prize,” says Wendy Cunningham, a specialist in youth development at the World Bank in Washington.

In the absence of a growth panacea, economists have been working on microscale solutions, such as training programs to smooth the transition from school to work. No magic bullets there yet, either. “We seem to lack a creativity about how to address the issue. I can’t point any fingers because I certainly don’t have the answers,” says Sara Elder, an economist at the ILO in Geneva.

One reason answers are so scarce is that rigorous measurement of antipoverty programs became widespread only in the past decade, thanks in part to the influence of economists such as Esther Duflo and Abhijit Banerjee of the Abdul Latif Jameel Poverty Action Lab, based at Massachusetts Institute of Technology. Serious analysis requires tools such as randomized trials and control groups that most bureaucrats and do-gooders don’t know. And measuring long-term impact takes a decade or more.

One finding that has emerged is that more education is not always better. What matters is matching the skills of the workforce to the skills that employers demand. In Iran, where the percentage of people aged 15 and over with postsecondary degrees has soared from 2.5 percent to 10.5 percent over the past 20 years, the education system has become “a giant diploma mill,” says Djavad Salehi-Isfahani, an economist at Virginia Tech. Egypt and Tunisia are headed in that direction; in 1990, only about 2 percent of their people aged 15 and over had post-secondary degrees, but by 2010 the ratios were up to 6.7 percent for Tunisia and 6 percent for Egypt, according to Harvard University’s Center for International Development.

The extra schooling didn’t help. Much of the anger that boiled over in the two nations, in fact, came from college graduates who couldn’t put their degrees to work. Typical is Saad Mohammed, 25, a 2010 graduate of Cairo’s venerable Al-Azhar University, interviewed in Liberation Square between protests. He feels betrayed that he has been unable to find work in his chosen field, “origins of religion.” Mohammed hopes that “a new government will give me a job in a religious charity.” The mismatch is worst for young women in the Middle East, who are getting as much advanced education as men but have far fewer job opportunities.

China, too, has produced more college diplomas than it can make use of. The number of graduates has quintupled in the past decade, and “the Chinese economy has just not been able to create that many jobs for high-skilled labor,” says Anke Schrader, a researcher in Beijing at The Conference Board’s China Center for Economics and Business. Manpower says that according to its analysis of the Chinese labor market, newly minted technical-school graduates are earning as much or more than new university graduates, with monthly pay of 2,000 to 4,000 renminbi a month, and in some cases 6,000 renminbi, vs. 2,000 to 2,500 for the university grads. (Monthly pay of 2,000 renminbi equals $3,600 a year at market exchange rates.)

In the U.S. and much of Europe, the problem is just the opposite of the Arab world’s: not too much college education but too little. According to a study by the Organization for Economic Cooperation and Development, less-educated youth are 4.6 times as likely to be unemployed as more-educated youth in the U.S.-a measure of the potency of knowledge in a knowledge economy. That means that the U.S. has fallen off the top of the world league table for college graduation rates at the worst possible moment. As of 2008, only 60 percent of students in American four-year schools had managed to graduate within six years, according to the National Center for Education Statistics.

Even in technologically sophisticated nations such as the U.S., college isn’t for everyone. But traditional vocational programs, though popular, are not the best solution for youth unemployment, according to effectiveness research conducted by the World Bank. Cunningham, who has a PhD in labor economics and has worked in youth development at the bank since 2000, says vocational programs “often are set up without a good understanding of the demands in the labor market and become obsolete very quickly. They have staff that stay on and on. They don’t have the money to update their technology.”

More successful are programs that are tightly linked with employers. The Jóvenes (Spanish for youths) programs in several Latin American nations require that an employer sign a document promising to take their graduates as interns, and they teach life skills alongside technical ones. Employers range from bakeries to clothing manufacturers to computer repair shops. The question, says Cunningham, is whether the Jóvenes programs can be scaled up from hundreds of participants to hundreds of thousands.

These days there’s a newfound appreciation for an ancient work arrangement, the apprenticeship, because it greases the transition from learning to doing. Germany and Austria experienced milder youth unemployment in the global downturn partly because of blue-collar apprenticeship programs, says Stefano Scarpetta, deputy director of the directorate of ­employment, labor, and social affairs at the OECD in Paris. Last year, the International Labor Organization says, Germany’s youth unemployment rate was 13.9 percent, compared with a Europe-wide average of 21.2 percent and 21 percent in the U.S.

In an update on the apprentice idea, countries such as the Netherlands encourage university students to gain work experience while enrolled. Scarpetta says 70 percent of Dutch youth ages 20-24 are getting some work experience. By contrast in Italy and Portugal only about 10 percent work while in school. The Netherlands’ youth unemployment rate is just 11.2 percent.

Something similar is catching on in the U.S. AT&T, with almost 270,000 employees and an annual training budget of nearly $250 million, is trying to smooth high school students’ transition to work with a program called Job Shadow that exposes students to the realities of employment. Insight into the minds of American teenagers has made AT&T executives realize the magnitude of the challenge. “I had three students shadowing me a while ago-juniors in high school,” says Charlene F. Lake, AT&T’s chief sustainability officer. “When I asked them what they wanted to do after high school, two of them hadn’t thought about it. One girl said she’d like to teach and expressed surprise that she needed more education to do that. She didn’t even realize she had to go to college.”

For many young people who lack work experience, structure is the key. “You need to have rules and regulations,” says Executive Director Mary B. Mulvihill of the Grace Institute in New York, which offers tuition-free training in personal and office skills to help “under­served” women become self-sufficient. “You need to say, ‘If you do this, look how your life is going to change.’ If it’s more loosey-goosey, I don’t think it works.”

If the purpose is to create jobs, as opposed to just filling them, loosey-goosey may be exactly what’s needed. Entrepreneurship-with all its guesswork and improvisation-could be the most underexploited means of reducing youth unemployment. In 2008 the University of Miami started an entrepreneurship program called Launch Pad inside its career center to send the message that starting your own company is a valid career option, not just a class to take.

Since then, University of Miami students and recent grads have launched 45 companies. Coral Morphologic collects and raises corals for sale to aquarium owners. Sinha Astronautics has conceived of a space plane for launching satellites into low-earth orbit. Audimated, a music website, allows fans to make money by promoting their favorite indie artists. The man who launched Launch Pad is William S. Green, senior vice-provost and dean of undergraduate education. “Young people are interested in managing their own lives and are a little bit cautious about big corporations,” he says. “This has become the largest single student activity on campus.”

After Miami’s entrepreneurship initiative caught the eye of Stephen A. Schwarzman, the billionaire head of private equity firm Blackstone Group, the Blackstone Charitable Foundation last year launched a similar program in southeastern Michigan with Wayne State University and Walsh College. On Jan. 31, as President Barack Obama announced his Startup America initiative at the White House, Blackstone said it would expand what it also calls LaunchPad to five more cities, as yet unnamed, devoting $50 million over five years. Schwarzman, buttonholed at the World Economic Forum in Davos, said Blackstone “started getting focused on this area when it became clear that [government efforts] were not in our judgment going to lead to significant declines in unemployment.”

To free-market economists, one solution to youth unemployment is simple: Clear away the government-imposed obstacles to hiring young people. They blame high minimum wages, for instance, for discouraging companies from hiring promising young people who haven’t had a chance to accumulate the knowledge or experience to justify being paid even the minimum wage. Following that counsel, most European countries, where minimum wages are high relative to average pay, have lower minimums for young workers. (The evidence is that high minimum wages do exclude some young people, while benefiting others by raising their pay.) Likewise, too-strong protections for the permanent workforce can hurt young people because they aren’t similarly protected and bear the brunt of downsizing in hard times, the ILO warned in a 2009 report.

Right or wrong, the free-market argument hasn’t carried the day: Britain and New Zealand actually raised their minimum wages during the global downturn. And the argument for the negative effect of worker protections hasn’t convinced Austria and Germany, which have strong employment regulation and yet have had healthier job markets in the past two years than countries such as the U.S. with fewer worker protections. Thea Lee, deputy chief of staff at the AFL-CIO, argues that unions can’t be blamed for high youth unemployment: “Business likes to have workers with no power, no rights, no protections.”

That’s a bit harsh. After all, company executives are squeezed too, and hiring neophytes is costly. Joerres, the Manpower chief, blames the faster pace. “Businesses did more training when the life cycle of their products and employees was longer,” he says. “Now if the life cycle of your product is 18 months and it takes 12 months to bring your employee up to speed, you lose.”

Chronic youth unemployment may not be fixable. But there’s evidence it can be reduced through the concerted efforts of government, labor, business, education, and young people themselves. Luckily the soil is fertile: All over the world, the hittistes and shabab atileen, NEETs and freeters and boomerang kids are hungry for a chance to thrive. Says John Studzinski, senior managing director at Blackstone Group: “To a certain extent, all you can do with youth employment is plant seeds.”

Editor’s Note: This article was written as the cover story on February 2 in Bloomberg Businessweek.