Opinion: The cost of youth disengagement
Young people out of employment or education are likely to have a lifetime of poorer outcomes in terms of unemployment, wages and even happiness and health. Associate Professor Gail Pacheco checks out the situation in New Zealand. This opinion piece was first written for Employment Today.
Over the last decade, interest in the economic state of the average young person has escalated and there has been growing speculation that more needs to be done to address the challenges and difficulties faced by young people in acquiring the appropriate skills for the workforce— and ensuring a smooth transition into the labour market.
The rising level of New Zealand youth who are NEET (not employed, in education or training) is concerning at both the local and national level, with youth exclusion, disengagement, and overall under-utilisation in the labour market associated with serious economic and social costs.
There is a multitude of empirical evidence suggesting that young people out of employment or education are likely to have a lifetime of poorer outcomes in terms of future unemployment, lower future wages, and even reduced happiness and health. Recent US evidence, for example, shows that early spells of unemployment may lead to a wage penalty in later years, with a six month spell of unemployment experienced at 22 years of age leading to wages that are two to three percent lower than they otherwise would have been at age 30-31.
There is also evidence in New Zealand of path dependence, with indications that youth who experience a long-term spell of NEET (at least five months) will experience much poorer outcomes than their non-NEET peers after two years; and that the outcomes are particularly poor for individuals who leave school between the age of 15 and 17.
In March 2014, there were 81,500 young New Zealanders aged 15-24 who were NEET, 28,000 of them in Auckland. This equates to approximately 12.8 percent of all young New Zealanders (and 12.2 percent of young Aucklanders). What’s particularly concerning is the total number of NEET youth has grown steadily since data for this group was first collected by Statistics NZ in March 2004. While this is partly mitigated by the population growth in this age group, the rising numbers of NEET youth even prior to the 2008 recession is indicative of wider issues affecting youth that are yet to be addressed.
Figure 1 (see page 24) illustrates that the NEET rate (in Auckland, and New Zealand) is consistently lower for 15-19 year olds, relative to 20-24 year olds. This is expected as individuals in the 15-19 age group are more likely to be engaged in education. There is also evidence of seasonal fluctuations in NEET numbers—with drops in the NEET rate in quarter four each year, and rises in quarter one in many years. This is likely due to the rise in part-time and temporary work during the Christmas and summer season. It is also important to note that the steepest rise in NEET levels over the last decade has been experienced by 20-24 year olds in Auckland, with more than a five percentage point rise in their NEET rate (12.4 percent to 17.6 percent).
Figure 2 (page 24) indicates that while the NEET rate in Auckland is similar relative to New Zealand in general, there are marked differences across the ethnicity spectrum. For example, Maori and Pacific youth are more than twice as likely to be in NEET status, relative to their NZ European counterparts. To estimate the cost of rising numbers of NEET youth, it is possible to project the loss to productivity, measured in foregone wages, and the expected strain on public finances. Focusing on short-term costs over a one- to three-year time period, costs can be defined as the excess cost of being in the NEET group compared to the hypothetical situation that these youth would have experienced (on average) as their non-NEET counterparts aged 15-24. There are three types of costs to explicitly consider:
1. The cost of unemployment, in terms of the expected loss in foregone earnings and tax revenue, and the expected benefit payments;
2. The cost of inactivity, in terms of foregone earnings, and benefit payments for those who are inactive and engaged in caregiving; and
3. The cost of educational underachievement. This relates to the wage differential NEET youth are likely to experience upon (re)engaging with the labour force. Once they re-enter the labour market, they are likely to find work at a lower skill level, relative to their non-NEET peers, who had a smoother transition into the workforce.
By employing the method outlined above, it can be shown that the expected short-run per capita cost (over the next one to three years) of each NEET youth in New Zealand is $21,969. The comparable figure for NEET youth in Auckland is $23,661, and this is primarily due to the higher wages found in Auckland, relative to the rest of the country.
There is also significant variation in the cost associated with being NEET across different ethnic groups within Auckland. In particular, the per capita cost over the next one to three years is lowest for NZ European NEET youth at $18,178, and highest for Maori NEET youth at $28,289, while that for Pacific Peoples NEET youth sits in between at $22,242.
Further analysis shows that this difference is a result of the greater propensity of Maori and Pacific Peoples to disengage from the education system earlier, to withdraw from the workforce due to caregiving responsibilities at a younger age, and to experience, on average, longer durations of unemployment than their NZ European counterparts.
These costs are conservative in nature as there are numerous other costs associated with youth becoming NEET that are difficult to quantify; for instance, poorer physical and mental health outcomes, increased substance abuse and prevalence of criminal activity. It is therefore prudent to consider these estimates as lower bound thresholds in terms of the true cost of youth disengagement.
The sizeable costs highlight the need for policy intervention directed at improving transitions from NEET status to the workforce or further education/training. The Department of Labour (2009) describes NEET individuals as “missing the opportunity to develop their potential at an age that heavily influences future outcomes”.
The implication being that these youth face a higher probability of becoming disadvantaged or marginalised later in life. More evidence is needed on the New Zealand front as to the true long-term consequences of a NEET spell for a young individual. For instance, evidence from the UK attempts to calculate the present value of the life time cost of being NEET and shows it is approximately nine times that of the short-term costs.