13 December 2011 Last updated at 19:02 ET

Future costs of youth unemployment

Viewpoint By Paul Gregg and Lindsey Macmillan

Future job prospects and earnings potential are hit by being unemployed

This recession has left a legacy of high youth unemployment, a common facet of most recessions affecting most countries.

In hard times young people face two hurdles to finding work.

First, firms tend to hold onto their existing, experienced staff and focus on reducing recruitment, to lower staff numbers. This collapse in new vacancies hits young people hardest.

Second, with more unemployment comes more choice of potential employees for firms which are hiring. Firms favour previous experience and this places young people in a Catch-22 situation of not being able to get the experience they need to get work because they can't get the work in the first place.

For the least educated or those who are unlucky enough to experience long periods out of work, it becomes increasingly hard to get that break that opens the door to the labour market. All this locks many young people out of work for long periods and raises concerns about their future chances in their working lives.

We can see from previous generations' experiences of youth unemployment that the longer the period spent out of work as a youth, the more time spent out of work later in life, and the lower potential wages when in work.

The evidence on the future costs of youth unemployment comes from two UK birth cohorts, which track all babies born in a particular period for the rest of their lives. By chance, the participants in the first cohort were aged 21 when the 1980s recession hit and in the second cohort the participants were aged 20 when the 1990s recession hit.

High youth unemployment is one of the biggest problems confronting societies around the world, condemning whole generations to a life of much reduced income.

In our special report we look at the challenges facing today's young and jobless, and the attempts to overcome the problem.

In graphics: youth unemployment

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About one in five young people in the first cohort spent more than six months out of work before age 23, and it was similar in the second. Furthermore, these people spent about 20% of their time unemployed five years later and 15% 12 years later.

The evidence suggests that an extra month out of work before age 25 raised the proportion of time out of work between age 26 and 30 by 0.75%; an extra year out of work when a youth led to 10 months more unemployment later in life. It is a very similar story for wages, with an extra month unemployed when young associated with 1% lower wages in their early 30s.

Evidence

It's possible that these legacies may not reflect just the pure effect of youth unemployment, but also that those experiencing more unemployment are less well educated and come from deprived backgrounds. The great advantage of the birth cohort studies is that so much is known about the young person's childhood, from their education to their attitudes and beliefs, their health and engagement in risky behaviours. Almost as much is known about their parents.

The evidence suggests that about half of the later lower wages and higher unemployment exposure stems from these background differences between people, and about half is a result of the unemployment itself.

Therefore, a year of youth unemployment reduces earnings 10 years later by about 6% and means that individuals spend an extra month unemployed every year up to their mid-30s. These effects diminish slowly in later adult life but are still present well into peoples' 40s.

These penalties not only harm people's lives, but also cost governments and society at large a lot of money, both currently in terms of higher unemployment benefits and lost tax revenue and also well into the future through long-term reduced productivity and earnings, and more unemployment.

Commentators sometimes talk of a lost generation after a recession. This is an exaggeration, but perhaps one in five shows long-term scars from youth unemployment, even when aged above 40, in terms of lower wages and greater unemployment.

Paul Gregg is professor of economic and social policy at the University of Bath; Lindsey Macmillan is from the Centre for Market and Public Organisation, Bristol.