The Lost Generation

The continuing job crisis is hitting young people especially hard—damaging both their future and the economy

By Peter Coy*
BusinessWeek

Bright, eager—and unwanted. While unemployment is ravaging just about every part of the global workforce, the most enduring harm is being done to young people who can't grab onto the first rung of the career ladder.

Affected are a range of young people, from high school dropouts, to college grads, to newly minted lawyers and MBAs across the developed world from Britain to Japan. One indication: In the U.S., the unemployment rate for 16- to 24-year-olds has climbed to more than 18%, from 13% a year ago.

For people just starting their careers, the damage may be deep and long-lasting, potentially creating a kind of "lost generation." Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities, or come to be seen by employers as damaged goods.

Equally important, employers are likely to suffer from the scarring of a generation. The freshness and vitality young people bring to the workplace is missing. Tomorrow's would-be star employees are on the sidelines, deprived of experience and losing motivation. In Japan, which has been down this road since the early 1990s, workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression, stress, and work-related mental disabilities, according to the Japan Productivity Center for Socio-Economic Development.

When today's unemployed finally do get jobs in the recovery, many may be dissatisfied to be slotted below people who worked all along—especially if the newcomers spent their downtime getting more education, says Richard Thompson, vice-president for talent development at Adecco Group North America, which employs more than 300,000 people in temporary positions. Says Thompson: "You're going to have multiple generations fighting for the jobs that are going to come back in the recovery."

What's more, the baby boom generation is counting on a productive young workforce to help fund retirement and health care. Instead, young people risk getting tracked into jobs that don't pay as well, says Lisa B. Kahn of the Yale School of Management. That would mean lower tax payments for Social Security and Medicare.

Only 46% of people aged 16-24 had jobs in September, the lowest since the government began counting in 1948. The crisis is even hitting recent college graduates. "I've applied for a whole lot of restaurant jobs, but even those, nobody calls me back," says Dan Schmitz, 25, a University of Wisconsin graduate with a bachelor's degree in English who lives in Brooklyn, N.Y. "Every morning I wake up thinking today's going to be the day I get a job. I've not had a job for months, and it's getting really frustrating."

ANXIETY AND FEAR

The case for action is strong. Governments should act now before the damage gets even worse, argues David G. Blanchflower, an economist at Dartmouth College who recently served on the Monetary Policy Committee of the Bank of England. He's not sure what will work, but he favors trying everything from subsidizing education and training to cutting minimum wages for young people and trainees. "It has to be now," says Blanchflower. "It can't be in two years' time."

Most analyses of youth employment focus on people aged 16 to 24, which includes everyone from high school dropouts to wet-behind-the-ears college grads. But in this era of rising educational requirements, some people don't start their careers until their mid or late 20s—and these young college grads are taking it on the chin as well.

According to a BusinessWeek analysis, college graduates aged 22 to 27 have fared worse than their older educated peers during the downturn. Two years ago, 84.4% of young grads had jobs, only somewhat lower than the 86.8% figure for college graduates aged 28 to 50. Since then, the employment gap between the two groups has almost doubled.

Robert I. Sutton, author of The No Asshole Rule, a management book, says he's seeing "more anxiety and fear" among his students at Stanford University. At Northwestern University Law School, at least three-quarters of students who graduated in May had their employment deferred, in some cases up to a year, says Bill Chamberlain, head of the school's career center.

But the situation is most severe for job seekers who lack college diplomas and thus have fewer options. "My friends tell me: 'Go fill this out. Go do that,'" says Charlie Black, 26, of Manhattan, who was out one recent weekend shopping for a Halloween costume for his 2-year-old daughter, Bree. Black has been a union extra in several TV shows and movies, and for a year he worked the overnight shift at an Abercrombie & Fitch (ANF) store. Now, jobless for almost a year, he would be happy to work as a janitor. "But no jobs have been calling back," says Black.

It seems strange at first blush that young people are the biggest victims of the current economic slump. One could easily imagine that companies in a recession would prefer to hire young people, who are cheap, and slough off older workers, who are expensive. But both employers and older workers are sitting tight, taking as few risks as possible in an uncertain environment. With no openings, employers are refusing even to look at the résumés of those on the outside looking in.

The sense of stasis in many Western countries is reminiscent of Japan, where talk of a lost generation has been around since as long ago as 1995. Some 3.1 million Japanese aged 25 to 34 work as temps or contract employees—up from 2 million 10 years ago, according to the Ministry of Internal Affairs. Many Japanese blame the young people themselves, saying they are spoiled, alienated "freeters"—a term meaning job-hopping part-timers. But economist Souichi Ohta of Nagoya University argues that a big part of the problem is Japanese employers, who value long experience at their companies—which newcomers by definition don't have.

Europe offers different lessons about what to avoid. In Spain, employers generally put older workers on long-term contracts that are hard to break. When demand slumps, they get rid of the younger workers, notes Alfredo Pastor, an economist at Spain's IESE Business School and former Spanish Secretary of State for the Economy. That's one reason Spain's unemployment rate for 16- to 24-year-olds is a sky-high 39%. The rate is 24% in France and 19% in Britain.

Economists in several countries have studied the damage such high unemployment can cause. Kahn of Yale found that graduating from college in a bad economy has a long-lasting negative effect on wages. For each percentage-point rise in the unemployment rate, those who graduated during the recession earned 6% to 7% less in their first year of employment than their more fortunate counterparts. Even 15 years out of school, the recession graduates earned 2.5% less than those who began working in more prosperous times.

SUBMINIMUM WAGE?

What can be done? For one thing, companies should keep hiring young people even if they're doing layoffs. That's how General Electric (GE) operates, says Susan P. Peters, the company's vice-president for executive development. She says GE learned from the mistake of its aviation business, which froze hiring and training during a downturn years ago and found its talent pipeline dry when business recovered. "We tell our businesses, 'Tough, you have to hire,'" Peters says.

Free-market economists favor removing obstacles to employment of the young, such as high minimum wages. "The government in some ways is contributing to this problem," says Kristen Lopez Eastlick, senior research analyst for the employer-backed Employment Policies Institute. She points out that the 40% hike in the federal minimum wage over the past two years made it less appealing to hire young workers. One possibility: Some U.S. states and European countries have enacted subminimum wages just for young people or people enrolled in apprenticeships.

More job training would help as well. In April the British government guaranteed that starting next January, all people under age 25 who have been unemployed for more than a year will have a job offer, training, or a paid workplace experience.

The U.S. has been slower to beef up job programs for the young, partly because of massive budget deficits. The Obama Administration is again considering a plan proposed during the campaign to give $3,000 tax credits to employers for each new hire, although an Administration spokesman says talks with Congress are only preliminary. An argument in favor of action: The current generation of young people is larger than the one that follows. Dartmouth's Blanchflower points out that even if programs are left in place after the recession ends, they will serve fewer people and therefore become less costly.

One possible example for the U.S. to follow is Germany's apprenticeship program, which guides young people from high school into skilled blue-collar jobs. Young-adult unemployment in Germany has risen less than in most other developed countries.

Young people have figured out how to avoid horrid blanks on their résumés. Enrollments are breaking records at such schools as Cincinnati State Technical & Community College and LaGuardia Community College in New York. With no job in sight, Shireen Rahjou, 23, of Boca Raton, Fla., is working toward a master's degree in public relations. She recently landed a paid internship—O.K., not a job, but a foot in the door—at a PR firm in Miami.

With jobs scarce, Stanford's Sutton says some of his students plan to start their own businesses. Schools should encourage that instead of churning out "passive regurgitators," argues Kate McKeown, an adjunct professor of entrepreneurship at Fordham University's College of Business Administration.

Meanwhile, though, the tide of youth unemployment keeps rising. "We're seeing further deterioration," says Stefano Scarpetta, who heads the employment-analysis division of the Organization for Economic Cooperation & Development, a forum for rich countries.

The unemployment crisis among the young is not as dramatic as the financial crisis of a year ago. But it may turn out to have longer-lasting effects.

With Mark Scott in London, Ellen Gibson and Lindsey Gerdes in New York, Carol Matlack in Paris, and Kenji Hall in Tokyo

*Coy is BusinessWeek's Economics editor.