June 24, 2014

Dreams Deferred: Young Workers and Recent Graduates in the US Economy

Testimony Before the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy
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The young are always far more affected by an employment crisis than older workers. Today, however, they face one of the worst labor markets of any generation. Not only have they experienced the Great Recession, but six years later they still face a poorly performing labor market. Their employment level is down, earnings and earnings growth are lower, wealth is lower, and millions of the young have yet to even enter the labor force. In fact, they are a large part of the biggest ongoing economic challenge we face today—the shrinking labor force. 

If this continues and we have a permanently smaller labor force, we will have slower economic growth and a diminished standard of living in the future. 

Part of the solution is, of course, policies that promote stronger economic growth and stronger job creation. Another part of the solution is to focus on youth, particularly those that have not participated in the labor market. This means doing what we can to lower the cost of hiring for companies and raising the incentive to work for the young.

The Growing Problem of Youth Disengagement from Work

The gloomy job environment has implications for the young far beyond the bad news contained in the high unemployment rate for their age cohort, which is twice that of older Americans.

Today, just 63.4 percent of youth aged 18 to 29 are employed. Job prospects have been so bad that many have withdrawn from the labor force and do not even show up in the official unemployment rate statistics. This decline in participation since 2007 means that there are about 2 million young workers missing from the labor force. If not left uncounted in the official unemployment rate, these 2 million would raise the youth unemployment rate from its current 10.9 percent rate to 15.4 percent—well above their highest rate in over 65 years (see figure 1).

It is well established that the longer an individual is out of the labor force, the less likely they are to return to employment. Or, in this case, ever enter the workforce. Currently 1.2 million of the unemployed are trying to find work for the first time in their lives. Worse, a shocking 400,000 of the long-term unemployed have never worked before (see figure 2). If the labor market doesn’t improve and many of the long-term jobless youth don’t enter the workforce soon, they may never work. 

This youth disengagement from the labor force poses a real problem—and not just for the young but for the future performance of the US economy. A permanently smaller future workforce would impact income growth and possibly even lower our future standard of living. To maintain economic growth, we need the two “Ps”—participation and productivity. That is, we need to have an active labor force that is educated and skilled. Economic forecasters have for years predicted a slowing of US economic growth as baby boomers retire. If youth labor force participation doesn’t improve, the decline will be even more dramatic.

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