Economic Effects of Youth Unemployment and Fundamental Measures - Restructuring the Education System

Transcription

1 MONTHLY FOCUS NO Economic Effects of Youth Unemployment and Fundamental Measures - Restructuring the Education System By SOHN Min-Jung Co-authored by RYU Ji-Seong, PARK June, LEE Chan-Young, MOON Weh-Sol August 2010

2 I. A Sharp Increase in Youth 1 Unemployment The first half of 2010 showed clear signs of a recovery in employment with an increase of 283,000 new jobs compared to the previous year. During the same period, however, the number of jobs for young workers dropped by 34,000. More recently, in June, the total number of jobs grew by 313,000 year-on-year, but the number of jobs for youths fell by 85,000. Since the global financial crisis claimed a heavy toll on the youth labor market, employment rates for young adults and 30-something workers 2 are still showing no signs of returning to the pre-crisis level. 3 In the first half of the year, the actually-felt youth unemployment rate posted 23.0%, 2.7 times higher than the official youth unemployment rate of 8.6 %, indicating that nearly a quarter of Korea s young people are having difficulties in finding employment. The number of discouraged young job seekers 4 surged to 1,162,000, which is 3.14 times the total number of unemployed youth in Korea (370,000), and surpasses the 1,159,000 recorded in 2009 during the global financial crisis. This evidently shows that the current youth unemployment problem remains far from being resolved despite the recent positive trends in employment. Table 1. Comparison between Official and Actually-felt Rates of Youth Unemployment (Unit: %, 10,000 persons) Classification 2009 Jan.-June 2010 Official Rate (unemployed youths) 8.1 (34.7) 8.6 (37.0) In this report, the term youth refers to all aged 15 to 29, as defined and used by Statistics Korea and the Ministry of Labor. The employment rate, which indicates how many people actually have jobs, is decided by the number of employed workers divided by the total productive population, while the employment rate by age group is calculated by the number of employed among that particular age-group divided by the number of all productive people in that age group. The currency crisis delivered a hard blow to 50-something workers, however, the recent global financial crisis has worsened employment conditions for their children, that is, youths and 30-something workers. In the first half of 2010, those preparing for employment occupied 40.0 % (465,000) of the total number of discouraged young job seekers. A large number were studying for various state examinations for public service, resulting in the imbalanced pooling of a high-quality workforce to certain jobs.

3 Actually-felt Rate (discouraged young job seekers) 22.9 (115.9) 23.0 (116.2) Note: 1) Discouraged young job seekers have been included in the actually-felt unemployment rate 2) The actually-felt rate of youth unemployment has been obtained by dividing the number of discouraged young job seekers (has been revised to include the unemployed, involuntary parttime workers, economically inactive persons preparing for employment, idle persons, and others not in the labor force) by the economically active youth population (includes the employed, the unemployed, economically inactive persons preparing for employment, idle persons, and others not in the labor force). Source: The actually-felt rates were calculated by SERI using the original data on the economically active population provided by Statistics Korea. Definitions of the Official Unemployment Rate and Actually-felt Unemployment Rate Official Unemployment Rate = Unemployed/Economically Active Population Actually-felt Unemployment Rate = Discouraged Job Seekers/Economically Active Population, persons preparing for employment, idle persons, and others in the labor force Korea s youth unemployment problem is not just a cyclical problem that is sensitive to business-cycles and readily resolved once the economy fully recovers. It is rather a structural problem that can persist in the mid- to long-term because Korea, compared to major countries, has the highest rate of youths in NEET 5 status for the five-year period after graduation. And with the duration of unemployment prolonging, the percentage of NEET is on the rise, increasing the possibility that youth unemployment will become a chronic structural problem. Table 2. NEET Rates of Major Countries According to Time Since Graduating School (Unit: %) NEET stands for Not in Education, Employment or Training and represents youths who are out of school, work and job-training for five years after graduation.

4 After Graduation Korea Austria Denmark Germany Greece Italy Spain United Kingdom One Year Three Years Five Years Note: Youth refers to all those between the ages of 15 to 29. Source: OECD (2008). OECD Employment Outlook. Therefore, in the mid- to long-term, fundamental measures for the youth unemployment problem must be devised from a labor supply perspective, that is, from the job-seeker s viewpoint. Short-term, temporary measures are ineffectual in tackling the problem. For example, government youth internship programs implemented in 2009 contributed to the creation of short-term employment; however, they will not be effective in expanding youth employment on a mid- to long-term basis. II. Structural Causes of Youth Unemployment 1. Economic Cost of Youth Unemployment In the short-term, youth unemployment causes the loss of income and in the mid- to long-term, it is detrimental to the formation of human capital and results in the reduction of lifetime income. A delay in the transition from education to employment affects not only the loss of income but reduces lifetime income due to the prolonged period of time spent being unemployed. If it is assumed that the period of unemployment is one year, the long-term income loss is estimated to be about four to five times more than the shortterm income loss. Under the same assumption, the total sum of loss for both short- and long-term income for youths aged 25 to 29 6 amounts to 4.9 trillion and 23 trillion won respectively 7 (Here, short-term income loss refers to the income loss of young workers, In 2009, the annual average size of the unemployed youth population aged 25 to 29 totaled 39,000 (25 years old), 42,000 (26 years old), 45,000 (27 years old), 39,000 (28 years old), and 35,000 (29 years old), respectively. These figures were obtained using the estimates that regard only 60 % of income of a two or more

5 incurred during periods of unemployment. Long-term income loss refers to the loss of lifetime income of young workers who are assumed to earn 15% less compared (from time of re-employment to age 60) to those who have never been unemployed. Figure 1. Short- and Long-term Income Losses of Youth Unemployment Source: Reformulated based on Chong-myon Kim (2006), Implications on Long-term Costs of Youth Unemployment and Fiscal Policy, Finance Forum, Korea Institute of Public Finance. From the nation s fiscal perspective, youth unemployment can be blamed for the decrease in income tax revenue and increase in the fiscal spending on social security for the aging population. In 2009, the loss of tax revenue per unemployed youth (one-year period) was 330,000 won, making the total loss of tax revenue throughout the youth s lifetime 8 million won. This means that taking into account the 20,000 unemployed income household as youth income (Sung Myong-Jae, 2005), which amounts to approximately 40 % of income of a single income household (Statistics Korea, 2010). The estimates are based upon the prospective Korean household income distribution by age group until the year 2050, authored by Sung Myong-Jae in his paper, Trends in the Changes in Korea s Poverty Rates and Policy Directions: Trends in Poverty and Policy Implications Observed through Characteristics of Income Distribution and Hypothetical Panels, Korea Institute of Public Finance. Also, used herein is the finding of a study that about 15 % of a decrease in income can not be recoverable over time after re-employment of displaced workers. Ruhm, C. (1991). Are workers permanently scared by job displacements? Jacobson, L., LaLonde, J. R. & Sullivan, G. D.(1993). Income Losses of Displaced Workers. Another reference used for this calculation is the data that in 2009, the annual average size of unemployed youth aged 25 to 29 comprised 39,000 (25 years old), 42,000 (26 years old), 45,000 (27 years old), 39,000 (28 years old), 35,000 (29 years old).

6 youths aged 25 to 29 in 2009, the total loss in long-term income tax revenue would amount to 1.5 trillion won. 8 Finally, if youth unemployment becomes a chronic problem, it will not only hamper the nation s human capital accumulation but will also weaken its steady growth base. In the mid to long term, it threatens to damage both the quality and quantity of the country s young workforce, to which national competitiveness is heavily dependent on. And as the state of unemployment persists, young job seekers lose their desire and willingness to work. It also weakens the individual s human capital accumulation capabilities due to the loss of learning opportunities acquired during the early stages of employment. Furthermore, a decline in young employees could damage both the company s productivity and production base as existing employees will be unable to pass on their knowledge and skills to the next generation. 9 The loss of income as a result of prolonged unemployment can lead to a decline in personal consumption which will inevitably lead to a decline in domestic demand. If unemployed young adults aged 25 to 29 experience short-term income losses for one year, or if 20% of them suffer from long-term income losses, annual domestic consumption will decline by 0.7%. 10 Prolonged unemployment can also aggravate social instability. 11 It will increase urban poverty and may even be the cause a type of cocooner s crime prompted by being alienated from society in the long-term. Figure 2. Effects of Youth Unemployment If it is conservatively assumed that 20% of the 20,000 unemployed youths aged of 25 to 29 are in a prolonged state of unemployment, the loss of income tax revenue will total billion won. On-the-job training in regards to the transfer of skills to young workers is particularly critical in the manufacturing industry because of its unique industrial attributes, and therefore, the reduction in the youth labor force is directly linked to the permanent loss of industrial skills. This is calculated on the assumption that in 2009, total private consumption expenditure amounted to 520 trillion won; and 75% (an average personal consumption spending rate) of 4 trillion and 900 billion won, which is the total amount of income losses of unemployed youth aged 25 to 29 for one year period of joblessness, was actually spent in the consumption market. Trends in the rates of death (persons, per 100,000 persons) by suicide (deliberate self-injury) among young adults aged 25 to 29: 11.2 persons (2000); 14.2 persons (2002); 15.3 persons (2004); 15.5 persons (2006); 25.2 persons (2008)

7 2. Structural Causes of Youth Unemployment The proportion of those entering the so-called decent jobs, which refers to permanent positions at large companies, takes up a mere 10.3 % of the total number of newly hired workers. More specifically, the number of college graduates totaled 547,000 in 2009, but only 39,000 were fortunate enough to find positions at large firms. Worse still, recent studies have shown that this figure is now on a downward trajectory. Table 3. Number of Newly Hired Employees and New Employees of Large Firms among Graduates of College/Graduate School (Unit: persons, %) Classification Graduates 527, , , , ,964 Newly Employed 317, , , , ,487 New Entrants in 58,474 45,813 45,010 51,464 48,955 Large Companies (18.4) (12.4) (11.6) (13.2) (12.6)

8 Note: 1) In the graduate category, all those who have completed their education at community colleges, teaching colleges, 4-year universities, industrial universities, technical colleges, and graduate schools have been included. 2) Figures in ( ) refer to the share of those newly employed at large companies. Source: Korean Educational Development Institute, Education Statistics. Affected by the disparity between affiliated college departments, the lack of conformity in industrial demand and education has created a mismatch between industrial demand and college education. For example, those who majored in teaching recorded a high level of conformity at 89.3% while those who majored in the liberal arts and humanities posted a poor rate of 44.5%. In a survey, 43% of businesses found the job performance of their new employees unsatisfactory and, as its reason, pointed out the discordance between field experience and college education. 12 With an increase in college enrollments, the age of first-time employees and the reservation wage level, which refers to the desired level of pay, are also rising. The expectations of job seekers in regards to the type of employment they want to have also become higher, causing more problems in finding employment. In the past, Korea s infamous education fever played a key role in the continuous rise in college enrollments 13 and undeniably contributed to the rapid economic growth of Korea. However, this has become one of the main causes behind the rising number of unemployed youths. Expressly, based on the Confucian worldview, the unique characteristics of Korean society, which stresses the importance of one s educational status, has only served to fuel the incessant desire for higher education regardless of industrial labor demands. Competition for College Diploma (sheepskin effect) Sheepskin, which refers to sheep leather, informally denotes a diploma. - The term is originated from the old custom of making diplomas with sheep leather. Korea Employers Federation (2006). Survey for Employment Status of College-educated, New Entrants. Rate of College Enrollment: 33.2% (1990) 51.4% (1995) 68.0% (2000) 82.1% (2005) 83.8% (2008) 81.9% (2009)

9 The sheepskin effect refers to the idea that acquiring higher education is more effective than acquiring occupational skills or experience in obtaining higher wages. This phenomenon occurs because there is an asymmetry of information with regard to college degrees in that they are a sign of a person s ability. The sheepskin effect was established as an economic theory by the 2001 Economics Nobel Prize winner, Michael Spence, in his Job-Market Signaling Model The social phenomenon of seeking higher education leads to the delay in young adults entering the labor market. Furthermore, the creation of decent jobs, in comparison to the past, has gone down, and yet job seekers are failing to adjust their expectations for job placements and wages despite the growing supply of a highly educated workforce. In recent years, the increase in the reservation wage has been far greater than that of actual wage. Thus, the ratio of actual wage to reservation wage, which represents the percentage of wage satisfaction, has decreased. Table 4. Comparison between the Actual and Reservation Wage of Young Workers (Unit: 10,000 won, %) Graduate of 4-year College Graduate of 2-year College Classification Actual Wage (A) 1,726 2,199 1,196 1,617 Reservation Wage (B) 2,004 2,949 1,459 2,623 Satisfaction Rate (A/B) Note: Reservation Wage refers to the minimum level of pay desired by potential employees. Source: Korea Research Institute for Vocational Education and Training (2003); Survey for Employment Status of Vocational College and University Graduates (Research Report, ); Korea Research Institute for Vocational Education and Training, Korea Employment Information Services, Workforce Demand and Supply Forecasting Center (2008); Survey for Job Preferences by College Students, Korea Employment Information Services. Ministry of Labor, Labor Statistics.

10 . Policy Suggestions Job creation, of course, is a prerequisite to resolving the youth unemployment problem. However, attention must also be paid to the serious mismatch between the supply and demand of labor in the current youth labor market. With this in mind, long-term structural changes to the educational system should be implemented as well as strengthening education on work ethics. In particular, educational restructuring is needed to increase the opportunity for today s youths to develop clear career goals and obtain the necessary education that best fits these goals. 1. Practical Education for Career Planning It is crucial to provide guidance on the proper level of education considering that the rate of return in terms of college education is relatively low and a college degree does not necessarily mean a better job and higher wages. Currently, the wage premium on a college education in Korea is smaller than in other OECD countries. However, the cost of tuition is relatively high. 14 Therefore, it is important to spread this information to the public to enable people to make rational decisions on whether to advance to college. In other words, education in work ethics should be reinforced and systemic incentives should be provided from the elementary and middle school level so that students learn that there are other options than going to college. Practical Education in Advanced Countries The United States and the United Kingdom offer courses of entrepreneurship at every level of education. - In the U.S, representative examples are Mini-Society (elementary school level), Making a Job (middle school level), and Enterprep (high school level). - The United Kingdom focuses on early education under the educational motto, The earlier entrepreneurship is taught, the faster it is acquired. In 2007, the ratio of average wage of college-educated employees to the average wage of high-school graduates aged 25 to 34 posted 1.25, lower than the OECD average ratio of OECD (2009), Education at a Glance.

11 Germany enhanced its competitiveness in manufacturing and eased youth unemployment through apprenticeships. - Students who have completed middle-school work as apprentices at global companies like Volkswagen or Siemens while taking theoretical courses at public vocational schools. - Apprentices who pass their qualification exams are respected as highly skilled workers and hired even by major companies. - In 2009, Germany s unemployment rate for youth aged 15 to 24 stood at 11 %, well below the OECD average of 16.4 %. Also, in consideration of the serious mismatch small and medium enterprises (SME) are facing, efforts should be made to inform unemployed youths of hidden jobs through various channels. Here various channels include off-line information like Japan s White Paper on SMEs and customized employment support services that job seekers can easily access both on- and off-line. To connect job seekers with SMEs, Japan implemented a program called Bus Tour to Discover Local Attractions, operating in Osaka. It is recommendable for Korea to benchmark this example and devise a similar innovative and strategic program in order to solve its youth unemployment problem. Japan s Bus Tour to Discover Local Attraction LASERCK, a maker of laser cutting machines, with 66 employees and a capital of 50 million yen, located in Yao city, Osaka, recruits qualified young employees through this tour program. - The Ministry of Economy, Trade, and Industry operates the bus tour as one of the matchmaker projects to connect SMEs with job seekers - During the three month period between August and December in 2009, the company hired 8 new employees and expects to hire 6 more among those graduating college in President Yanagimoto Chuji has expressed his wish to invest money in securing new talents even if he has to cut cost from other expenses, and he will continue to do so in the future. Source: Japan Small and Medium Business Administration (April 2010); 2010 White Paper on SMEs) 2. Promotion of Employment-friendly Colleges The main focus of the policy to promote employment-friendly colleges is that systematic support is vital to interlinking the school curriculum with industrial workforce

12 demands. Colleges should create practical, demand-driven majors and reinforce industryspecialized programs such as industrial-academic cooperation (Co-op) programs and long-term internships; and industry-academia joint programs with overseas enterprises also should be pursued to assist employment. Annually, conformity assessment of majors to industrial fields should be carried out by each college and used to modify its curriculum 15 in order to expand the talent pool of demand-satisfying workers. For its part, the government should attract colleges to national industrial complexes to foster talents who have both academic and industrial knowledge. Also, research institutes should also be located within the complex vicinity in order to integrate academics and industry. Table 5. Achievement of Korea Polytechnic University 16 Employment Rate Academic-industrial Cooperation Overall Employment Rate Regular Job Rate Family Companies Field Experience Engineering House On-campus, business-affiliated Research Institute 2,800 students on-the- 41 fields on the 85.4% 70.1% 3,356 job training at 1,695 joint research tasks 17 companies with152 companies Source: Internal Document of Korea Polytechnic University In addition, the government should support the establishment of urban-style advanced vocational school offering courses for fashion, design, software, and knowledge-based services. Currently, colleges are inclined to create new disciplinary departments at their convenience, without deep consideration to social and industrial changes, and an increase in the average number of academic departments was 1.6 times more than the 37.5 departments recorded in 1990 at 61.6 in This is mainly due to their reckless installation of new majors, regardless of pre-existing majors. A Study on Competitiveness Enhancement Measures of Higher Education Industry, Korea Research Institute for Vocational Education and Training. Engineering House is a research-production complex on campus, representing educational-industrial cooperation, where professors, students, and corporations take part in the joint projects of education, research and development. Family companies refer to those corporations which signed on an agreement with the university in order for technical exchanges between the university and companies, joint research and development, on-the-job training for the university students, and the mutual share and use of experimental or training facilities.

13 3. Business-sponsored Continuing Education To attract the young workforce, SMEs should introduce tuition aid programs as a part of employee benefits. The program will be helpful in attracting those who cannot afford college tuition fees despite their academic ability. And employees who already have college degree should be encouraged to take advantage of the program to pursue a higher education, thus forming the company s R&D base. The government, of course, should minimize the financial burdens of SMEs, for instance, by giving full tax credit on tuition aids, thereby making the companies attractive to college-educated job seekers.