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Youth unemployment in China: A crisis in the making

Youth unemployment has created "a generation at risk" according to the International Labor Organization, with worldwide youth unemployment forecast to rise to 12.8 percent by 2018. But these headline figures do not necessarily tell the real story given the discrepancies among different parts of the world.

In the developed economies, the youth unemployment rate - unemployment among those aged 16 to 24- is approximately 18.1 percent. While the rate of Germany stands at 9 percent, those of the UK and the U.S. are 20 percent and 16 percent, while in Spain and Greece half of the young people are jobless.

(Read more: Can China protect its prized 7% growth level?)

Youth unemployment is highest in the Middle East and North Africa at 28.3 percent and 23.7 percent, respectively. By contrast, East Asia and South Asia have the lowest rates at 9.5 percent and 9.3 percent.

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One may imagine that China – perhaps the world's only economic powerhouse at this moment – would have a low youth unemployment rate. According to the official figures it does: youth unemployment stood at 4.1 percent in 2010. Yet this number must be taken with a grain of salt considering the Middle Kingdom does not use the internationally accepted metrics to measure such unemployment.

If we turn to other sources, the picture is rather different. For instance, a report prepared by the China Household Finance Survey in 2012 puts China's youth unemployment at 8.1 percent. Others suggest that the rate to be as high as 20 percent.

(Read more: Get ready for more China shadow-banking defaults)

Youth unemployment with Chinese characteristics

While the exact rate is up for debate, the underlying unemployment issue among the youth is not. Even though there is no specific data on the jobless rate of Chinese people in the 16 to 24 age group, the China Household Finance Survey suggests an unemployment rate of 9.6 percent for this age group. While this may not appear to be particularly high, a breakdown by education profiles reveals a worrying trend.

As shown in figure 1, those who are less educated are far more likely to be employed than those who are better educated. Put differently, there appears to be an inverse correlation between educational attainment and ease of finding employment, contrary to the U.S. and the UK where a higher level of education helps young people secure jobs.

Source: China Household Finance Survey (2012)

This observation is perhaps not that surprising; China's economic miracle has insofar been driven by three sectors: export-driven manufacturing, construction and large energy and capital intensive heavy industries dominated by the state, none of which offer large number of white-collar jobs suitable for university graduates.

By contrast, low-skilled workers with a primary and junior secondary education, especially young migrants from the rural China, can easily find jobs in the transportation, construction and catering industries. This is especially true in coastal provinces such as Guangdong and Fujian as well as major cities including Beijing and Shanghai. Indeed, currently these businesses are finding it tough to recruit and retain workers as demand is high and supply is low. This, in turn, has led to the continuing increase in wages.

(Read more: China central bank urges proper risk management)

This highlights a fundamental issue: youth unemployment in China is a structural rather than a cyclical problem – the country is not creating a sufficient number of high-quality positions to soak up its educated youngsters. Worse yet, the number graduates and the number of institutions of higher education have been on the rise over the past two decades. At the same time, most universities are more interested in pursuing revenue and growing themselves in size. The result is that there is little motivation to enhance the quality and the employability of their students.

In 2013, it was estimated that at least 600,000 graduates from the prior year had yet to have found employment. This is adding to the approximately 7 million students who are leaving their universities with most want to enter the workforce immediately.

Hence, China's youth unemployment issue has a rather different characteristic: On the one hand, high-school-level-educated youngsters are more likely to find jobs given that there is a shortage of such labor. On the other, there is a big pool of qualified graduates who are having a hard time to find the jobs that they desire.

Youth unemployment in China: tales of two parties

Low-skilled youth may find jobs easily right now, but if the country's economic development slows this group may experience increasing difficulty in finding or maintaining jobs. Furthermore, since these jobs are often low paid and rarely come with social security such as unemployment insurance, these young laborers face various forms of social hardship such as unstable income and little or no old-age pension. This could create a severe problem as this segment of the population tends to be the most irrational, unstable and aggressive, as history has shown.

Top university graduates, like those in the West, will be able to find the jobs to their liking. But with the proliferation of universities, there will be ever more graduates rolling out second-tier universities. While are be unable to compete for jobs with the top university graduates, they're reluctant to take up low-level and lowly paid works.

(Read more: The China risk you may have forgotten about)

These so-called "啃老族" would rather stay at home and rely on the parents for subsistence than taking up jobs that they do not like. Parents often play encourage this behavior; many parents have to hold on to low-skilled jobs to put their children through university, thus finding it unacceptable that their offspring would end up in same sort of job they are in. Instead, they keep their children at home and pressure them to pursue better jobs.

From this arises another problem: many graduates decide to continue their studies, making them even more qualified, and in turn they're only willing to consider better salaried jobs.

China needs to move quickly to reform its economic foundations. Instead of simply throwing money into expanding its manufacturing capacities, it has to invest in improving those industries such as professional services sectors and creative industries to take full advantage of the talent and skills of the young Chinese. If the current trend continues it could lead to social instability that would affect everyone in the country. In this respect, youth unemployment is surely a crisis in the making.

Terence Tse is an Associate Professor in Finance at ESCP Europe Business School in London. Mark Esposito is Associate Professor of Management at Grenoble Graduate School of Business in France.

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