Unemployment is a terrible thing. Youth unemployment has knock-on pernicious consequences in the wider society that can last a generation.
Jobless levels have been coming down in the US recently, although we need at least two more quarters of continuing falls before we can feel optimistic, but in the European Union (Germany excepted) they remain stubbornly high. It is the number 1 issue for governments in the West, or if it isn’t it should be.
At the same time, workers are being urged to make greater provision for their retirement, and indeed to put off retiring until later in life. In the UK the retirement age has been raised from 65 to 67 for workers currently under 40, and in France it was viewed almost as sacrilege when the retirement age was raised from 60 to 62 recently. Pension provision is a major worry for workers and future liabilities are a major issue for governments’ welfare budgets.
Are these two issues connected? Some people think so. Journalists on the Financial Times and The Sunday Times, for example, have opined recently that high levels of youth unemploymentarise partly from the fact that current workers are not leaving to make room for them. Making employees delay retirement still further will only exacerbate the problem, they believe.
This is a form of economic illiteracy. In fact it is analogous to mercantilism, the prevailing orthodoxy of the time that was refuted utterly by Adam Smith in the 18th century. The amount of jobs in the world isn’t a finite number, to be shared out as one might a box of chocolates.
Jobs are generated (and lost) all the time in a dynamic, not static, environment, and a growing economy will always generate more jobs no matter how long people put off retirement (by the logic of the mercantilists, if we all retired at 40 there would be more jobs for young people).
Even a stagnating economy that loses jobs in one sector, say shipbuilding or agriculture, creates jobs in new industries such as telecoms or media services as its structural makeup responds to changing competitive advantages.
Youth unemployment is particularly prevalent in economies where labor markets are inflexible, and is often found to be lower in countries with a higher percentage of elderly workers in employment. There is very little direct correlation between the two.
The need to delay retirement arises from the issue of funding. The idea that one retires at 60 with a pension provision until death dates from Bismarck’s era when life expectancy was in the 50s or 60s rather than in the 70s or 80s as it is now. To fund an annuity that pays out for 30 years or more means either a bigger pension pot or a later retirement age. It’s a simple choice.
These two issues are related insofar as they both cry out for flexible labor markets and other incentives for companies to create jobs. But it would be refreshing if more commentators realized that there isn’t a finite number of jobs to go around, and lowering the retirement age, something that we can ill afford to do in the current climate, is not the way to create jobs for the young.
The author is Professor Moorad Choudhry, Treasurer, Corporate Banking Division, Royal Bank of Scotland. The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment.