Flawed youth contract will do little to help jobless

It’s less than six months since Deputy Prime Minister Nick Clegg launched the ‘youth contract’, the coalition’s big idea for cutting youth unemployment. One shouldn’t therefore read too much into the fact that the £1 billion package of wage subsidies and work experience placements has so far failed to dent the problem (indeed the most recent available data show that the number of unemployed young people in the 18-24 age group targeted by the contract increased between April and July). But while the jury is still out, the court of policy appraisal today received disconcerting testimony from the cross party House of Commons Work and Pensions select committee which places a serious question mark over the central wage subsidy element of the contract.

In their report Youth Unemployment and the Youth Contract, MPs on the committee, though generally supportive of the contract in principle, doubt whether offering employers a financial incentive of up to £2,275 if they hire and employ a young jobless person for six months will succeed in helping 160,000 young people into work. Not only is the committee sceptical that the incentive is big enough to attract enough employers but its report also quotes a senior DWP civil servant who states that both UK and international evidence for the effectiveness of such subsidies is ‘varied and patchy’ (mandarin speak for ‘they aren’t that great’) .

I’m not at all surprised by this. At present the main factors deterring employers from hiring young unemployed people are actual lack of demand for products and services, uncertainty about future demand, inadequate credit available to small businesses which prevents them from expanding, and a shortage of suitably qualified or experienced applicants from the pool of young unemployed.

A financial incentive is unlikely to encourage employers to recruit young workers they can’t use or don’t want. As a result the policy will either attract too few employers or mainly operate to the advantage of those employers who are already recruiting young people, resulting in considerable deadweight subsidy with relatively little net impact on youth unemployment.  Increasing the size of the subsidy, which the Commons committee suggests might prove necessary, would probably attract more takers but wouldn’t remove the problem of deadweight.

Moreover, in a labour market experiencing a serious shortage of demand, a financial incentive to recruit young people from the eligible target group will reduce the chances of other unemployed people being hired, so the net impact on total unemployment is zero. This in itself is not a reason for objecting to the subsidy since one might prefer to shift the burden of unemployment from young people to others, especially if limiting the well-known ‘scarring’ effects of youth unemployment is a policy objective. But this is very much a second best solution when what’s desperately needed are demand side measures to boost economic growth and cut joblessness for people across the age spectrum