Employment situation brightens, but concern about wages remains

Meanwhile, the intra-euro area range is remarkable, with Germany at just 8 percent, the lowest youth unemployment rate in the OECD. Spain and Greece indeed exceed 64 percent in the latest data. Youth unemployment rates have, moreover, increased in the last 18 months in the OECD, and in the four “Club Med” euro area countries of Italy, Portugal, Spain, and Greece. With these remarkable youth unemployment rates, it is striking how limited the social unrest has been.
But as pointed out by Steven Hill in the Financial Times earlier this year, youth unemployment rates are a flawed basis for outrage because of their methodological shortcomings. Unemployment rates are calculated as the share of people in the labor force (i.e., employed or looking for work). But a large share of the youthful cohort is still in school and hence not in the labor force, at least in industrialized countries where educational opportunities are widely available. This means that the actual percentage of unemployed youth is lower than it appears. For example, if 70 percent of the age group from 15 to 24 years in Spain and Greece are enrolled in education,1 and just 30 percent are employed or actively looking for work, a 64 percent unemployment rate would be estimated as 64 percent of the 30 percent in the labor force, or just a 16 percent share of the total. That is not healthy by any means, but it is a lot better than suggested by a 64 percent headline number. It also helps explain why there has not been more social unrest.
The problem is as follows: the adult jobless rate is calculated as the percentage of unemployed workers divided into the number of total workers in the labour force. So if you have 20 jobless workers and 200 workers in the labour force, the unemployment rate is 10 per cent.
But when it comes to youth, those attending university or job-training full-time are not considered part of the labour force because they are neither working nor looking for a job. With millions of students removed from the labour force, that makes the denominator in the equation much smaller and, with the numerator staying the same, the unemployment rate looks higher.
In the example above, let’s say that of the 200 workers, 150 enter a university. They would no longer be counted as part of the labour force, so even though the number of young people actually out of work has not changed, the unemployment rate has quadrupled to 40 per cent.
For adult unemployment, the same methodology probably understates the true level. Since it only includes adults in the labour force, those who have quit searching are not counted. The number of such “discouraged workers” has climbed higher than normal, so unemployment looks lower than it really is.