Adam Smith Institute

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We predict a - significant - rise in youth unemployment. What joy

As a tendency - not an asserted truth - we tend not to believe in macroeconomics very much. Too much maths and wand waving by those who really never can gain the information necessary to feed into the equations even if they did work. Microeconomics though we believe in very strongly. Get the details of legal structure, incentives and the freedom to respond to them correct and she, that whole economy, will largely come out right. Where we would assert a truth is that even if you do have a macroeconomic policy - even one that’s vaguely correct - you do still have to get those details of the markets themselves correct. Macro is a nice addition to micro that is, not a substitute for it.

At which point our prediction from this most recent UK budget. We’re going to see a significant and sustained rise in the youth unemployment rate. Which is not, we’d suggest, something that policy should be trying to encourage.

A basic point: whatever rules we make about the price fixing of wages - minimum wages that is - they’re obviously going to bite hardest upon the young and untrained. For they’re the people who have to leap that hurdle from not working to having convinced someone to give them a try. This will also be true of “workers’ rights” like protections against unfair dismissal, whatever rights folk might have to maternity leave and any other non-cash expense of employment.

The effect of such things will bite hardest upon those attempting to enter the labour market. Obviously they will. How would anyone think otherwise?

The minimum wage rise for 18 to 20 year olds will add £2,500 a year to the cost of employing one such. The drop in the National Insurance payment level will add £600 (15% of the £4,000 increase in the taxable amount). So, roughly, a £3,000 addition to the cost of employing some fresh faced shaver straight out of education. Or, given that starting wages are fairly obviously going to be at or close to that minimum wage level, a 15% or so increase in the cost of giving the young that first step on the path to a career.

This is a hard bite. Somewhere between fewer and many fewer are going to be given that opportunity. The gap between taking on an untrained and untried youth and instead hiring a known quantity, someone who’s already been working a few years, has, after all, now shrunk. Therefore the incentives have changed and so will behaviour.

We’ve also that issue of workers’ rights now kicking in immediately and not after some probationary period. Trying the fresh-faced now comes with a substantial - well, substantially higher - risk as well as cost.

So, what do we all think will happen as a result of this change in incentives? Fewer fresh-faced will get hired. Obviously.

Contrary to popular belief we’re all in favour of Europe. Just perhaps not the political confection that is the European Union. Parts of Europe are lovely places, many Europeans are equally lovely, the food’s often good, the wine better and so on. Britain has done well over the decades by importing much of that food culture, the wine’s very definitely got better and climate change seems to be making the weather more European too. So, good.

But one aspect of the European experience we’d suggest we should not import is the Latin-style youth labour markets. Here in the UK the “youth” (as in, 18 to 24) unemployment rate is 12.8%. In Portugal - as an example - more like 20%*. And that’s after 350,000 of the young have left the country in search of a job - 3.5% of the entire population. In Spain it’s 29%.

The reason the Latin countries have such high youth unemployment rates? Because worker protections - and they’re strong - kick in from day one of a job. Further, the minimum wage is high as a percentage of the median wage and yes, social security taxes upon employment are high. All of these bite upon the young and untrained more than upon the rest of the workforce.

As we say, importing some European things is wonderful. Others perhaps not so much. And importing the youth labour markets, thus the youth unemployment rates, of Southern Europe strikes us as not just a bad idea but a positively insane one.

Yes, obviously there were other things in the Budget. But there’s a strong argument to be made that this is the one single issue that’ll have the most pernicious long term effects.

Finance bills don’t get voted down especially with today’s sort of majority. But here’s hoping…..for the children, you see, for the children……

Tim Worstall

*Yes, that’s the 16 to 24 rate but sadly different countries compose stats slightly differently. By that same W Bank measure the UK is at 12.5% for 2023.