The Treasury

Global Navigation

Personal tools

Treasury
Publication

Monthly Economic Indicators

Special Topic: Trends in youth labour markets

The subdued nature of the New Zealand labour market has been the subject of attention over the last few years, given its importance for the living standards of New Zealanders. This special topic examines the youth segment of the labour market (15-24 year olds). It finds that 15-19 year olds have been most affected during the aftermath of the global financial crisis (GFC) with higher unemployment and lower participation rates. However, the proportion in education has risen.

Youth unemployment has risen around the world...

The unemployment rate for 15-24 year olds rose substantially owing to the effects of the GFC, as illustrated below in Figure 7. This has not been abnormal in the international context, with youth unemployment rates rising significantly in most countries, including the euro area, UK, and, to a lesser extent, Australia. Some countries within the euro area have seen even larger problems, with Spain’s youth unemployment rate above 55% and Greece’s over 62%. This global phenomenon has generated much debate and concern.[2]

Figure 7 – Youth unemployment rates
Figure 7 – Youth unemployment rates   .
Source:  Statistics New Zealand, Haver, the Treasury

...as youth were most affected by the recession and deteriorating labour market

Youth have also been most affected by the economic downturn in New Zealand. The aggregate unemployment rate rose 3.6% points between the September 2007 and 2012 quarters; 15-19 and
20-24 year olds made disproportionately large contributions to the unemployment rate increase, adding 0.8% and 0.7% points respectively.

The GFC hit 15-19 year olds particularly hard, with their unemployment rate increasing around 11% points to about 26%, above the highs seen during previous recessions. The 20-24 unemployment rate increased around 6% points to 13%, below previous recessions (Figure 8). The NEET rate (youth not in employment, education or training), which is arguably a better measure of youth labour market performance, rose less following the GFC (about 3% points for 15-24 year olds). This lesser increase, as discussed later, is owing to the increased proportion of 15-19 years who were undertaking study.

Figure 8 – NZ youth unemployment rates
Figure 8 – NZ youth unemployment rates   .
Source:  Statistics New Zealand, the Treasury

During an economic downturn such as the GFC, there is typically more capacity in the labour market, as workers are laid off. Given a choice, most employers will hire a more experienced, older worker, than an inexperienced young person, especially if paying the same or a similar wage. Evidence of this effect can be seen from the fall in employment for 15-19 year olds following the GFC, while employment of 20-24 year olds remained relatively constant. There is also evidence of additional older people working since the GFC, with the employment rate for those 65 and over rising from 14% to 20% since 2007. As both younger and older workers tend to be more concentrated in part-time employment, this suggests that firms may have substituted towards the 65-plus group in addition to 20-24 year olds.

Another reason for youth being disproportionately affected by the recession is the industries they are typically employed in. Young, unskilled workers tend to be employed in retail and food service. Figure 9 below illustrates that employment in the retail trade, accommodation and food services industry fell steeply and then grew more slowly than total employment. The retail industry is usually hit hard during a recession, as consumer spending decreases in line with falls in income and confidence. This goes some way to explaining why youth employment has declined steeply and has not recovered.

Figure 9 – Industry employment
Figure 9 – Industry employment   .
Source:  Statistics New Zealand, the Treasury

It should also be noted that the youth minimum wage for 16-17 year olds was replaced by the New Entrant minimum wage in 2008, which is estimated to have had a detrimental effect on employment for this age group. [2]

15-19 age group participation declines significantly...

A key trend following the GFC is the decline in the participation rate for 15-19 year olds. The participation rate for this age group has fallen around 10% points to about 45% (Figure 10).

Figure 10 – Youth participation rates
Figure 10 – Youth participation rates   .
Source:  Statistics New Zealand, the Treasury

This could be interpreted as a “discouraged worker” effect, where people give up looking for work and leave the labour force, lowering the participation rate. 20-24 year olds, on the other hand, have continued to participate in the labour market, consistent with the lesser impact on their employment and unemployment.

...but the proportion in education has risen

Usually a fall in the participation rate is a negative for the labour market, as the pool of workers available to firms is lower and fewer people have confidence to seek work and gain income. However, in this case, there appears to be a positive aspect in that a large number of the 15-19 year olds who have left the labour force are instead participating in education. Figure 11 shows the proportion of youth studying, with the proportion of 15-19 year olds in education increasing significantly over the past seven years, including prior to the GFC. This is backed up by the increased numbers enrolled at tertiary education providers. This may have longer-term benefits of a more productive and skilled labour force, although these young people still have to make the transition to employment. Further, the number of 15-19 year olds who are not in employment, education or training has returned to its pre-GFC level, although the working-age population for this group has fallen over this time, leaving the NEET rate slightly higher. The proportion of 20-24 year olds studying has stayed fairly constant until recently, when it has fallen.

Figure 11 – Proportion of youth in education
Figure 11 – Proportion of youth in education   .
Source:  Statistics New Zealand, the Treasury

Overall, while there have been some recent signs of a strengthening in the labour market, conditions for youth, in particular 15-19 year olds, remain difficult. We expect conditions to improve over time as moderate economic growth continues and demand for labour increases. While there are some positive aspects in the long run of having a higher proportion of youth in education, this must be balanced against the effects of many youth missing out on valuable workplace experience.

Page top