GSE Insights: Towards an intergenerational conflict?

Edoardo Campanella (International Trade, Finance, and Development '09) is an economic advisor to the Italian Senate and was formerly an economist at the World Trade Organization. He recently published an article in The Guardian's online edition about the causes and effects of youth unemployment in Italy's labor market. Now, Mr. Campanella expands his analysis to reveal similar trends across Europe, the United States, and Asia.

"Beware Italy's intergenerational conflict" by Edoardo Campanella, | 14.07.2010

Among the several spillovers of the current global financial crisis, one of the most shocking in the developed world is the upward trajectory of youth unemployment rate, which rose by six percentage points in the OECD area in the two years to the end of 2009. European figures are particularly scary, with the Euro-zone experiencing a 20% youth unemployment rate compared to 15% before the crisis and Spain an alarming 42%. But the size of the youth marginalization could be more severe than these figures suggest.

The youth unemployment rate, indeed, does not entirely capture the problem since it considers only people aged 18-24, while in many advanced countries longer and longer educational paths delay the entrance of young people into the workforce. In Italy or Spain, for instance, people aged 24 or more are still at university, so if they were unemployed, they would be counted in the standard unemployment rate and not in the youth one. Just to give you a sense of the problem. According to the Italian national statistical institute, ISTAT, in 2009 two million of people, aged 18-34, were classified as NEETS (not in employment, education, or training).

The economic explanation of this phenomenon is straightforward. According to economists Bentolilla, Boeri and Cahuc over the 25 years preceding the Great Recession many European countries implemented reforms of employment protection, that led to a labor market dualism. Speaking loosely, temporary-contracts guarantee a far lower degree of protection compared to the permanent ones and young people usually have no choice but getting the first kind of contract. Therefore, risks are concentrated on the youth and firms have no incentives to transform short-term jobs into permanent contracts.

Consequently temporary workers receive much less training with great losses of human capital. But not only. Young people's productivity is further negatively affected by the condition of precariousness. Since they do not feel to be part of the organization they are working for and they are conscious of the incoming unemployment, they do not put great efforts in what they do. And the issue is not only to be employed or not, but whether job opportunities match your expectations and your skills. This is often not the case in countries like Italy or Greece as confirmed by the so called "brain drain" phenomenon, in contrast with the “brain exchange” one experienced by large European economies, such as Germany, France, the UK and even Spain.

However, young people have to blame themselves for part of their marginalization, since fresh graduates prefer more prestigious jobs in finance and consulting to more productive ones in manufacturing. Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, calculates that if there was a normal match between the two, then the unemployment rate in the US would be 6.5 percent, not 9.6 percent. It comes as no surprise that during the crisis in the US the unemployment rate increased and so did the demand for workers in manufacturing, generating the above mismatch. In aggregate terms, the lack of on-the-job training, together with a low degree of effort by young workers and a mismatch of labor demand and supply, contributes to reduce the growth potential of the economy as a whole, further reducing job opportunities for young people. A vicious circle.

As in time of crisis recoveries are associated with a large use of short-term contracts, young people's marginalization could get worse and bring about dramatic political consequences. When young people cease to be the engine of the economy, long-run economic growth is endangered, and social unrest becomes a threat to the democratic political order. In normal circumstances, youthful creativity and tenacity make the economy grow fast, bringing about new innovations and dynamism. But when young people are left behind, their impetuousness and energy do not serve for constructive initiatives but turn to destructive activities such as protests, riots or revolutions.

Europe recently experienced just this sort of turbulent period, during the 2005 civil unrest in France. Even if the violence and the burning of cars and public buildings frightened Paris and Europe, the consequences of those protests did not bring about radical changes because they involved only a minority of young discriminated immigrants and the problems were not perceived by the rest of French youth. But this does not mean that nothing will happen in the future. On the contrary, if things got worse in Europe because of a population growing older, of a reduction of intra-family transfers, and of an increasing youthful dissatisfaction, then a strong reaction in one country could spread out around advanced economies, like during the protests of the “1968”.
Nevertheless, the rebellion is not necessarily expected to be violent, but could be apathetic and silent as it is happening in Japan, where youngsters, born after the bubble burst, never knew Japan as a flourishing economy. They got used to a frugal life style and grew up without the ambition of competing with the rest of the world. Unsurprisingly, but also for other reasons, China recently overtook Japan as the world's second largest economy. Both the European and Japanese alternative do not look attractive. The latter reminds more a "mass suicide", while the former could degenerate in a civil conflict. Policy makers of OECD countries should step-in trying to avoid a foretold political and economic catastrophe. 

Edoardo Campanella

Edoardo Campanella '09, Economic Advisor to the Italian Senate

"Beware Italy's intergenerational conflict" by Edoardo Campanella, | 14.07.2010

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