Does inequality deter young people from entering education or employment?

Apologies to young people if this seems like a stupid question. The more obvious brakes on entry to education/employment now could include:

 

From 1998, student loans for tuition fees

A continuing mismatch between the qualifications available and the needs of the job market

A continuing lack of vocational education (and funding for it)

A lack of employers willing to train new recruits (particularly public sector ones post-recession)

Lack of well paid and secure employment, due to cyclical/structural changes in the jobs market (structural= technology/globalisation/immigration?)

Not enough older workers retiring, or being laid off in the latest recession (the IFS says this relationship is a myth – “Releasing Jobs for the Young? Early Retirement and Youth Unemployment in the United Kingdom, James Banks, Richard Blundell, Antoine Bozio and Carl Emmerson, IFS, July 2008)

Job mobility issues, particularly relating to house prices in the SE

 

Due to lack of time, I’m going to skip research on this question for now [but see my next blog posting about the evidence] and use my own personal experience of 4 years of youth worklessness during the worst period for UK youth unemployment – the 1980’s. I don’t think that NEETs were/are really aware of the increase in inequality during the late 1970’s to early 1990’s. Like the proverbial frog in the pan of water, the heating was gradual and (unlike the frog) you got used to it.

 

Changes to higher education funding, and the removal of government subsidy for youth employment in times of recession have made things worse since the 1980’s. Had I not benefitted from a year of subsidised work, and 5 years of free university tuition (partly under the Scottish system), I might never have had a decent career.

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How serious, and how recent, is the problem of youth worklessness?

As mentioned in yesterday’s posts, globalisation and technological change led to an increased demand for technological skills across the OECD nations in the period 1977-1991, which in turn led to higher incomes for a tiny elite and a lesser reduction in incomes for the lowest skilled. With other changes (demographic, taxation, etc), this led to a rise in overall OECD household income inequality (as measured by Gini coefficients, which are not very revealing, but widely used).

 

Turning now to young people not in Employment, Education, nor training (the “NEETs”, or “workless”), this is a serious issue because early unemployment can lead to a lasting damage to personal income, and wellbeing, even over 35 years later (Blanchflower and Bell 2011).

 

The best statistics we have on unemployment by age (the ONS Labour Force Survey) only go back to 1992. That data shows an initial rate of 11.9% unemployed and not in education in 1993, dropping to 6% in May 2004 and rising again to 10% in 2011. Those figures exclude those not actively seeking work and also not in education, which in 2011 took the total up to almost 20% (see next link).

 

A TUC pamphlet on this topic (“Touchstone Extras #7. Generation Lost: Youth unemployment and the youth labour market”) uses various proxy measures to get a rough figure for earlier rates:

https://www.tuc.org.uk/economic-issues/touchstone-pamphlets

The raw number of young unemployed (by different measures) started in 1969 very low by current standards (0.03M?), went up sharply between 1975-77 (0.3M), before the recession that started in 1979–80 saw it rise to 1.25 million. It then fell at the end of the 1980s, but remained above all pre-1979 figures. The 1991–3 recession saw a further rise, but did not have as bad an effect on youth unemployment as the earlier recession.

 

Over the same period (1969-2011), ONS data tells me that the proportion of the population aged 16-24 has changed relatively little (12.3% to 12.0%, ranging from 14.0% in 1981 down to 10.6% in 2002). I shall thus ignore population change and stick to raw numbers.

 

Youth unemployment (and thus presumably youth worklessness) is not new, and is better than it was in the early 1980’s (when I graduated for the first time).

Where does increasing UK household income inequality come from?

I have already mentioned household break-up (due to divorce) and increasing income amongst the richest UK households during the period 1977-1991 (ONS report).

www.ons.gov.uk/ons/rel/elmr/economic-and-labour-market-review/no–12–december-2008/the-distribution-of-household-income-1977-to-2006-07.pdf

 

A 2011 study “Divided we Stand: Why Inequality Keeps Rising” by the Organisation for Economic Co-operation and Development (OECD) investigated economic inequality amongst workers in OECD countries.  The main reason for increasing inequality seems to be an increased difference between the demand for, and supply of, particular skills.

https://en.wikipedia.org/wiki/Economic_inequality#Measurements

That probably applies to the UK, and explains the ONS finding above.

http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm

It also blames:

  • failures of education for poorer households (I would add “lack of vocational education”),
  • lack of retraining during later life,
  • insecure and part-time work,
  • lack of opportunity for women (but only worth 1 point of Gini coefficient),
  • lack of good quality jobs,
  • labour market segmentation (certain careers are only open to certain types of worker), and
  • less income redistribution through taxation (perhaps the general switch to indirect taxation of expenditure).
  • More assortative mating (the phenomenon of people marrying people with similar background, for example doctors marrying doctors rather than nurses).

 

This list may be long, but it is not exhaustive, nor is it focussed exclusively on the UK.

One thing I omitted to mention in my first draft of this post is the possibility of policy measures to avoid/mitigate income inequality.  I will consider this in a later posting.

 

 

What has happened to UK household income inequality historically?

UK ONS figures suggest that the income growth of the middle 1/5 of households (only) has tracked national GDP since 1977, in contrast to the trend of declining incomes (relative to GDP) in the USA.

http://www.ons.gov.uk/ons/rel/household-income/middle-income-households/1977—2010-11/rpt–middle-income-households.html

 

However (for reasons which emerge below), the following report tells a different story for household incomes across the entire distribution:

www.ons.gov.uk/ons/rel/elmr/economic-and-labour-market-review/no–12–december-2008/the-distribution-of-household-income-1977-to-2006-07.pdf

 

“Income inequality is relatively high in the UK compared with many other European countries.”

 

It says that 1977-1991 was “a period of substantial change to the income distribution”, whereas 1992-2002 was “a period of relative stability”. It continues: “During the 1980s there was a substantial increase in income inequality caused by increased inequality in the distribution of income …”. “No shit, Sherlock”? (if you will pardon the expression!)

 

“Between 1977 and 1996/97 the proportion of retired households in the bottom income quintile group decreased, while the proportion of children living in households in the bottom quintile group increased.” So that’s an increase in inter-generational income inequality (a term that I have just invented).

 

“The extent of inequality within an income distribution is commonly measured by the Gini coefficient [see my previous post on measuring inequality]. On the basis of this measure, inequality increased substantially between 1977 and 1990, with the most rapid increase taking place in the mid and late 1980s” … In the discussion of alternative measures of inequality and why they disagree with each other: “much of the increase in inequality was due to income growth at the top of the income distribution” …”the households which benefit from growth in income from employment are predominantly in the middle and upper part of the income distribution. Consequently, in periods of rapid growth in employment income, these households ‘pull away’, while during periods of low or falling employment income other households, those predominantly reliant on benefit and pension income, have a chance to ‘catch up’.”

 

Others (in the OECD) have mentioned an increasing disparity in the way certain skills are rewarded in the economy. This seems broadly consistent with the ONS report.

 

The income growth at the top of the income distribution explains why the ONS report based *only* on the middle 1/5 of households fails to reflect the full story.

More here: https://www.equalitytrust.org.uk/how-has-inequality-changed

 

 

What is economic inequality?

What is economic inequality?

Wikipedia says: “Economists generally think of three metrics of economic disparity: wealth, income, and consumption”.  Let’s leave aside how much people freely choose to consume, and look only at their underlying wealth and income.

As Wikipedia says, the balance between income and wealth changes with career progress.  For most people, the majority of their wealth is not inherited, and is thus a product of household income.  Income thus appears to be the main driver of inequality.

Note: breakup of households (due to increasing divorce rates) is also believed to have a significant effect on household inequality, as you might expect.

Income can be measured at the level of the individual, or (more meaningfully) at the level of the household.  The household is the same level at which the ONS measure income inequality.

Issues remain about how to compare full-time workers with part-time, and comparing self-employed with employees.  Using household income (partly) overcomes these issues.

Inequality can be compared before or after taxation, and can opt to take into account public services.  These would make figures even harder to understand.

So, IMHO concern should be focussed on net income inequality at the household level.  Ideally this should include income from capital, asset transfer (eg inheritance) and savings.

 

How do you measure economic inequality?

https://en.wikipedia.org/wiki/Economic_inequality

… There are various numerical indices for measuring economic inequality. A widely used one is the Gini coefficient https://en.wikipedia.org/wiki/Gini_coefficient , but there are also many other methods https://en.wikipedia.org/wiki/Income_inequality_metrics.  The Gini measure has a number of shortcomings.  It is not intuitive, it does not indicate the income level at which the inequality exists, it gives peculiar values under certain demographic conditions, and negative income/wealth values also generate strange values.  However it does have general acceptance and it takes account of all income inequality.

Note: attempting to understand the integral calculus involved in the Gini coefficient can cause headaches – stick to the graphical description!

Why worry about economic inequality?

It is generally agreed that economic inequality (however defined, and measured) is bad for social cohesion, and bad for economic growth.
https://en.wikipedia.org/wiki/Economic_inequality

The corrosive effect on social cohesion seems self-evident.  That would also seem to suggest a potential problem for democracy, as economic disposession leads to the rise of political extremism (and potentially an imminent disastrous British exit from the European Community).

The problem for economic growth is that if all the nation’s capital is in the hands of an oligarchy, then there will be a shortage of disposable income for the consumption of anything except luxury goods (and not that many of those).  Without retail spending, and house purchase, the UK economy will tend to stall.
(This growth based on unsustainable spending is far from ideal, but at present that seems to be the reality.  Others have argued for prioritising economic stability over growth.
https://en.wikipedia.org/wiki/Tom%C3%A1%C5%A1_Sedl%C3%A1%C4%8Dek_%28economist%29)

Several OECD reports warn about the damage to social cohesion and economic growth.

May 2015“In It Together: Why less Inequality Benefits All”
http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm

A 2011 study “Divided we Stand: Why Inequality Keeps Rising” by the Organisation for Economic Co-operation and Development (OECD).
https://en.wikipedia.org/wiki/Economic_inequality#Measurements

In the UK the Office for National Statistics has a statistical theme of household income inequality, which at least suggests some concern about this issue in central government
http://www.ons.gov.uk/ons/taxonomy/index.html?nscl=Income+Inequality+of+Households

Prominent individual sociologists have also expressed concern.  Professor Danny Dorling of Oxford University is an example:
http://www.dannydorling.org/books/onepercent/

As have a number of prominent economists:
http://www.bbc.co.uk/news/business-34987474
(includes a podcast)