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Can corporate America solve growing problem of youth unemployment?

Good news for the young unemployed. Hiring letters via www.shutterstock.com

Can corporate America solve growing problem of youth unemployment?

As of 2014, there were approximately 39 million people aged 16-24 in the US, and 5.4 million of them were neither employed nor in school. That’s almost 14% of the age cohort, or more than two-and-a-half times the national rate of unemployment.

These 5.4 million Americans represent a major challenge because they face a high risk during adulthood of low income and reliance on government support programs. Because engaging them in the labor market or school can have such a large effect on society, public policymakers have often referred to this population as “opportunity youth.”

Recently, a coalition of large corporations announced the “100,000 Opportunities Initiative” in an attempt to deal with this problem. More than a dozen companies including Starbucks, Microsoft, Walmart and Hilton spanning a wide range of industries are trying to jointly engage at least 100,000 of this underemployed demographic by 2018. They hope to improve their future job prospects by providing apprenticeships, internships, training programs and in some cases actual full-time employment.

This is an admirable goal, and we should all hope that it proves successful because it is a big problem for society. Recent research shows that opportunity youth will face a less prosperous adult life. On average, they will earn about one-third less than the typical American and face higher risks of unemployment, criminal activity and poor health.

Opportunity youth also place a hefty burden on the rest of society. The evidence suggests that over a lifetime, each of these opportunity youth costs US taxpayers nearly US$235,000. Add this up across the current 5.4 million strong cohort of opportunity youth and the cost becomes a staggering $4.7 trillion.

How do these youth raise costs for the rest of us? They are more likely to rely on government transfer programs like Medicaid, food stamps and Temporary Assistance for Needy Families. They are also more likely to be incarcerated and drive up the costs of the criminal justice system.

Before considering whether the corporate jobs initiative can succeed, let’s review the latest research on opportunity youth to understand how it has become such a big problem.

Why is the problem growing?

My own analysis of March Current Population Survey data, presented in the graph below, shows that the the opportunity youth problem has been growing since 2000. The number in the group rose sharply during the Great Recession of 2007-2008 and has not returned to pre-recession levels.

This graph shows the rising number of ‘opportunity youth.’ Author calculation of Current Population Survey data, Author provided

While there is no authoritative research explaining why the problem is growing, there are several plausible explanations.

Before turning to these, let me point out that the growing numbers are not due to a rising number of youth or fewer students attending school.

As illustrated in the figure below, the share of young people that are considered opportunity youth has also been rising over time.

This graph shows how the share of young people who are in the ‘opportunity youth’ category has been growing. Author calculation of Current Population Survey data, Author provided

Second, the share of youth in school has been rising as well – though it has fallen a bit over the past few years. The main cause of the rising share of opportunity youth is that the fraction that are employed has been on the decline.

Mismatched skills and needs

So why are fewer youth engaged in the labor market when they are not in school? Is it because youth are becoming lazier and less motivated, as some have suggested?

Research suggests this is not the case, and I don’t think this is the answer. Research indicates that the vast majority of opportunity youth believe that a career job is important to their life and that it is their responsibility to find one.

One of the main reasons youth are having difficulty finding jobs is that there is a growing mismatch between their skills and employer needs. One study finds that almost 40% of employers say a lack of skill is the primary reason for entry-level job vacancies.

Why would this mismatch problem be growing? Some believe that technological advances are eliminating routine manual jobs in our economy. Other research shows that increased import competition from low-wage economies is contributing to the decline of manufacturing. As the economy adapts to these trends, the skills that employers need will change and our educational system needs to adjust.

Yet another possible explanation for the rising share of opportunity youth is the minimum wage. While the real value of the federal minimum wage has fallen in the US, that is not the only factor that determines whether a young inexperienced worker is hired.

Even if the minimum wage is held constant, employment opportunities fall when foreign competition or technological change reduces the demand for low-skill workers. The presence of a minimum wage prevents labor markets from adjusting wages to decreases in demand and makes it more difficult for low-skill workers to find employment.

Can the corporate initiative make a difference?

Creating 100,000 opportunities over the next three years touches only the tip of a 5-million-person iceberg. Can this initiative have much of an effect if it only helps 2% of those in need?

The answer depends on the execution. First, the partners need to think carefully about how to structure the opportunities to generate the greatest value added.

As a college professor, I know the rising importance of internships to our students – and I have heard of both wonderful and terrible internship experiences. If this initiative is to be successful, the employers need to think carefully about what their program will provide in the way of useful skills and not simply shoot for a goal of creating their quota of “opportunities.”

To really have an impact, the partners should also think carefully about how to evaluate the success of their program. This is challenging and requires that they consider how best to measure success.

Labor economists are well aware of the problems in measuring the success of training programs. We know that a simple comparison of outcomes for those who did and did not go through the program will frequently lead to incorrect conclusions about its impact.

Establishing treatment and control groups that can be compared to accurately measure outcomes will be another important aspect to address. Moreover, they should also be careful to monitor the relative success of different types of opportunities.

Best practices

While the most direct effect of the initiative will be realized by the 100,000 youth who gain some new skills, the overall impact could be much larger if these corporations can use what they learn to convince others of “best practices.”

Who knows? If it is sufficiently successful, the government might consider incentivizing such programs in the future. After all, getting just one of these young people engaged in the labor market or school could save us a big chunk of change.