Opinion: guaranteed employment for young people

This is part two of a two-part post regarding policies to tackle youth unemployment – part one is here.

Welcome as the youth contract initiatives have been, I do not believe that they are yet comprehensive enough to adequately address what has been and remains a long-term endemic problem with youth employment in the UK.

For 16-24 year olds not in education, training or employment, we ultimately need to be able to offer a guarantee of paid work within a structured training program, albeit at minimum wage, even if this is in the public sector. The jobs and training would need to be concentrated in industry sectors where employers were experiencing skills shortages and where a rebalancing of the economy and green job initiatives are expected to increase the demand for semi-skilled and skilled technicians. The training objective should be the acquisition of transferable work skills and transition to private sector employment in a two-year time-frame with a cut-off of support at the age of 25.

Tax and benefit reform can greatly aid this effort. By replacing the coming universal credit and expected personal allowance of £10,000 with a citizens income tax credit for all over 18’s, work will always pay. The citizens income benefit is unaffected by other earnings. Coercion is removed from the mix for young people when there is a guarantee of paid work to supplement the basic citizens income.

A key aim of tax and benefit reform is to ensure that all 16-24 year olds can be guaranteed voluntary employment, whether in the public sector or private sector. 16-17 year olds would not be eligible for the citizens income. Those not continuing education and unable to secure work in the private sector will have the option of entering a remunerated structured training programme through a subsidised apprenticeship scheme or taking up paid-up employment in the public sector. All over 18’s, including university students would be eligible for the Citizens income as would other 18-24 year olds on apprenticeship/training schemes.

The number of 16-24 olds that may take-up the offer of guaranteed employment is estimated at around 300,000 based on an assessment of the CIPS statistics at http://www.cipd.co.uk/publicpolicy/_work-audit0311.htm.  Hourly minimum wage rates currently vary as follows:

  • £6.08 – the main rate for workers aged 21 and over
  • £4.98 – the 18-20 rate
  • £3.68 – the 16-17 rate for workers above school leaving age but under 18
  • £2.60 – the apprentice rate, for apprentices under 19 or 19 or over and in the first year of their apprenticeship

As an approximation of the initial direct costs of a guaranteed youth job scheme, I would suggest a figure of £2.5 billion in direct wage and support costs as a reasonable estimate. Using a commonly applied multiplier of 1.5 for the economic effects of a fiscal stimulus we can expect an increase in GDP of £3.75 billion as result.  The tax take of around 40% of this increase in GDP will amount to £1.5 billion, leaving a net cost to the exchequer of £1 billion.

Although, in public finances these days a billion is referred to as a rounding error, I would not advocate any unfunded stimulus measures until the structural deficit is well and truly under control, even if actual public borrowing undershoots target levels. I have posted separately on the tax reforms that would underpin this program. The stimulus will come from breaking the liquidity trap – the movement of money that would likely stay as part of the uninvested cash piles in company and high net worth balance sheets, not being recycled into productive investment by a retrenching banking sector, to consumption on the goods and services favoured by young people. An approach that perhaps can be supported by social and economic liberals alike.

* Joe Bourke is an accountant and university lecturer, Chair of ALTER, and Chair of Hounslow Liberal Democrats.

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  • Richard Dean 26th Feb '12 - 11:32am

    I am a bit sketical, but that is my nature. Here are some initial questions

    > Is training the root of the problem? I’m not at all sure that it is! Trainng is only a small part of a project budget or product budget, and of a business sees a profitable opportunity, training is not necessarily the critical thing that stops them going for it
    > How do you calculate bthe figure of 2.5 billion? Our recent initiative re the 10,000 figure will cost 21 billion a year, so should we cancel that and use the money in this scheme?
    > The multiplier of 1.5 is an average over many contexts. It seems likely that work that involves more thn the average amount ofntraining will have a productvity that is less than the average, so maybe this number is too high.
    > Where does the tax take number of 40% come from? Remember that these jobs will be at the low end of the income scale
    > How will this scheme interact with the rest of the economy? Will the new, low-wage jobs simply result in other people being made redundant
    > Will this create a major problem at the 2-year cutoff, or at age 25? Does the 2-year duration limit mean that in effect we would sinmply be extending school a further 2 years? Are there ways that this scheme may actually prvent young people from finding or taking up other opportunities?
    > How will the sceheme be attractive to those companies who operate it?

  • Richard,

    1. Training – lack of preparation for the workforce/work skills is very often the reason that employes give for a reluctance to hire younger staff.

    2. Budget – The apprentice rate starts at 2.60 per hour and the highest minimum wage rate is 6.08 per hour. The 2.5 bilion budget is based on and average annual wage of 8,500 and approx 300,000 participants.

    3. The fiscal multiplier of 1.5 is a commonly quoted ratio for the economic effects of government spending in the economy. The idea being that new consumer spending by the workers employed will itself generate increased employment in the private sector and hence an increase in GDP higher than the actual amount of the quantum of the new government spending.

    4. The tax take is based on the assumption in the earlier article ob tax and benefit reform . Direct wages would be taxed at 32%. VAT and other indirect taxes on consumption would make up the balance of the tax take.

    5. In the years prior to 2008, something like 3m new private sector jobs were created. mostly filled by an influx of immigrants from eastern europe. Experience shows that in a growing economy, increases in the labour force leads to the creation of new jobs as oppossed to displacement of existing workers.

    6. After 2 years of work experience, if not before, most participants should have developed sufficient work skills to transition to better paying jobs in the private sector. Vocational training for 16-17 year olds might be seen as extending school by a further 2 years , but ii is paid work (with one or two days a week of classroom traing). The model seems to be quite successfully pursued in Germany. Young people, particularly graduates, will have a strong incentive to find better paying work as the economy recovers. By the age of 25, participants wil have had ample opportunity to develop a career path and will have the safety net of a basic citizens income at all times.

    7. Employers often cite the cost of training new staff and the lack pr productivity until trained as the reason for a reluctance to take on younger works. The target employers for this scheme are companies providing goods and services to the public sector, public sector and social enterprise organisations. SMe’s and to limited extent larger employers with suitable training and apprenticeeship programmes. The public subsidy of trainee wages seeks to overcome the objections that employers most frequently cite for taking on trainees.

  • Richard Dean 26th Feb '12 - 5:30pm

    Thanks Joe, I hope I didn’t seem too critical – your suggestions are a lot better than many, and better than I myself could come up with. I do think you have rather assumed that training is the problem though, and have not looked at some of the other risks. Is it feasible that the 2.5 billion might actually create zero growth in GDP? Trainers and training have actula costs, and also opportunity costs since neither the trainees nor the trainers are actually producing while they are training. If the GDP actual growth is zero, you will lose most of the 40% tax take, and the net cost might be two or more times your estimated 1 billion. Cheap at the price I suppose, but the real question is – will it work? How can we estimate that?

  • Richard,

    With respect to the training point, the emphasis of this guaranteed work program should not be on young people that have previously acquired work skills and experience. They will readily find employment as the economy recovers to a more normal state, but rather on those who find it difficult to find work even in a good economic climate.

    The CIPD work audit concludes as follows:

    {i}Beyond ensuring that fiscal and monetary policy are conducive to growth and job generation the principle policy focus should be on how best to reduce the underlying structural youth unemployment rate which is probably close to the 9%–10% rate observed prior to the recession and is likely to persist even when the demand for labour eventually picks up. Especially worrying in this respect is the related observation that this structural problem is not only far worse than desirable but itself appears to have had been getting worse for a few years prior to the recession, suggesting that either the employability of the core youth jobless is deficient and/or that the cost of employing them is too high relative to their labour market value. This implies the need for faster progress on vocational skills and welfare policy, a thorough review of the effect of the national minimum wage on youth employment and an assessment of the case for reducing national insurance contributions for employers hiring young people with limited skills.{i}

    With regard to the GDP effects, the productivity of the employed youth is not so important as the introduction of an additional 2.5 billion of wages and consequent consumption spending into the economy that would not otherwise occur. The concept of a liquidity trap may not be recognised by all or even the majority of economists, but virtually all treasury spokesman of whatever political stripe recognise that companies and wealthy individuals holding back on investment and banks not recycling accumulating cash funds by reducing lending to SME’s, housebuyers and others puts a major brake on economic growth.

    I think it was Keynes, during the great depression, that wrote to President Roosevelt suggesting that the government should employ men to dig holes and refill them again if necessary. It did not matter to Keynes what the money spent on, just that wages were being paid to the unemployed to kickstart economic activity.

    Nothing as radical as Keynes is suggested here. There are a myriad of useful and productive tasks to be undertaken. We are currently increasing central government funding to local councils by 2.5% to allow for a council tax freeze. Many local councils are currently in dire need of extra hands for every aspect of council service provision, but are unable to fund the wage costs needed. Child care provision is another area in need of serious attention. Public crèches, along the Scandanavian model, staffed by trainees under the supervision of experienced professionals may be part of the answer to freeing up more single mothers to take on paid work.

    In the private sector, engineering concerns continue to bemoan the lack of technicians with the basic skills needed for traditional manufacturing

    Will it work?. As Liberal Democrats, our focus is on the provision of equal opportunities for all. The outcome is ultimately dependent on the whether the individual seizes the opportunities made available to him or her.

  • Richard Dean 27th Feb '12 - 5:26pm

    Thanks Joe, That’s a lot to think about! 🙂

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