Questions and answers about coronavirus and the UK economy

How can we protect young people from being scarred by coronavirus?

Young people suffer negative consequences from recessions – and we expect their experience of the Covid-19 crisis to be no different. The government has a toolkit of policies to protect them from long-lasting ‘scarring’ effects: which measures are most likely to succeed?

Although the hospitalisation and mortality rates of young people (aged 16-24) from Covid-19 are relatively low, they will bear the economic consequences for many years after the pandemic is over. Economists have analysed a large set of potential policies that might help to protect them and reduce economic ‘scarring’ by the crisis. The evidence suggests a three-pronged policy attack:

  • First, incentives to remain in full-time education at further education colleges or universities, or to enter apprenticeships, will be most beneficial.
  • Second, the government must offer a guarantee to young unemployed people of support through quality work experience with training, job search and hiring subsidies as incentives for employers to recruit them.
  • Third, reducing youth unemployment ultimately requires policy to boost aggregate demand – to encourage spending in the economy, which will create jobs, benefitting young people most as job vacancies increase.

What does evidence from economic research tell us about the effectiveness of different policies? 

Since lockdown, the reduced number and lower quality of jobs available mean that potential long-run consequences for our young people include lower future wages (Gregg and Tominey, 2005), unstable employment prospects (Gregg, 2001), poorer mental health (Bell and Blanchflower, 2011) and even reduced life expectancy (Schwandt and von Wachter, 2019). At the Economic Observatory, Del Bono and Holford (2020) explain the compelling evidence that entering the labour market during a recession leaves a long-lasting scar on an individual.

Economic evidence about the effectiveness of different policies in helping young people focuses on three broad categories of action: 

  • Encouraging young people to remain in education or training.
  • Helping young people, especially disadvantaged young people, to find employment.
  • Boosting aggregate demand and job creation

Related question: What are the prospects for young people joining the labour market now?

Encouraging young people to remain in education or training

Subsidising university education

Maintenance grants for university will encourage young people from low-income families to remain in full-time education and delay entering work during the economic fallout from Covid-19 (Azmat and Simion, 2020). In the UK, providing maintenance grants for university education of £1,000 increases enrolment by 4 percentage points (Dearden et al, 2014). As grants for university education were scrapped in 2016 in England, an important policy option will be reintroducing maintenance grants for potential university students.

The effect of raising tuition fees in the UK was small on the whole compared with other countries (see Dynarski, 2003, for the United States; and Kelchetermans and Verboven, 2010, Hubner, 2012, and Nielsen et al, 2010, for Europe). The difference is likely to have been because the UK fee increase to £9,000 coincided with the Great Depression and a lack of vacancies for the young, which meant that young people still enrolled at university. Reducing tuition fees may not increase enrolment by non-disadvantaged students in the current situation.

The government is already taking some actions: for example, allowing students to declare whether their family income has been substantially reduced (in England, by more than 15%) and apply for higher maintenance loans. This is for all university students, not just new entrants. 

Related question: Why should students pay university fees if all lectures are online?

There could also be policies to encourage young people to go back into education, including encouraging access courses, part-time courses and increasing support for those from poorer families pursuing postgraduate qualifications or further degrees. As many young people who could have gone to university (but didn’t) initially faced the prospect of a job-rich economy, a chance to revisit this decision during the post-Covid-19 recession may be attractive to some.

Access courses offer a return route and can be run jointly by a group of universities in an area in conjunction with further education colleges. Some universities are already offering bursaries for adults economically hit by Covid-19 to re-enter education (Times Higher Education, 2020).

Apprenticeships

To create a smooth transition between school and work, the government could ensure that more young people take up apprenticeships, which increase earnings (Cavaglia et al, 2020) and have very positive transitions onto full-time work. The UK has grown its apprenticeship scheme in recent years, but 40% of the apprenticeships are taken up not by young people but by individuals over the age of 25 (Department for Education, 2020), The number of firms willing to offer apprenticeships will also fall in the recession.

The UK has just announced a policy to provide additional incentives for employers to hire young people for apprenticeships, as detailed below.

Related question: What future for apprenticeships after coronavirus?

Help for young people to find employment

During the current recession, the number of vacancies has fallen and the number of individuals claiming benefits increased to record highs. Therefore, any policies to help young people to find a job immediately may not be successful given the scarcity of jobs in the labour market (Bell and Blanchflower, 2012).

But there are opportunities for creative policies to boost the CVs of young people or to give firms incentives to fill any vacancies by hiring young people. The most effective programmes of the past, such as the 1998 New Deal for Young People, combine incentives for employers to hire young people with individually targeted job-seeking support for young people.

Job search support

The Work Programme was the 2010-15 coalition government’s flagship welfare-to-work programme. (It was replaced in 2015 with a programme targeting those with health issues/disability.) Young people who had been out of work for three to nine months would work with providers to find employment, with the providers receiving money for placing the individuals into jobs plus an extra reward for sustained jobs. Providers primarily used one-to-one job search support and, to a lesser extent, employer engagement and training.

For an ambitious scheme, the effects were modest (Gregg, 2014). On average, a provider working with jobseekers for two years placed 18% into sustained employment. (There has not been a comprehensive analysis of the scheme, but Meager, 2011, is the most useful summary.) As the job market strengthened over time, the scheme became more successful, with 25% of jobseekers finding sustained work. The scheme’s success was modest but as the programme was low cost, it provides a viable option now for the young and unemployed.

On top of this, the Youth Contract offered subsidies worth £2,275 to employers that recruited a young person from the Work Programme and retained them for at least six months to a full-time post. Take-up was very limited and again the effects minimal, partly because the Work Programme providers did not support this element (Gregg, 2014). 

Incentives for providers and employers to hire the young

International evidence shows that well-targeted hiring subsidies (focused on those most at risk) raise the employment of supported individuals even five years after the subsidy ends (Brown, 2015). Without targeting, there are large deadweight costs – paying employers to hire who they would have anyway, or firms hiring a subsidised worker by displacing an existing worker. Design is crucial here, and was not well done in the case of Youth Contract discussed above.

Offer high quality work experience 

Young people can be taken out of unemployment and temporarily placed into work experience with the hope of longer-term employment. The UK’s 2009 Future Jobs Fund, which offered six months paid work experience to 18-24 year old Jobseeker’s Allowance claimants, raised job entry and reduced time on benefits for the young participants (Department for Work and Pensions, 2012). Two years after starting the six-month programme, participants were 11 percentage points more likely to be in employment. The resulting benefits broadly offset the costs.

The Future Jobs Fund was replaced by the less expensive ‘work experience’, offering only up to eight weeks of unpaid work and focused less on carefully selected, high quality placements. The short-run effects were positive (Gregg, 2014), but declined by one year after participation and became less effective the longer the programme ran. Although cheap – as no wage was paid – the effectiveness was poor, indicating that high quality design is crucial. 

Combined programmes

In the UK, the 1998 New Deal for Young People was compulsory for the young unemployed and offered four options: employment placement; education/training; a place on an environmental taskforce; or a voluntary sector equivalent. Its innovation over past schemes was to require job search and subsidies for employers hiring the young people.

The scheme proved successful, increasing employment by around 5% (Blundell et al, 2001), and its marginal benefits were higher than the marginal cost of the programme (Van Reenen, 2004). The low quality elements of the environmental taskforce and voluntary sector options were less effective than the other two, and the employment option the most successful (Dorsett, 2006).

Another combination programme that is still running is the traineeships programme being offered to those young people on benefits without the necessary qualifications to start an apprenticeship. It offers work experience with training and is designed as a pre-apprenticeship with a view to movement into full-time education or an apprenticeship.

The programme raised employment by 18% after a year, proving more effective than the Future Jobs Fund or the New Deal employment option (Dorsett et al, 2019). Moves onto apprenticeships were less positive and the programme should be viewed as a work experience programme with training. Traineeships are very small-scale, with around 20,000 starts a year, and will be hard to grow substantially in a deep recession.

In summary, combined programmes offering work experience preferably with training (as with traineeships), with required and continuing job search support and a hiring subsidy for moves into regular work, are effective and must be at the heart of efforts to address youth unemployment. But they are expensive and they need to be focused on the most at risk of long-term damage from unemployment.

Lower cost programmes for the less seriously in need (or at early durations) should not be lower quality work options such as make-work schemes (for example, the environmental taskforce or similar), but job search support with hiring subsidies. 

Guarantees

Guarantees must integrate the elements above with apprenticeships and continuing education as options to offer a range of positive pathways, avoiding low quality placements. A two-tier entry system is required.

High-risk individuals (those with low education and/or who are eligible for pupil premium, living in a deprived area, been in care, disabled, etc.) or those with high unemployment duration are the priority. They need early access compared with others who initially receive job search support and the hiring subsidy (such as the Gateway period of the New Deal). 

The UK government has recently announced plans to create high quality placements for up to six months, for young claimants of Universal Credit in a scheme most similar to the Future Jobs Fund. It has also offered to create 30,000 more traineeships for young people.

In addition, firms hiring apprentices will have incentives to hire young people: they will receive an additional £2,000 for hiring someone under the age of 25. This is a step in the right direction with further policy needed to help support young people wanting to return to or stay in education.

Boosting employment demand

Many firms are facing an uncertain future after lockdown. Policies to encourage them to hire workers will increase spending in the economy, ultimately creating more jobs, which will help to reduce youth unemployment (Bell and Blanchflower, 2012). Social distancing has hit consumption but not prices, so supporting employment and job creation should not come from a VAT reduction.

The tool of a reduction in employers’ National Insurance (NI) is not targeted to the most vulnerable, including the young. Instead a targeted cut in employers’ NI for lower waged jobs is crucial for three reasons. It helps young people (as they are lower paid), the hardest hit sectors (which are generally low wage) and lower wage jobs make up the bulk of entry jobs following unemployment, after which they can move into better paid openings. This could be done by raising the earnings threshold at which employers start to pay NI by £5,000 a year for the next two or three years. 

Another way to encourage firms to hire workers would be by reducing the wage paid by employers for young people. In the UK, the standard minimum wage (called the National Living Wage for age 25+ rates) is £8.72 per hour but £4.55 for 16-17 year olds, £6.45 for 18-20 year olds and £8.20 for 21-24 year olds.

Before the crisis, following the review by Arindrajit Dube, the government proposed to lower the age for eligibility for the National Living Wage from 25 to 21. At this time, when the risk of mass youth unemployment is high, it would be wise to postpone this change until the recovery is well advanced, to encourage hiring of young people.

What we will need to know

The education of many young people has finished and results will shortly be announced. Keeping track of how many individuals enrol to continue their studies, how many enter apprenticeships or new jobs compared to the number leaving school with few educational qualifications will be important.

In addition, for young people who have left education, tracking employment levels as lockdown eases will not just inform policies but also needs to identify who is not getting work and is in need of support. Many at risk young people will not be claiming DWP benefits, and we need to know who requires help. Linked administrative data (mostly from DFE and DWP) are getting much better and faster, and so can be used in this regard but it needs rapid development.

Where can I find out more? 

Youth unemployment – still waiting for the upturn: Paul Gregg discusses policies implemented by the UK coalition government of 2010-15 to increase youth employment and summarises evidence of the effectiveness of these policies.

Youth employment challenges in a post COVID-19 recession – is education the best protection? Becci Newton sets the arguments for keeping young people in education to avoid the scar from entering the labour market during a recession.

We must act now to shield young people from the economic scarring of Covid-19: David Bell and Danny Blanchflower suggest policies that can help to protect young people from the economic effects of Covid-19.

Unemployment: the coming storm: Paul Gregg predicts the labour market fallout from Covid-19 and provides potential policy solutions.

Who are the experts on this issue?

Authors: Paul Gregg and Emma Tominey

Published on: 09th Jul 2020

Last updated on: 21st Oct 2020

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