Why the Answer to Youth Unemployment Isn’t University

Why the Answer to Youth Unemployment Isn’t University

Australia is facing a generational crisis for young people over the next decade and beyond.

In this 3-part series, I’m unpacking why, and what I think Australian can do about it. 

If you missed Part 1: Why Young People Are Facing a Generational Crisis, you read it here.

In Part 2: Why the Answer to Youth Unemployment isn’t University, I’ll unpack:

Let’s dive in 👇

This generational crisis for your young people will occur even with the Australian government’s significant historic fiscal response to COVID to stimulate new job creation.

Why?

Pre-COVID we already had an issue with high youth unemployment and underemployment.

We also had spare capacity in the job market with unemployment in January 2020 at 5.2% above the natural rate of unemployment of 4.5%.

Note: The natural rate refers to the level of unemployment in a market where there is no longer any unemployment that has been caused by cyclical conditions like a downturn in economic growth.

In the above diagram, we can see the growing gap that was already occurring in the Australian economy in 2017 between the unemployment rate (orange line), and the natural rate of unemployment (black line). The bigger this gap, the more spare capacity that exists in the labour market.

In response to the growing unemployment figures and specifically youth unemployment the Australian government has:
  1. Introduced $114BN of infrastructure spending over the next decade which the government argues will support 140,000 people with work.
  2. Implemented changes to university funding (making Arts degrees for example 113% more expensive) to encourage students to pursue areas of skills shortages in their course selections to try and address structural issues impacting youth unemployment.
  3. Introduced the Job Maker Subsidy (max of $10,400 for 12 month period) to incentive businesses to hire young people aged 18-34 years old.
The main criticism of this policy response however has been:
  1. Infrastructure spending has already been fast-tracked. While the spending and projects are expected to take up to 10 years, this will largely provide employment to those already graduated, and in specific industries only. It’s a short-term boost that doesn’t address key structural challenges.
  2. Students won’t generally change their university course preferences based on pricing signals. Given the fact students receive HECS/HELP funding, the overwhelming majority don’t look at cost at all. This means that it’s likely there will be only small changes in course selection, and students will continue to graduate with similar degrees. Recent data shows that in fact there was a 10% increase in 1st preferences for Humanities courses despite a 113% price increase!
  3. Businesses base hiring decisions upon future expected demand for their goods and services, and while high levels of uncertainty exist due to COVID, overall hiring remains depressed, and a hiring incentive may not be enough to counteract this. Furthermore, with downward pressure on wages due to 106 applicants per every entry-level role, it’s also cheaper for firms to hire more experienced people who have been out of work due to COVID. This will mean that similar to the GFC, the labour market will recover quicker for those aged 30 and above, but still suffer from up to a decade of labour market scarring for young people aged 18-29. It’s unclear if the Job Maker incentive will be enough to counteract this.

Even if the policy response does work (and I hope it does) and it successfully leads to improved employment opportunities for young people, the government’s own forecasts for unemployment for 2021 and beyond still remain very high (much higher than pre-COVID which was already concerning for young people).

According to the government forecasts, unemployment is expected to be 6.5% in 2021-22, 6% in 2022-2023, and 5.5% in 2023-2024.

This will mean that given we were already at 1 in 3 young people unemployed or underemployed pre-COVID when unemployment was at 5.2% (and we had less young people graduating from school then), youth underutilization (unemployment + underemployment) is only going to get higher and this is IF the government policy response works!

Overall, we’ve got a perfect storm hitting young people over the next decade with an inadequate government policy response.

All of this also needs to be considered in the light of the Australian economy being built on mining exports and our three largest trading partners (China, Japan and South Korea) have all announced targets of net-zero greenhouse gas emissions, with intentions to reduce their demand for coal.

Australia’s diplomatic and trade relationship with China who represents our single largest trading partner (39% of all goods exported go to China, and 27% of all our imports are from China) is also currently incredibly complicated, and likely to stay that way for some time.

China has recently placed bans or delays on Australian coal ($14 BN worth of exports), wine, lamb, lobsters, barley and log timber and if these trade bans and delays continue this will have an impact on Australia’s economic recovery and our unemployment levels (remembering that China’s demand for our commodities was the key factor in our bounce back and GFC recovery).

How do we solve this generational crisis we are facing?

Notwithstanding the structural issue with the mismatch of the supply of skills to the labour market demand (which the government has been trying to address…) what is evident is that we need to find a way to massively jump-start new job creation in the Australian economy.

We have more young people than ever before graduating from high school, at a time where there will be significantly less available jobs for young people. University therefore isn’t the solution. While getting young people trained in relevant skills is important, it’s only useful if there are jobs available.

We need to create A LOT more jobs for young people. And quickly!

How can we do this, however? 

We need to first understand the key levers.

Currently, in Australia, small and medium businesses are the largest source of employment for Australians:

  • Small business (those employing < 20 people) employ a staggering 44% of the Australian workforce.
  • Medium sizes business (those employing 20-199 people) employ 24% of the Australian workforce. [Source]

Overall, 68% of Australian’s work in small to medium businesses.

This indicates that one of the most effective ways to increase employment is to find ways to either:

  1. Encourage small to medium sizes businesses to hire (which is the point of the Job Maker grants) or
  2. Encourage more people to start businesses!

Given that the governments forecast unemployment figures remain high despite Job Maker, it shows that simply encouraging firms to hire more isn’t enough.

We need more new business creation, and consequently, new job creation.

Furthermore, Schramm’s Law states that:

The single most important contributor to a nation’s economic growth is the number of start-ups that grow to a billion dollars in revenue within 20 years.

Why? 

Successful businesses that grow to significant sizes improves GDP outcomes for the economy, lift employment levels, and lead to increased research & development often leading to the development of entirely new industries. Worryingly, when we consider Australia’s largest businesses, short of one exception (Atlassian), Australia’s largest companies were founded over 100 years ago.

One of the best ways to create jobs is to encourage new business creation and we need to do this quickly in Australia because our future depends on it.

How does this necessarily lead to increased employment for young people specifically?

On the face of it, new businesses could simply hire more experienced people given we’ve got spare capacity in the labour market.

Research reveals that up to 85% of all jobs are filled by networking. [Source]

This means that if a young person starts their own business, it’s more than likely that when they go out to hire their first team members, they will hire peers from their existing network.

The key, therefore, lies in specifically encouraging young people to create new businesses and start-ups.

Running your own business is the future of work

In Australia, data from 2015 indicates 4.1 million Australians or approximately 32% were freelancing or working as independent contractors.

There are also 2,065,523 small businesses in Australia (Source), which means that:

1 in every 12 Australians right now has their own business of some type.

What this reveals is that if we are going to equip young people for this future, they need to learn to run their own businesses.

So really, in addition to broadly looking at ways to accelerate new job creation in the Australian economy, we should be finding ways to encourage young people to start businesses.

This is where encouraging young people to start businesses is a win-win. We not only equip young people with the skills they’ll need to thrive in the future of work, we can also jump-start new job creation for young people.

By young people, for young people.

But isn’t starting a business risky, especially if you’re young and don’t have any experience?

Of course, starting a business has its risks. Most businesses fail.

When we think of starting a business, there are two key types of risk to consider:

  1. Financial risks
  2. Career risks.

What are the financial risks of starting a business?

When we consider financial risks, the costs today of starting a business thanks to the internet has fallen incredibly, so it’s now very very cheap to start a business.

You can register as a sole trader for free, set up a website for free, market it via social media at no cost, and even use an on-demand or drop-shipping service so that you only pay for a product when you’ve received payment from a customer.

Of course, other businesses (like setting up a restaurant) may take a significant investment of capital, but if you’re averse to that, and want to minimise your financial risk, it’s the easiest it’s ever been.

What about career risk however if your business fails?

We need to think about career risk as distinct from job risk.

  1. Job risk refers to the chance your job will no longer exist. A start-up has a high job risk because if the start-up fails, you’re out of a job!
  2. Career risk refers to the chance your long term career will be negatively impacted.

Start-ups reward you with much lower career risk. (H/T to Erik Torenberg)

Even if your business fails, it actually increases your employability.

How?

Starting a business rapidly accelerates your learning curve. All of a sudden by necessity you need to learn a huge amount, from market validation, product development, marketing, sales, recruitment, management, leadership and more! Developing all of these skills, (and showing the initiative to start and lead your own business) actually improves prospective employers’ evaluation of what you can bring to their organisation.

Running your own business, and having to get out there and sell your product or service also leads to a rapid acceleration in your network, and with 85% of jobs filled by networking, it also, therefore, increases future employment options for you.

Therefore, starting a company is actually what is known as an asymmetric bet. 

According to venture capitalist Erik Torenberg:

An asymmetric bet is a bet that, if it works, will have tremendous upside, and if it doesn’t, will still generate optionality.

We think something is risky (e.g. starting a company) when it actually buys optionality, and we think we’re buying optionality (e.g. joining Goldman Sachs) when we’re actually taking a big risk as we’re capping our upside. [Source]

As a result, the best thing we can do if we want to increase employment opportunities for young people is to encourage and support them to create businesses.

This will either support new job creation for other young people OR even if the business fails, will equip them with greater skills and increase their employability to get a job with existing organisations.

Overall, the net outcome is more young people in work!

So to summarise so far:

  • We need to create more jobs in Australia quickly to meet the increased supply of young people graduating + plug the shortfall in employment opportunities that will exist post the COVID-19 recession.
  • The largest source of employment in Australia is small to medium businesses (68%)
  • To increase new job creation, we, therefore, need to encourage more new business creation.
  • With 85% of jobs being filled by networking, if we encourage young people to start businesses, this will have a positive impact on youth employment levels.
  • Running a business of some form is the future of work, and thus by supporting more young people to start their own businesses we’re preparing them to thrive over the long term.
  • Even if the business fails, starting a business is an example of an asymmetric bet, whereby a person’s employability increases.

So, what can Australia do to rapidly educate, train and support young people to start their own businesses?

Read Part 3: How to Rapidly Scale-Up Youth Entrepreneurship & New Business Creation in Australia
Written by
Rowan Kunz
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