YOUTH UNEMPLOYMENT ESSAY

MACROECONOMICS
[SAMPLE ASSESSMENT MATERIAL (H060/2)]
EVALUATE, WITH THE AID OF AN APPROPRIATE DIAGRAM(S), WHETHER
EMPLOYMENT SUBSIDIES OR THE PROVISION OF YOUTH TRAINING SCHEMES IS
LIKELY TO BE MORE EFFECTIVE IN REDUCING THE LEVEL OF YOUTH
UNEMPLOYMENT IN THE UK (20)
KNOWLEDGE (DEFINITIONS):

• A subsidy is a grant given by the government to producers to encourage production of a

good or service. Unemployment is when someone of working age is out of work and
actively seeking work
APPLICATION / ANALYSIS:

• Youth employment subsidies would effectively reduce the costs of production for firms
across the UK, resulting in SRAS increasing from SRAS to SRAS1. This results in the price
level falling from P0 to P1 and real output increasing from Y0 to Y1. The increase in real
output would lead to higher employment. This is because labour is a derived demand,
wanted not for its own sake, but for the level of output it can produce and at what value
that output can be sold for. As the employment subsidy requires that the firms must
employ youth workers at the minimum wage, Diagram 2 shows that labour demand will
increase from LD to LD+Sub, resulting in an increase in UK youth employment (in this
specific labour market) of size L1 – LD.
• This increase in labour demand has eliminated the previously occurring classical
unemployment of size LS – LD, and it would indeed be true that the rise in youth
employment would be occurring across a range of labour markets and so would result in
more people earning higher disposable incomes (the youth who were previously
unemployed). As a result, consumption should rise, causing AD to rise (as consumption
is a component of AD), resulting in the price level increasing back from P1 to P0 with real
output increasing from Y1 to Y2. This increase in real output could potentially lead to
further increases in UK employment (and thus youth employment), highlighting the
potential success of a youth employment subsidy

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• On the other hand, youth training schemes could be equally beneficial. As said youth
training schemes would be provided by the government, their provision will lead to an
increase in government spending and thus an increase in AD from AD to AD1 (as
government spending is a component of AD). The youth training schemes would also
increase the current levels of human capital, and thus the labour productivity of youth
workers, resulting in LRAS increasing from LRAS to LRAS1. The resulting effect would be
an increase in the price level from P0 to P1, an increase in real output from Y0 to Y1, and
also an increase in productive potential from YFC to YFC1. This increase in real output
would likely lead to an increase in UK youth employment because, as stated previously,
labour is a derived demand. The increase in productive potential also represents the
decrease in structural unemployment that has occurred as result of the improved skills
of younger workers (higher occupational mobility), meaning that they will no longer be
blocked out of jobs due to not having the necessary skills

EVALUATION:

• There are, however, potential drawbacks of both methods of government intervention

• Starting with youth employment subsidies, one potential problem is that its success is
dependent on the size of the subsidies being correct. The UK government will ultimately
be guessing the necessary size that the subsidies will have to be in order to incentivise
firms to employ more youth workers. If the subsidy is not large enough, then there will
be few firms who choose to accept the subsidy, meaning that there will be few extra
youth workers who will find employment, in which case the subsidy program would fail.
This is made worse by the fact that even if the subsidy is extremely large, if young
workers do not have the necessary skills to fill the job vacancies that firms wish to create
and then fill, firms will still not accept the subsidy and so said unskilled youth workers
will remain structurally unemployed
• Moving onto youth training schemes, one potential problem of the schemes is that
there is simply no guarantee that they will work. To believe that the youth training
schemes will definitely work, is to believe that the UK government knows exactly what
skills are in demand from employers and that they know an effective way of teaching
them to the youth. It is quite feasible that the government may not be quite so well
versed on such matters and so, as a result, the quality and/or relevance of the schemes
could be very low. Even in the case that the government did have perfect knowledge of
such matters, the entire process could take many years to have an effect meaning that,

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MACROECONOMICS
in the short run, structural youth unemployment is likely to persist as a result of the
time lag
• Lastly, the major issue with both of the methods of government intervention is the very
high opportunity cost. Subsidies and youth training schemes are extremely expensive,
often costing billions of pounds to be done effectively. This is money that could have
been spent on other essential services such as healthcare, education, transport etc... In
the case that the UK government actually funded the subsidies, or training schemes,
through cuts in spending in these areas, they may actually create further problems by
increasing the levels of occupational and geographical immobility due to worse
education, worse healthcare or worse transport. Additionally, if the subsidies or training
schemes are paid for through borrowing, then the government will have to pay this back
in the future, and they may do this by raising taxes. Raising taxes would likely reduce
both AD and LRAS, which would reduce the level of real output and thus the overall
demand for labour. As a result, any positive effects (on UK youth unemployment) that
are gained from either method of intervention, may simply be heavily reversed in the
future

JUDGEMENT:

• Balancing both sides of the argument, between the two potential methods of
government intervention, the provision of youth training schemes is likely to be more
effective in reducing the level of youth unemployment in the UK. Youth unemployment
subsidies do have the potential to have a positive impact on UK youth unemployment,
however, it could be argued that subsidies are an attempt to solve the symptoms of the
problem, rather than the actual problem itself (low skilled youth workers). This makes
the youth employment subsidy extremely unlikely to work in the long run. Youth
training schemes, however, do directly deal with the problem of occupational
immobility of youth workers, and they even manage to increase the productive potential
of the economy which can provide great benefits for all economic agents. Both schemes
are subject to the problem of very high opportunity cost, but this simply makes it more
evident that, between the two, youth training schemes are likely the better method of
intervention. This is because its effects are more long term and it has a higher chance of
producing a return for the government if it does succeed in the long run (unlike the
subsidies)

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