The kids aren’t alright: a new approach to tackle the challenges faced by young people in the UK labour market

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The core concern explored by the Intergenerational Commission has been the breakdown of generational progress. Previous research has illustrated that, across a number of domains, the assumption that each generation will do better than the one before it no longer holds.

This paper moves beyond the diagnosis of these problems to consider what action is needed to address the challenges facing millennials. The Intergenerational Commission’s final report later this year will recommend a specific suite of reforms across a broad range of policy areas. In this paper, we focus on the labour market and outline a fundamentally new approach: an active labour market policy to confront the challenges of the 21st, not the 20th century. In particular this means a new focus on the security of, and opportunities within, work for young people, rather than a narrow focus on youth unemployment.

The labour market has, on the whole, not been kind to millennials (those born 1981-2000). Employment rates are the clear exception to this, with a record share of people in work and millennials not seeing the high unemployment that previous generations experienced in recessions when young. For millennials, rather than the quantity of jobs, concern has instead focused on the security and rewards that their roles too often lack.

Typical weekly earnings for millennials who have turned 30 are currently £470, £15 less than that of generation X when they turned 30 between the years of 1996 and 2010. This represents an unprecedented break with the past in which successive generations earned significantly more than their predecessors did at the same age. In part this is because today’s young bore the brunt of the pay squeeze that followed the financial crisis; hourly earnings fell by 11 per cent for people in their 20s, the largest fall of any age group. Young people have also been central to the significant rise in insecure work that has taken place since the financial crisis, experiencing the sharpest increase in part-time work, self-employment and accounting for the majority of zero-hours contracts and agency workers.

This weak pay progress predated the financial crisis to some extent and there were wider signs that the labour market was becoming a more difficult place for younger people even before Northern Rock was nationalised and Lehman Brothers went to the wall. Job-to-job moves – one of the key drivers of pay progression – began to slow from the early 2000s and the pay rises received by the growing group of people remaining in the same job also shrank from the mid-2000s. We also find that even before the recession, but especially in the years since, the kinds of occupations young people have moved into are lower skilled than in the past and in sectors where progression appears more difficult.

It will be years before we can fully understand how deep the labour market scars of millennials will be from spending long periods in insecure and low-paid work. But simply assuming challenges from these big shifts in our labour market will disappear would be a dangerous mistake. Effects on pay trajectories are likely to be lasting despite some signs of a partial bounce-back on pay, and the tightening labour market, this has not brought the share of younger people in atypical work back to anywhere approaching pre-crisis levels.

In many ways, labour market policy in previous decades offers a helpful guide to how to respond to these challenges. The success of a new breed of active labour market programmes in the 1990s and early 2000s, including the New Deal, stands out. These started with a clear diagnosis of the challenges our labour market faced at the time, focusing on moving unemployed and inactive individuals into work following the legacy of high unemployment from the 1980s and 1990s. In the early 1980s almost 40 per cent of the population were out of the labour force and for much of the mid-1990s long-term unemployment for those aged 18 to 24 was around 30 per cent whereas it has stood below 20 per cent for past two years. Government eventually responded with a focused package aimed at specific groups in need of support. To do this, labour market flexibility was promoted while expectations of and support to work were both increased. Such targeted action made a meaningful difference both to short-term indicators as well as helping to shift cultural norms around employment in the longer term. The evidence that these approaches worked is visible in the share of people currently in work.

But in the same way that the New Deal learned the lessons of the past and shaped them to the challenges of the 1990s and 2000s, new approaches to the big labour market issues of today are needed but conspicuously lacking. In part to help fill that gap this report calls for a ‘Better Jobs Deal’, made up of new aims and new approaches.

The shape of a new approach to active labour market policies would involve a shift in whom such a policy agenda is focused on and what it is trying to achieve. While support for those out of work remains crucial, a new labour market policy should refocus on the millions of workers, particularly younger workers, who have become stuck in low-paying, low-skilled or insecure jobs. A Better Jobs Deal should explore how workers in these positions can be actively supported to access opportunities to progress, be that within a firm or by taking up an opportunity to move jobs or area.

As well as refocusing on different people a broader shift of objective is also needed, to focus on the nature of work. The benefits of flexible labour markets are well-demonstrated. But as the government has acknowledged in relation to the Taylor Review, that flexibility has become too one-sided for many. This has bred insecurity that is bad for individuals in the here and now while also reducing their capacity to take wider and important labour market risks. For a modern labour market policy more secure work should be a goal in itself but it can also act as a springboard, with workers feeling better placed to seek pay rises and new opportunities.

The shift in the focus of a new active labour market policy should go further, because a Better Jobs Deal should not focus solely on workers. We need a Better Deal for Retail, Hospitality and Social Care. Overlooking firms and the sectors they operate in would miss a key part of the puzzle not least given the fact that some low-paying sectors and workers in them risk being trapped in a loop of low expectations. The traditional pressures that would push firms out of such an equilibrium are weaker, with our analysis and polling by Ipsos MORI suggesting that younger workers have lower expectations in terms of pay rises and inflation than older people, with a mixture of contentment and a fear of changing jobs helping to keep them in their current roles. This may be due to the scarring effect of the recession and is compounded by the diminished role of unions in advocating for more historically ‘normal’ pay increases and rights. Whatever the cause, if it continues it risks leaving some younger workers stuck in low-paying or insecure positions who would otherwise not be.

While firms have clearly benefitted in the short term from this reduced pressure on wage bills, this may well be damaging in the long run to the companies themselves and may not be sustainable anyway in a much tighter labour market. While far from the full story on the UK’s woeful productivity performance, poor management and low investment associated with low pay equilibriums have clearly played a part. But more pressingly for individual firms, with vacancies at record high levels and a potentially smaller pool of workers following Brexit, employers will have to break out of this loop sooner or later. Doing so with the support of a coherent new approach which identifies how firms and sectors as a whole can move forward, rather than in an ad hoc, reactive way is likely to mean better results for both employers and workers.

With a much tighter labour market today, now is the ideal moment for this new approach. Figure 1 below sets out the structure it might take. This Better Jobs Deal is formed of three pillars: enhanced security, better workplaces and greater opportunity. All three pillars aim to reduce the risk that a cohort of young workers find themselves unable to progress as far in the labour market as they might otherwise have done, and they aim to do it now rather than in a decade’s time when much of the damage has been done. The Intergenerational Commission’s final report will provide firm policy recommendations. Here, we present policy options that would reinforce the three pillars.

Turning first to security, we need to offer a better deal to the self-employed and those in insecure work. Providing zero-hours contract workers with a right to a contract that reflects the average hours they work week in, week out would be a start. Trialling a premium payment for lower earners working non-guaranteed hours would shift some of the risk associated with these kinds of working arrangements – in many cases dominated by young people – back onto the employer. Crucially, however, policies along these lines could do so without removing the flexibility that many people on such contracts value. With young people more likely to work for themselves than in the past we also need to revisit whether so many people should really be outside as much of the employment law that we have collectively decided should generally apply. Narrowing the entitlement gap to employees through, for example, the extension of statutory maternity and paternity pay would offer greater certainty for the UK’s 4.8 million self-employed.

A Better Deal is needed in workplaces too. Taking a sectoral view, the UK could lead the way internationally by developing genuinely transformative plans in low-wage, low-productivity industries. This should be the new frontier, where an active labour market policy overlaps with an industrial strategy. As with current active labour market policies, it should involve both carrots and sticks for sectors to improve. The government should sign new deals with retail, hospitality and social care. There are nearly 1 million non-graduates aged 18-35 working in these sectors that could benefit from employers working with government and unions to make them better places to build a career.

The deals with these sectors would have some common elements: they should all involve government working with firms and employees to design and publicise career paths, matched to skills gaps identified by employers and with incentives for firms to invest in the qualifications of their employees. (A forthcoming policy options report for the Intergenerational Commission will consider skills policy in depth.) Boosting the opportunities available to those with responsibilities outside of work through rethinking how jobs are designed would be another route towards making these sectors more of a route towards quality employment.

These new deals would also allow government and firms to respond to the unique challenges that industries face. In retail, this may involve ensuring that firms and employees are able to adapt to a world where commerce is increasingly done online. In hospitality, responding to the downward shift in labour availability that may follow Brexit is likely to be important. Government and the sector need to come together to address the challenges in social care ensuring that progression and worker development is part of the solution, not an afterthought.

Although sometimes overlooked in discussions of how to achieve these goals, trade unions clearly have a major role to play. Though union membership is just 20 per cent among people aged 26-30, compared to 29 per cent two decades ago, our survey and focus groups with millennials revealed that few have written off unions as a means of protecting their rights in the workplace. Indeed they have a much more positive attitude towards trade unions than older workers, just 8 per cent of millennials would not join a union because they don’t agree with them in principle. But a lack of information was a major barrier to joining a union, with many unwilling to commit to paying a monthly fee for membership of organisation they feel they don’t understand. To tackle this, unions should be given the right to speak to employees in their workplace, something young workers support, but should also look to offer reduced rates for younger people who repeatedly raise cost as a barrier to joining.

Going hand in hand with improving low-paying sectors and workplaces where younger workers are today should be a new focus for government on supporting some of the generation stuck after the financial crisis to take up opportunities to progress in work. That means a new approach to directly overcome some of the barriers young people face. Analysis of longitudinal data on people’s earnings suggests that approximately 1.5 million people across a range of sectors and occupations who were aged between 16 and 25 in 2006 had failed to move consistently onto higher wages a decade later. While many in this group may well be a happy in their current role, a number of programmes in other countries have sought to tackle the barriers facing younger workers who are stuck and may be seeking to move into better-paying positions.

Within such a large group, a range of issues may be limiting their ability to find better work but common themes include an inability to take risks in the labour market because of financial constraints, skills gaps or geographical search areas. As with the New Deal, different offers for groups facing different challenges should be available. A Better Deal for ‘movers’ would support those frustrated by the employment options available to them locally to broaden their search area. A similar scheme in Germany, for example, offered funding to help people to relocate for a new job, covering transport and initial housing outlays. But for some, progressing within their current industry should be achievable. In some instances, a lack of specific qualifications may prevent potential ‘climbers’ from moving into more senior positions.

For others, changing sectors altogether may be the best route to higher earnings. But our focus groups with younger workers underlined the perceived risk that comes with changing career, even at a young age. Support with the upfront costs of moving jobs or purchasing fundamentals for the job e.g. tools or software, could be offered to those who sign up for a Better Deal for ‘switchers’.

These Better Deals for a variety of groups would not solve all of the issues facing younger people in the UK. But they represent a different approach to conditionality than that currently used; rather than demanding activity in exchange for support, support would be offered to those with a proven job offer, interview offer or willingness to engage in training. This and the shift of focus to those who are in work but lacking security or opportunity, with a new appreciation of the need for firms to be partners in any such process, would represent a big step towards a labour market that works better for everyone.