3. The cost of holding the line

The burden of unemployment is not shared evenly either across the community or between communities. In a major study on social exclusion and distressed urban areas, the Organisation for Economic Cooperation and Development (OECD, 1998) found that deprived areas limit the opportunities and prospects of people who live in them. It was argued, "�without a vision of their potential, a nation not only bears the costs but also fails to realise the possibilities inherent in these places and their populations" (OECD, 1998: 11).

Research conducted by the Australian Housing and Urban Research Institute (AHURI) has highlighted the spatial patterns of change in population, employment and investment, social disadvantage, infrastructure and environmental quality in Australia's cities and the resulting wide disparities in the vitality of local communities. The researchers argue that we need to consider the issues involved in problems such as social polarisation, and prescribe workable strategies through which disadvantaged communities can regenerate. Such initiatives will need to extend beyond 'parachuting' solutions into localities from outside or relocating individuals and families to communities of greater opportunity (AHURI, 1999: 3).

CofFEE agrees that new initiatives are indeed required if we are to attenuate the economic and social costs that flow from unemployment. However, we must recognise that these problems have a macroeconomic origin. The 'bottom-up' solutions that are often proposed under the banner of social entrepreneurship do not indicate how they will remove the macroeconomic constraint (Cook, Dodds and Mitchell, 2001).

3.1 The price of inefficiency

Given that economic policy should be concerned with the efficient use of resources, it is paramount that we address the macro inefficiency associated with unemployment. The gravity of the problem posed by labour underutilisation, and its attendant economic and social costs, are being overlooked by policy makers in almost all OECD economies.

The output losses that arise when around 11.2 per cent of willing labour resources are underutilised are enormous. CofFEE estimates that this will have cost the Australian economy $39 billion in 2002 in lost potential output. This is around 6 per cent of current GDP or $143 per week per Australian family (ABS, 5206.0, 4102.0). As we will discuss in Section 4.6, the economic gains from fully employing the labour resources currently wasted in Australia far outweigh any potential efficiency gains from further labour market deregulation and microeconomic reform. CofFEE's indicators (see Summary Box 3) show the need for a new approach to employment policy.

3.2 The costs of long-term unemployment

In December 2002, there were 143,700 Australians who had been unemployed for 52 weeks or more (ABS, 6203.0). In comparison to the rest of the labour force, people who are long-term unemployed are less educated and qualified, their last job was on average less skilled, they reside in lower socio-economic locations, are more likely to live with other non-working adults and are less likely to speak English well (Dockery and Webster, 2001: 13).

Reducing long-term unemployment is critical if we aspire to economic outcomes that are both efficient and equitable. In general, the longer a person is unemployed the greater the costs of each additional period of unemployment, both to the person and to society. Material hardships, and the physiological and psychological damage resulting from unemployment, are all likely to increase as the duration of unemployment grows (O'Higgins, 2001: 50).

It is often the case that a person gradually loses skills, becomes increasingly depressed or angry at their situation, and suffers more from ill health, as the period of unemployment lengthens. At the same time, the person may miss out on opportunities for skill development, which arise through employment, imposing long-term cumulative income losses (Nevile, 2002: 249). The loss of skills and potential skills is a loss to both the individual and society and helps to explain hysteresis in the unemployment rate, which is worsening over successive business cycles.

3.3 The costs of youth unemployment

Despite a plethora of policies targeting young Australians, their unemployment rates continue to be more than two-and-a-half times the national average (ABS, 6203.0, December 2002). In 2001, Australia had the twelfth highest rate of youth unemployment among 30 OECD countries (OECD, 2002).

Youth unemployment has long-term implications because it occurs at the beginning of a person's working life. Not only does the person suffer from a lack of income, but joblessness at this age also means that they miss out on the opportunity for skill development that results from on-the-job training and subsequent work experience. The person's future earnings growth prospects and future job stability are thus undermined by the lost opportunities for skill development (ILO, 1998: 179).

Australian research by Chapman and Gray shows that young Australians experiencing either very long or frequent spells of unemployment have poor future labour market outcomes. Those most at risk of 'scarring' include young people with low levels of educational attainment, indigenous Australians and those living in low socio-economic areas. Thus, the long-term costs of youth unemployment are inequitable, being concentrated on the socially and economically vulnerable (2002: 87).

In addition, long-term unemployment amongst young males has a substantial effect on property crime. New research has highlighted the potential societal benefits (in terms of crime reduction) that could flow from policies that reduce long-term unemployment and promote young people's educational success. For example, elimination of long-term unemployment amongst males aged 15-24 through direct job creation, would reduce property crime in New South Wales by close to 7 per cent per annum. If these individuals continued in formal education to the end of Year 12 the reduction in break, enter and steal offences over the course of a year would amount to almost 15 per cent (Chapman, Weatherburn et al., 2002: 24).

Youth unemployment has long-term implications for the stability of the nation's social fabric because it frustrates two important transitions in life: (a) the passage from adolescence to adulthood, and (b) the passage of the individual into household and family establishment.

In Making Transitions Work, the OECD (2000) recommends that all transition policies for young people should include a commitment to a high level of youth employment as well as to post-secondary education. International and Australian research supports a new policy emphasis on helping young people make a successful transition from education to the workforce. The social and economic costs of maintaining the status quo are too high.

In 2002, the International Labour Organisation (ILO) published a major study on youth unemployment and employment policy. The study found little support for the argument that youth unemployment is frictional in nature and reflects a transitional phase that quickly leads to more or less permanent employment. Rather, prolonged spells of unemployment at the beginning of a young person's working life increases the probability of future joblessness. In addition, joblessness among the young is closely associated with crime, drug abuse, and vandalism. It promotes patterns of behaviour that are detrimental to the development and well being of young people, and damaging for society as a whole. High levels of youth unemployment are also likely to lead to alienation and social unrest (O'Higgins, 2001: 2).

In Australia, sustainable employment is a scarce commodity for teenagers. Many young people experience a difficult transition from full-time education to secure employment due to the relative absence of full-time jobs for this age group (Curtain, 2002: 14).

Australian statistics on the labour market status of young people are sobering. In December 2002, there were 172,400 persons aged 15 to 19 years in Australia who were either unemployed or not in the labour force, and not in full-time education. The unemployment rate for all 15-19 year olds stood at 17.0 per cent and at 22.3 per cent for 15 to 19 year olds looking for full-time work (ABS, 6203.0).

Early school leavers are less likely to participate in the labour force and more likely to be unemployed than are Year 12 leavers. In May 2001, 28.3 per cent of non Year 12 completers who left school in the year 2000 were not in education and were either unemployed or not in the labour force. This compared with 7.3 per cent of Year 12 completers (Applied Economics, 2002: 22).

Research on early school leaving points to school performance and socio-economic background as significant factors. Students in the lowest quartile of achievement in literacy and numeracy tests in Year 9 were almost four times more likely to leave school early than those in highest quartile of achievement (Ball and Lamb, 2001 cited in Applied Economics, 2002).

Teese (2002) reported that 38 per cent of the earliest leavers say they are not doing well enough to continue at school and that low achievers are particularly likely to view school as a prison. He also found a strong relationship between school completions and socioeconomic class. In addition, Marks and Fleming (1999) have reported that early school leavers are more likely to have parents in low skilled jobs or with little formal education. In this way, the difficult transitions experienced by early school leavers serve to reinforce the impact of disadvantages experienced earlier in the school and social system (Curtain, 2002: 14).

Ainley and McKenzie (1999) found that the first experiences early school leavers have in the labour market are crucial. Young people who do not experience full-time employment in their first year after leaving school spend substantially less time in work over the next five years than those who are employed full-time in their first year.

Although about half of all early school leavers return to some form of education or training at some time (Lamb and Rumberger, 1998), completion rates for post-school vocational and education courses appear to be low. Unpublished data from the National Centre for Vocational Education Research (NCVER) indicate that less than half of the teenagers who take up vocational courses complete all their modules, while 14 per cent do not successfully complete any module (cited in Curtain, 2002: 11).

It is clear that a significant number of young Australians fail to make a smooth transition from school to employment and that long-term disadvantages flow from this difficult process. Analysis of long-term trends from the Longitudinal Survey of Australian Youth shows that up to a third of young people experience a difficult transition. For 7 per cent it involves long-term unemployment while another 13 per cent attain full-time work but only after an extended period (up to four years) of unemployment, part-time work or activities outside the labour force (Lamb and McKenzie, 2001 cited in Curtain, 2002: 14).

The evidence of policy failure and the significant economic and social costs associated with youth unemployment, demand a new response from policy-makers. The ILO study argued in favour of moving towards a more demand-oriented strategy based on social partnership (O'Higgins, 2001: 1). It was critical of the excessive focus, in countries like Australia, on supply-side 'flexibility' and 'employability' policies. According to this viewpoint "young people are unemployed because they do not have the right skills and attitudes, not because society has failed to create enough jobs for them" (O'Higgins, 2001: 2). The ILO argues that promoting the skills formation of young people is an important aspect of policy, but is not sufficient to address the problem of youth unemployment. Young people can develop skills in the workplace, but this can only occur if they have access to jobs.

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