AI, Covid and taxes: what is behind steep rise in youth unemployment?

Youth unemployment is at the highest level since the Covid pandemic, as younger people bear the brunt of a worsening slowdown in the UK jobs market. Excluding the peak recorded during the autumn of 2020, when the country was entering the second pandemic lockdown, the jobless rate for 16 to 24-year-olds – running at 15.3% – is at the highest level in a decade. There are a multitude of reasons why young people are struggling to find work – including the lasting scars of the Covid pandemic, rising mental health issues, the rise of artificial intelligence and tax increases. Here we dive into the details. Economic weakness The UK economy is underperforming its potential. Sticky inflation, elevated borrowing costs, subdued consumer demand and Donald Trump’s erratic trade wars are all contributors, while budget uncertainty has not helped. This backdrop is discouraging employers from hiring. Young people typically suffer most when the economic chips are down. The reasons are brutal but obvious: lacking experience, employers see entry-level workers as expendable. Sanjay Raja, the chief UK economist at Deutsche Bank, said: “The higher up you go, the bigger the opportunity cost to replace workers who firms have put more investment and training into, and who are more difficult to replace.” Tax increase Rachel Reeves’s £25bn increase in employer national insurance contributions (NICs) in last year’s autumn budget is widely acknowledged to have driven up unemployment – including by the Bank of England. Adding to employment costs, the chancellor’s tax-rise was twofold: the headline rate was increased from 13.8% to 15%, and the earnings threshold at which the tax applies was cut from £9,100 a year to £5,000. Employers blame the latter for hitting part-time work, particularly in retail and hospitality – sectors that typically hire younger workers. There are however carve-outs: employer NICs are not charged on annual earnings below £50,270 for workers aged under-21 and apprentices under-25. Youth minimum wage The government increased the national living wage by 6.7% to £12.21 an hour from April. It also raised the 18 to 21-year-old rate by 16.3% to £10, as the first step towards a Labour manifesto pledge to scrap “discriminatory” youth age bands. Employers warned this risks pricing out young people. Nigel Farage has suggested cutting the rate. The Resolution Foundation has also urged Labour to ditch its plan to equalise the 18 to 21-year-old legal pay floor with the full adult rate. “I don’t think a higher minimum wage is a bad thing. But given the payroll cost increases we’ve had in the past year, this could have deterred employers from hiring,” said Raja. Artificial intelligence Businesses were already investing heavily in new technologies, including artificial intelligence, to replace simple human tasks. Leaps in tech and rising labour costs have accelerated this investment drive. Simple jobs handled in entry-level roles are most at risk, meaning young people are once again disadvantaged. “You’re in the perfect space where doing menial tasks – spreadsheets, etc – is being disrupted. It’s a little early for AI but automation utilisation is definitely having an impact,” said Raja. The retail, hospitality and health sectors in particular have been investing in automation; from self-scanning checkouts to smartphone apps to order drinks and food. Health emergencies Lockdowns at the height of the Covid pandemic disrupted the critical years of education for millions of students, making the transition into the world of work much harder than for previous generations. The number of young people with mental health issues and disabilities has also increased sharply. More than a quarter of 16 to 24-year-olds who are not in education, employment or training are in this position – double the figure in 2005. The age of austerity Young people have grown up as public services have crumbled, living costs have increased and average wage growth has flatlined. This has acted as a barrier to getting on and a disincentive to work. Ben Harrison, the director of the Work Foundation thinktank, said: “All of those factors taken together, it’s not necessarily too surprising you’ve seen this rise in mental health issues since the mid 2010s.”