The Entrepreneurship Solution: Meeting the Global Youth Unemployment Crisis

By Erin Watson-Lynn

Erin was a Global Voices Y20 Delegate for 2015

Abstract

Globally, some 75 million young people are unemployed. The International Labour Organisation warns that this is an unprecedented crisis. High levels of unemployment mean that young people across the developed and developing worlds face increased precariousness, poverty and uncertainty. The result of this is the threat of intergenerational inequality not seen since the Great Depression. Given the stubborn persistence of youth unemployment, more policy attention is clearly needed. The Group of Twenty (G20) leaders have made some commitments to address this crisis. One of these is to promote enabling environments for entrepreneurship. Entrepreneurship is an attractive policy proposition with some best practice examples. However, the macroeconomic impact of these policies is difficult to measure, and there is an absence of empirical evidence that has attempted to do so. This paper establishes youth unemployment as a crisis, describes how entrepreneurship can act as a possible solution, and provides two examples of frameworks for understanding the policy across varying environments. Finally, the paper offers three policy recommendations. 

Recommendations

Recommendation 1: Australia needs to lead the recovery of the youth unemployment crisis by establishing measurable, best practice policies for youth entrepreneurship.

Recommendation 2: Global leaders must commit to increasing women’s engagement in entrepreneurship by intervening earlier in the education life cycle, through business skills training and capacity building.

Recommendation 3: Financial institutions need to change their business lending practices in response to the labour market’s shift towards entrepreneurial activities, particularly for disadvantaged groups including women.

Introduction and background

Youth unemployment rates have been steadily increasing since the global economic crisis in 2008/09. The long-term effects of the downturn are disproportionately impacting young people. This means that 18 to 24-year-olds are finding it increasingly difficult to secure adequate employment. The G20 Leaders’ Communiqué 2014 established youth unemployment as a critical challenge. One of the popularly perceived solutions to this challenge is to create an enabling policy environment for entrepreneurship. Measuring the impact of entrepreneurship on youth unemployment is difficult because it requires quantifying a range of intersecting regional, demographic and institutional factors. While some frameworks have been developed, these are yet to be applied to a systematic analysis of entrepreneurship and its macroeconomic impact.

The purpose of this paper is to illustrate the youth unemployment crisis and the potential for entrepreneurship to overcome it. The paper is organised as follows. The first section establishes global youth unemployment as a crisis. The second section discusses entrepreneurship as a policy solution to the crisis. The third section presents two frameworks for understanding the current state of knowledge about entrepreneurship. 

Establishing the youth unemployment crisis

The impact of the U.S. financial crisis and the subsequent global economic downturn is still being felt. In the time since the crisis, youth unemployment rates have rapidly risen. The International Labour Organisation (ILO) estimates that 75 million young people are out of work globally, and it describes rates of youth unemployment as a ‘crisis of unprecedented proportions’.[1] The ILO further warns of a generation of young people facing increased difficulty in finding work. In developed countries, young people will experience high unemployment, increased inactivity, and precarious work. In developing countries, young people will experience this dangerous combination in addition to persistently high rates of working poverty.[2]

Throughout history, younger generations achieved a higher standard of living than their parents because of increased economic opportunities and intergenerational transfer of wealth. In other words, the current model of social and economic growth assumes higher standards of living passed from generation to generation. For the first time since the Great Depression in the 1930s, this model is under threat.[3] The outcome of this is an increase in intergenerational inequality, and an increase in inequality within the youth cohort. The ILO 2012 Call to Action on youth unemployment argued that increasing unemployment is ‘undermining the belief that each successive generation will see improvements in its employment and economic prospects’.[4] This threat is what makes the youth unemployment crisis so significant.

Historical unemployment rates vary from region to region, as does the five-year trajectory to 2019. Following the financial crisis, the general trend was for unemployment rates to drop; however, the ILO forecasts that some regions will experience an increase over the next five years. Figure 1 illustrates this regional trajectory.[5] Globally, unemployment rates increased across all age segmentations of the labour market during the financial crisis.

Figure 1: Regional unemployment rates over time, 2008-2019[7] 

Rates of unemployment among people aged 15 to 24 years are three times higher than the average unemployment rates for adults. In contrast, older workers have fared comparatively well. Their unemployment rates remain relatively stable, even in countries where overall unemployment has risen. The stability in this cohort’s unemployment rates may be explained by an early exit from the labour market, as we know older workers are finding it increasingly difficult to secure new employment opportunities.[6]

Across the G20 countries, rates of youth unemployment range from 7.7 per cent in Germany to 51.4 per cent in South Africa (Figure 2).[8] The associated challenges are equally varied. In developed countries, young people seeking employment face a more precarious outlook than in previous generations. Young people are more likely to experience prolonged detachment from the labour market, they are less likely to find quality employment with rising incomes, and they are less likely to secure adequate pensions and social protection. Among the developing countries, an economic slowdown as a result of fewer trade and investment linkages with developed countries has aggravated existing youth unemployment and poverty.[9]  

Figure 2: G20 Youth Unemployment Rates[10] 

Figure 2: G20 Youth Unemployment Rates[10] 

In Australia, the youth unemployment crisis is also deepening. At 13.5 per cent, the unemployment rate for 15 to 24-year-olds is double the overall national rate of 6.4 per cent.[11] The Australian Bureau of Statistics warns that the figure for young people is forecast to grow. Against a backdrop of an ageing population, the youth unemployment crisis is a major fiscal challenge for the current Federal Government. In the next 40 years, Australia will see its dependency ratio of non-working to working people increase to unprecedented rates.[12] The Government has committed to a range of public policies that discourage young people away from welfare dependency, as it attempts to tighten spending to address the country’s budget deficit. With varied success in achieving policy changes, youth unemployment rates have continued to grow over time.

The response to the youth unemployment crisis during the G20 Leaders’ Summit 2014, convened in Australia, indicates that there is significant high-level interest in addressing this challenge. The Leaders’ Communiqué demonstrated a commitment to addressing youth unemployment, which it says remains ‘unacceptably high’.[13] The Communiqué highlighted the broad commitments in the individual country Employment Plans, displaying overwhelming support for policies that drive employment for young people. For example, Australia’s Employment Plan made some policy commitments including expanding the Work for the Dole program, financial incentives for remaining in employment for periods of 12 and 24 months, and trades loans for young people undertaking an apprenticeship.[14] Along with a number of other job creation initiatives including attracting more women into the labour market, the G20 Leaders committed to addressing the unemployment crisis by encouraging entrepreneurship and innovation. The Communiqué further demonstrated the commitment of governments by committing to reducing barriers to new business ventures and investment. Finally, the Leaders’ Communiqué requested that Governments report back to the Summit in 2015. These commitments made by the G20 leaders are an important step in the global response to youth unemployment. 

Understanding ‘entrepreneurship’ as a policy solution

As established by the G20 Leaders’ Communiqué 2014, entrepreneurship is a popular policy proposition to help reduce rising youth unemployment rates. Entrepreneurship, however, is difficult to define, which the on-going scholarly debate reflects. For the purposes of this paper, I have used the definition by the Global Entrepreneurship Monitor (GEM). This definition is used because of the GEM’s emphasis on the relationship between entrepreneurial activity and economic growth. The definition was established in the 199 Executive Summary as follows:

‘Any attempt at a new business or new venture creation, such as self-employment, a new business organisation, or the expansion of an existing business, by an individual, a team of individuals, or an established business.’[15]

In the policy context of interest in this paper, ‘entrepreneurship’ is an umbrella term representing a suite of intersecting policies that create an enabling environment for entrepreneurship.

Entrepreneurship among youth cohorts is increasing. Historically, the trajectory for young people upon schooling completion was to secure work experience as an employee or in a family business. Moreover, institutional factors including barriers to finance and capital were likely to discourage young would-be entrepreneurs. With a sluggish job market, there has been a global shift in this paradigm. The GEM argues that increasingly, young people are channelled into entrepreneurship through educational, emotional and financial support [16] Entrepreneurial mind-set and the ability to recognise and to seize opportunities are important driving factors behind the surge in youth entrepreneurship. However, many young people are ‘necessity- motivated’ and are being pushed into entrepreneurship, as they have no better opportunities for work. These push factors are the result of high youth unemployment as well as age- and gender-based discrimination. In the GEM’s 2015 report on youth entrepreneurship, the authors found that 38 per cent of young entrepreneurs fell into this necessity-motivated category. The GEM 2015 report also identifies gender and regional differences in young people’s propensity for entrepreneurship.

Women face a doubly difficult time integrating into the labour market, because of their gender and age. While women and men are achieving parity in educational attainment, men are more likely than women to pursue a business education at the tertiary level. Interestingly, women who complete tertiary business studies are more likely to be entrepreneurs than men. Despite this promising finding, men have more favourable competencies for entrepreneurship. This means that men are more confident to run a business and more likely than women to have a role model in the workplace. Overall, men are more likely than women to be entrepreneurs at all stages of the entrepreneurial life cycle. What these data demonstrate is that there are more men than women engaged in early-stage business and more men than women who are established entrepreneurs. The GEM 2015 report on youth entrepreneurship found that women were more likely than men to be necessity-driven entrepreneurs and were less likely than men to obtain finance through an institution. Women’s businesses are primarily in the consumer services sector, while men’s businesses are more evenly spread across sectors. Young women tend to have smaller, more home-based businesses than young men. These women also tend to employ fewer people and do not forecast to generate jobs to the same degree as young men. [17]

The result of these differences is that young women’s businesses are often less sustainable than young men’s, and have less opportunity for growth.

There are important regional differences for young entrepreneurs, including their education levels and business training. One of the more interesting findings between regions is that the European Culture Countries (ECC) have low levels of perceived entrepreneurial competence, despite their populations’ high level of education and business training. In contrast, sub-Saharan African countries have the lowest levels of education and business training yet highest perceived entrepreneurial competence.[18] On the surface, this phenomenon appears to be a result of a more precarious labour market in sub-Saharan Africa. As stated earlier in this report, South Africa’s youth unemployment rate is more than 50 per cent. Such high unemployment rates illustrate a labour market environment where necessity-motivated factors may be driving young people into entrepreneurial activity.

The question of whether youth entrepreneurship is a solution to the unemployment crisis is an important one. There is significant potential for young people to engage in entrepreneurship in replacement of a historically traditional employment path. However, entrepreneurial policies are regionally and demographically important. This echoes the sentiment of the Organisation for Economic Cooperation and Development (OECD), which argued that ‘there are no quick fixes to ensure that all youth are integrated into the labour market’.[19] Despite the overwhelming support for the entrepreneurship proposition, there is little robust evidence that demonstrates the impact of entrepreneurship on youth unemployment rates. 

Youth unemployment and entrepreneurship: Measuring the impact

Entrepreneurship is a popular policy among G20 leaders. It is an attractive proposition because entrepreneurship contributes to economic growth, creates jobs, and can reduce poverty. However, one of the key challenges for global leaders and policymakers is that the factors influencing entrepreneurship vary from one country to the next.

Some countries have attempted, with varying degrees of success, to create an enabling policy environment for young people to engage in entrepreneurial activity. This tells us that tackling youth unemployment is one of the most significant policy challenges of our time.

Despite the popularity of entrepreneurship among global leaders, including those of the G20 countries, little is known about its macroeconomic impact. Ellis, Williams, and Pompa argued that ‘there is little systematic impact evaluation and a lack of robust evidence about what works best – and particularly what works best in difference contexts’.[20] Against this absence of conceptual understanding of entrepreneurship and youth unemployment, and lack of empirical evidence to support its implementation, there have been some recent attempts to develop frameworks for understanding this relationship.[21]

Figure 3: Decision matrix for context scenarios [25] 

Ellis, Williams, and Pompa developed a contexts framework that can be used to more efficiently design and implement youth entrepreneurship policies (see Figure 3).[22] In their framework, Ellis et al. identified three matrices that distinguish different types of entrepreneurial contexts. These matrices are: i. factor-, efficiency-, and innovation-driven, ii. conflict-affected, post- conflict, and peaceful, and iii. rural and urban.[23] The authors argue that the use of their framework is critical for ‘understanding and adaptation of youth entrepreneurship support’.[24] The framework enables an analyst to locate a country on the matrix, which then provides a context scenario for understanding that environment. While this tool is useful for policymakers, and helps to establish groups of similar contexts, we are yet to benefit from its application in an empirical analysis. 

In 2014, Ernst & Young produced a report that proposed a diagnostic tool and ten key recommendations for enabling entrepreneurship. It argued:

“Leveraging initiatives already successfully deployed in other countries is attractive and practical. However, conditions in all countries are not the same, and a program that works in one environment may need to be customised to be successful in another. With this in mind, we have developed a guide to diagnosing the youth employment challenge in G20 countries.”[26] 

Firstly, the diagnostic tool situates each country into one of four categories based on its score on two axes (Figure 4). The first axis represents ‘speed of economic growth’, and it reflects the labour market conditions for youth. A high score is representative of stronger conditions. The second axis represents ‘quality jobs for youth’, and it reflects education levels and the disparity between adults and youth in the labour market. A higher score is representative of a better quality of jobs for youth. Finally, the size of the sphere is representative of the relative youth population. 

Figure 4: The EY guide to diagnosing youth unemployment[27]

Figure 4: The EY guide to diagnosing youth unemployment[27]

Secondly, the ten policy recommendations that Ernst & Young proposed were then brought to life using best practice policy examples. Each of these best practice examples, when used in collaboration with the diagnostic tool, provides an interesting insight into the policy decisions of individual countries. For example, recommendation four highlights the need for a ‘new class of loan’ (i.e., microfinance), for targeted small business expansion. Unsurprisingly, the best practice examples from G20 countries (India, South Africa, Brazil, Italy, Saudi Arabia) all fall into quadrant two or three. 

This tells us that regardless of the pace of economic growth, microfinance programs are effective in contexts with a poor quality of jobs. Another example that represents a more diverse range of best practice policies is recommendation one. It states that mentorship and financial education should be a condition of funding. Countries from all four quadrants are represented in the best practice policies (Canada, 1; United States, 1; Brazil, 2; South Korea, 4; Argentina, 3). This tells us that mentoring and education in funding is perceived as an important policy, regardless of the speed of economic growth or the quality of jobs.

While the Ernst and Young report convincingly argues for supporting entrepreneurial policies to help overcome youth unemployment, it does little to measure the efficacy of these policies. Similarly to the Ellis et al. framework, we are yet to benefit from the application of this framework in an empirical analysis. Furthermore, how we use these frameworks to quantify impact remains a significant methodological question. In other words, while we are developing the tools to guide us through this macroeconomic challenge, we are yet to see the impact of entrepreneurial policies on youth unemployment through a rigorous empirical analysis. 

Conclusion

Youth unemployment rates are rapidly rising. Unprecedented changes in the global labour market mean that young people are facing increased uncertainty. This is threatening the historical trend for improved standards of living to be passed from one generation to the next. Across the G20 countries, rates of youth unemployment vary from 7 per cent to as high as 50 per cent. Australia’s circumstances appear modest, at just over 14 per cent. However, this is double the national average unemployment rate and is increasing over time.

Youth entrepreneurship is popular among governments as a solution to the unemployment challenge. Governments must develop a range of intersecting policies to create an enabling environment. This is because there is a range of regional, demographic, and institutional factors that influence entrepreneurial activity.

Despite the popularity of ‘the entrepreneurship solution’, little is known about the macroeconomic impact of enabling policy implementation. This paper has presented two frameworks designed for public policy makers to understand the institutional contexts. While these are useful to guide policy development, they are yet to be used in a systematic empirical evaluation of youth entrepreneurship and its impact on unemployment.

This paper offers three practical recommendations as a result of a review of the discourse. These are: i. that Australia should lead the world in developing measurable, best practice policies for enabling youth entrepreneurship, ii. that global leaders should commit to increase women’s participation in entrepreneurship by intervening earlier in the education life-cycle through business skills training, and iii. that institutions should change their business lending practices in response to the labour market’s shift toward entrepreneurial activities, particularly for disadvantaged groups including women. 

Full Footnotes and Bibliography can be found here or by copying the following URL into your browser: http://bit.ly/ErinWatsonLynn-Research