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We're all overstating Europe's youth unemployment

August 17, 2012: 10:14 AM ET

Sure, it's a problem. But it may not be as big a problem as the numbers suggest.

young-coupleFORTUNE – One of the biggest worries across governments worldwide is that the young are being left behind. From Spain to Greece and America, youth unemployment has reached record highs made worse by multiplying debt crises and lurching economies.

Over the summer, more than half of under 25-year-olds in Spain and Greece were jobless, while the segment of people out of work in the euro zone as a whole reached a 15-year high at 17.2 million. Though it hasn't been nearly as bad in the U.S., unemployment among 18 to 24-year-olds is nevertheless 16.4%. It's 9.1% for the rest of the population. And last month, the Organization for Economic Co-operation and Development (OECD) warned high unemployment could permanently scar the economic futures of the world's youngest workers.

The problem carries all kinds of implications for the broader economy. For one, the longer these workers languish, the more that delays their careers -- impacting how much they earn years from today. Governments worry about it because it could further strain public budgets and raise crime. In France, Francois Hollande recently won his bid for the presidency partly by campaigning to help out-of-work youths.

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Yes young people have it rough. But not nearly as rough as the numbers suggests, says Steven Hill, author of Europe's Promise: Why the European Way is the Best Hope in an Insecure Age and 10 Steps to Repair American Democracy. In a recent article in Project Syndicate, an economics blog featuring Nobel laureates, he argues that governments and economists have focused on the wrong statistics.

The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals who are employed and unemployed (but are looking for jobs). The problem, Hill says, is that it doesn't count the millions of young people still in college or vocational training programs as part of the labor force because they are neither working nor looking for a job. And as a result, the youth unemployment rate becomes artificially high. "So the perverse result of this way of counting the unemployed is that the more young people who pursue additional education or training, the higher the youth unemployment rate rises," Hill writes.

He suggests a more accurate measure: The unemployment ratio, which counts those still in school or getting job training. This makes some sense. Bad job markets generally tend to push people back to school or to seek new training. Once they graduate, these groups are more inclined than others to return to the job market. So why shouldn't they be counted as part of the labor force, even though they technically might not be looking for work?

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The differences between ratio and rate are significant. Take Spain, which has a whopping youth unemployment rate of 48.9% but a ratio of 19%, Hill writes. Similarly, Greece's rate is 49.3%, but its ratio is only 13%. For the wider euro zone, the youth unemployment rate is 20.8%, which is far above the 8.7% ratio.

And in the U.S., the ratio is 8.9%, while the rate is roughly double that at 16.3%, according to Hill's analysis of labor statistics. African Americans show the widest gap, with a 25.8% youth unemployment rate and a 12.5% ratio, followed by Hispanics at 19.2% versus 10.5%, respectively and Asians, 11.6% versus 4%, respectively.

Interestingly enough, the adult unemployment rate makes the jobless picture appear rosier than it really is. It actually tends to undercount the number of jobless individuals, since those who have given up their job search are not counted among the unemployed. With a tepid U.S. recovery, more and more people get discouraged and give up looking for work, which in turn, partly causes the unemployment rate to fall.

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This is a "distorted reality," similar to the way the youth unemployment rate is calculated. True, however you look at it, it's bad news. And you could argue that Hill is making a moot point. To most people, there may be little difference between bad and really, really bad. But in the world of policymaking, it matters as governments try to come up with what kinds of policies are needed to ease problems facing the young and jobless. And something as perhaps seemingly obscure as the difference between rate and ratio could make a real difference.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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