With UK unemployment rising, will the government’s plan for young people pay off? An economist’s view

There are nearly one million young people in the UK who are not in employment, education or training (so-called Neets). After falling in number during the 2010s before the pandemic, this cohort of 16 to 24-year-olds has grown from 750,000 only six years ago. This is a worrying shift, for several reasons.

Research shows that a spell of unemployment^[1] at a young age can have outsized negative effects on the young person. Workers who were unemployed for even a short time at a young age have to contend with lower wages^[2] and poorer mental health^[3] even years later. In the three months to October, unemployment in the UK climbed to 5.1%^[4], with young people particularly badly affected.

To address these challenges, the UK’s autumn budget^[5] introduced a package of measures intended to help young people move into stable work. The announcements include more apprenticeships^[6], employment support^[7] and a guaranteed work placement for long-term unemployed young people.

There were also policies aimed at young people already in work. The government previously promised to abolish the “discriminatory”^[8] lower minimum wage for 18 to 20-year-olds. As a step towards that, the minimum wage for this age group will increase by 85p per hour in April 2026, from £10 to £10.85. This compares to an increase of 50p per hour, from £12.21 to £12.71, for workers aged 21 or over.

To make sure employers play by the rules, the government also announced stricter enforcement of employment regulations, including the minimum wage, by the new Fair Work Agency^[9].

Together, these policies have a range of implications for young workers. The minimum wage increase means that full-time workers aged over 21 will earn around £900 more^[10] per year. And those aged 18 to 20 will receive about £1,500 more^[11].

Stronger enforcement should reduce the risk of young people being underpaid. This year, more than 40,000 workers^[12] won compensation for earning less than the minimum wage. But of course, these are only employees of firms that have been caught – the actual number of underpaid workers is likely to be higher. More effective enforcement should boost workers’ pay and living standards.

The guaranteed jobs scheme is expected to create around 55,000 jobs – and research indicates^[13] that programmes of this kind can help young people remain in employment even after the placement ends. More funding for apprenticeships also opens up opportunities for young people to enter skilled careers.

But there are also downsides. Although the minimum wage has increased substantially over the past few years from a maximum of £8.91 in 2022 to £12.71 from April, living costs have been rising as well. As the table below shows, increases in other costs have absorbed much of the rise. In particular, average monthly rents have been rising nearly as fast as the minimum wage over the last few years.

Not only that, but employers may respond to higher minimum wages by reducing new hires^[14] or relying more heavily on flexible arrangements, such as zero-hours contracts^[15]. Evidence shows^[16] that as the minimum wage has risen, employers have moved towards flexible, temporary and hourly-paid jobs.

This is concerning for full-time workers, but also for young people relying on part-time work in sectors such as hospitality or retail while studying.

For businesses, the debate has centred on rising costs, but the picture is actually more nuanced. Higher minimum wages do increase labour and administration costs. And employing young workers can be riskier – they have less experience and it is not easy for firms to know how productive they might be compared to more seasoned workers. As a result, higher minimum wages for young workers can encourage firms^[17] to substitute towards hiring older, and possibly less risky, workers.

A more cautious approach might have been for the government to address the challenges for young people sequentially, first expanding employment opportunities, and then later raising their minimum wage.

Yet the measures in the budget could create opportunities. Evidence has consistently shown^[18] that higher minimum wages can reduce staff turnover by encouraging workers to stay in their jobs, which are now worth more to them. This is particularly true for younger workers^[19], who tend to move jobs more often. This can lower recruitment costs and reduce interruptions for businesses, especially when they have invested in training staff.

Small and medium-sized firms will benefit directly from government-funded apprenticeships. They will no longer have to pay 5% of the training costs, making employing an apprentice more cost effective. And more flexible rules around apprenticeships give businesses greater freedom to tailor training to their needs, helping them build a workforce with relevant skills at a time of increasing technological change.

Today’s young people face significant uncertainty – nobody knows what the labour market will look like in five years’ time. But these changes represent a modest step towards supporting them.

But by increasing the minimum wage at the same time, the government is taking a gamble. On the one hand, higher wages alongside policies aimed at reducing the number of Neets could help young people into work and encourage them to stay there. But on the other, the wage increase could undermine these efforts if firms begin hiring fewer young workers. In that case, even well-designed employment schemes would struggle to offset the loss of opportunities.

References

1. ^{^} unemployment (theconversation.com)
2. ^{^} lower wages (onlinelibrary.wiley.com)
3. ^{^} poorer mental health (pubmed.ncbi.nlm.nih.gov)
4. ^{^} climbed to 5.1% (www.bbc.co.uk)
5. ^{^} UK’s autumn budget (theconversation.com)
6. ^{^} more apprenticeships (www.bbc.co.uk)
7. ^{^} employment support (www.gov.uk)
8. ^{^} “discriminatory” (www.gov.uk)
9. ^{^} Fair Work Agency (assets.publishing.service.gov.uk)
10. ^{^} £900 more (www.bbc.co.uk)
11. ^{^} £1,500 more (www.gov.uk)
12. ^{^} 40,000 workers (www.gov.uk)
13. ^{^} research indicates (www.oecd.org)
14. ^{^} reducing new hires (www.productivity.ac.uk)
15. ^{^} zero-hours contracts (academic.oup.com)
16. ^{^} Evidence shows (www.bankofengland.co.uk)
17. ^{^} encourage firms (onlinelibrary.wiley.com)
18. ^{^} Evidence has consistently shown (onlinelibrary.wiley.com)
19. ^{^} younger workers (onlinelibrary.wiley.com)