Invitation: Public-Private Partnerships Powering Entrepreneurs and Innovators

WWC_page_C_v1The Program on America and the Global Economy and the Kauffman Foundation Present:

Public-Private Partnerships Powering Entrepreneurs and Innovators

Friday, November 1, 2013

2:00 – 4:00 p.m.

Joseph and Claire Flom Auditorium, 6th Floor, Woodrow Wilson Center

________________________________________________________________________         

Keynote:

Jacques Gansler, Roger C. Lipitz Chair in Public Policy and Private Enterprise, University of Maryland 

Panelists: 

Stephen Campbell, Economist, Economics Analysis Office, National Institute of Standards and Technology

Sujai Shivakumar, Deputy Director, Board on Science, Technology and Economic Policy, National Academies 

Sue Gander, Director, Environment, Energy & Transportation Division, National Governors Association Center for Best Practices

Moderator: 

Kent Hughes, Director, Program on America and the Global Economy

Public-private partnerships are a key source of funding and support for small business, public infrastructure, and aspiring entrepreneurs.  The Honorable Jacques Gansler, head of the Center for Public Policy and Private Enterprise at the University of Maryland will deliver the keynote address.  Dr. Gansler will be followed by an expert panel that will discuss how small businesses and public entities can partner together and assess the potential beneficial results of public private partnerships. 

Visit The Program on America and the Global Economy website for more information and to RSVP or send an email (acceptances only) to page@wilsoncenter.org

Please allow for routine security procedures when you arrive at the Center. A photo ID is required for entry.

The Center is located in the southeast wing of the Ronald Reagan Building, 1300 Pennsylvania Avenue, NW, Washington, D.C. The closest Metro station is Federal Triangle on the blue and orange lines. For detailed directions, please visit the Center’s website, www.wilsoncenter.org/directions

Invitation: Small Business is Big Business in America

WWC_page_C_v1

The Program on America and the Global Economy and the Kauffman Foundation Present:

Small Business is Big Business in America

Wednesday, October 30, 2013

1:00 – 3:00 p.m.

Joseph and Claire Flom Auditorium, 6th Floor, Woodrow Wilson Center

________________________________________________________________________        

Keynote:

Jeanne Hulit, Acting Administrator, U.S. Small Business Administration

Panelists: 

Giovanni Coratolo, Vice President of Small Business Policy, U.S. Chamber of Commerce 

Robert Dilger, Senior Specialist in American National Government, Congressional Research Service

Sean Mallon, Senior Investment Director, Center for Innovative Technology

Shelly Mui-Lipnik, Senior Director of Tax and Financial Services, Biotechnology Industry Organization

Moderator: 

Kent Hughes, Public Policy Scholar and former Director, Program on America and the Global Economy

Continuing with our focus on the critical importance of entrepreneurship to the American economy; PAGE will host Jeanne Hulit, Acting Administrator of the SBA, to discuss public policies or private practices could increase the availability of small business financing in the future and innovative businesses that can drive future growth and prosperity. 

A light lunch will be provided from 12:30 – 1:00 p.m. 

Visit The Program on America and the Global Economy website for more information and to RSVP or send an email (acceptances only) to page@wilsoncenter.org

Please allow for routine security procedures when you arrive at the Center. A photo ID is required for entry.

The Center is located in the southeast wing of the Ronald Reagan Building, 1300 Pennsylvania Avenue, NW, Washington, D.C. The closest Metro station is Federal Triangle on the blue and orange lines. For detailed directions, please visit the Center’s website, www.wilsoncenter.org/directions

Does the crisis protect us from creating another bubble?

bubblesLast month, President Obama warned that “[w]hen wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy.” On August 10, he further cautioned that even in a slow-growth environment, we have to avoid the creation of “artificial bubbles.”

These warnings come after a prolonged period of historically low interest rates and the Federal Reserve’s unprecedented Quantitative Easing (QE) program. Although recent talk of tapering has sent bond yields up, the program has seen the central bank increase its balance sheet from $900 billion before the collapse of Lehman Brothers to $3.6 trillion. The S&P 500 index is chasing new highs and is up over 240% since its lowest point during the crisis, despite slow growth in the economy. Even Ben Bernanke hinted that low interest rates may incentivize risk-taking by financial institutions.

In this environment, fears about new bubbles are widespread. Some claim that—following an unhealthy pattern of artificial recoveries since the tech-bubble of the 1990s—the driving forces of the current recovery are again real estate and automobile sales. As these are mostly debt-financed, the argument goes, the recovery is fuelled by cheap credit and far from being structural. It is true that house prices have seen an impressive recovery, rising 15% year-on-year in June. Similarly, one can find a very high correlation between car sales and economy-wide growth figures. However, correlation does not imply causation. After 5 years of deleveraging, job uncertainty, and a significant reduction in net household wealth, it seems likely that buyers would postpone important investment decisions. The recovery in housing and automobile markets is therefore also a consequence of increased consumer confidence that results from an improved economic outlook, something that can be seen as a positive sign.

Others see bubbles in gold, investment in China, in emerging markets generally (though this risk might have been reduced after important capital outflows following the Fed’s announcement of tapering), treasuries, college tuition, and exchange-traded funds (ETFs). Another interesting example is the so-called “carbon bubble,” according to which oil-exploring firms do not factor in the possibility of government action on climate change, which could see two-thirds of fossil fuel reserves remain buried. Most convincing, along with Ben Bernanke’s concerns, is the argument that looks at the structural impact of central bank policy on the economy: while large corporations have access to cheap credit that boosts their profits and sends their share prices up; small firms cannot obtain loans at all, and sorely needed investment is postponed.

But does the current rise in stock prices really indicate a growing bubble? After the 2008 crisis, everyone can tell the tale: it all started with the housing bubble that turned into the subprime-mortgage crisis as loans turned sour. Because the financial sector was then forced to curtail lending, the global economy was pushed into a recession, which turned into a sovereign debt crisis in Europe as tax revenues declined and exposed structural imbalances that had been hidden by the bubble.

In hindsight, this is an easy story to tell, but people know little about what creates bubbles in the first place, and—more importantly—what drives investors to make such seemingly irrational decisions when, ex post, it is so easy to identify a “bubble”. As Harold L. Vogel writes, financial asset bubbles are broadly seen as inflations of price beyond what would be expected based on fundamental economic features alone. However, it is very difficult to identify what prices these fundamental features give rise to.

Economic research has produced many theories about the emergence of bubbles but so far, no model has been found to describe—or even predict—patterns of financial bubbles. Among the most debated issues are the assumptions of efficient markets and the rationality of actors. Although it might be rational for single investors to participate in bubbles when they expect others to remain in the market, Vogel rightly points out that the very idea of a bubble requires that there is a wave of irrationality that carries a majority of investment decisions in the excitement of the moment.

Several explanations for this irrationality have been investigated, and behavioral economics will have much to contribute to the debate over the coming decades. At the heart of the creation of a bubble seems to lay a tendency of humans to linearly extrapolate from past performance. Neurological research suggests that investors even override more cautious instincts to sell at times when they fear markets might crash. Furthermore, dynamic prospect theory posits that people change their very attitude to risks over time. The more they have already gained, the less risk-averse they become—implying a strong departure from rationality.

Overall, academic research suggests that a (limited) departure from the investor rationality and efficient markets hypothesis is warranted. Under conventional assumptions, statistical theory would suggest that daily market return amplitudes of 4% would only be observed once every 63 years (but it has been observed on several days in 2008). Clearly, markets do not always behave rationally.

The question that naturally follows is whether this is necessarily bad. Some claim that bubbles might actually spur much-needed technological investment that can drive future growth. Furthermore, bubbles might just be part of the economic cycle of boom and bust. After all, household wealth took a $5 trillion hit with the implosion of stocks in the 1990s, without causing anything like the current crisis.

But this does not square with the common narrative of the post-2008 financial crisis. Paul Krugman has argued that what makes this time different is the concentration of risk in the financial sector. The reason the burst of the bubble caused so much damage to the economy was that banks had to repair their balance sheets and therefore curtailed lending, which caused the economy to contract and the governments to bail out banks in order to prevent further damage. More worryingly, these bail-outs came with few strings attached, so that banks have no incentives to avoid similar behavior in the future.

Is this what we are witnessing right now? By historical standards, price-to-earnings ratios are normal, but some analysts claim that these are unsustainable because profits are held artificially high by low borrowing costs. While the profit-to-GDP ratio has historically been at 6%, it is currently at 10%, and Smithers & Company, a London-based market-research firm estimates stocks are overvalued by forty to fifty per cent compared to historic values. Counterarguments cite lower taxes, globalization (profit-to-GDP ratios are inadequate as companies make much of their profit abroad), and high unemployment (that allows companies to cut payrolls) as reasons for the relative surge in profits.

It comes in the nature of a bubble that it is quite difficult to realize when one is in it. Prolonged periods of low interest rates and QE certainly bear the danger of providing excess liquidity to financial speculators. With sluggish growth, investors are sitting on large piles of cash and seek returns, which can prepare an irrational environment prone to the development of bubbles. Although the stock markets are high, the money supply remains low, and there does not seem to be the same sense of euphoria that we have seen during earlier bubbles. Furthermore, one has to remember that central bank policies often follow a Taylor rule of monetary policy, which is highly dependent on economic performance—low interest rates therefore indicate, above all, bad economic performance. For the moment, the danger of a financial bubble does not seem to be imminent, but both the President and the Chairman of the Federal Reserve are right to keep an eye on financial markets as the economy gathers pace.

Posted by: Marvin Gouraud

Sources: Harold L. Vogel (2010) “Financial Market Bubbles and Crashes”, Bloomberg, U.S. Census, Financial Times, Forbes, Wired, Huffington Post, The New York Times, The Guardian, The New Yorker, NBC News, Leir Center for Bubble Research, The Telegraph, CNN Money, The Economist, IMF, Federal Reserve, NewsDay.com

Photo credit courtesy of Maricel Cruz (edited)

The Decline of the “Supermajors”

oil sunset

On the surface, it appears that the “supermajors” are doing well as oil prices remain high and profits continuously flow in. The big five oil companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Shell—reported a combined $19.5 billion for their second-quarter 2013 profits last week. Exxon Mobil Corp., with a market capitalization of $414.55 billion was only recently taken over by Apple Inc. as the leading company at the New York Stock Exchange. The 2013 second-quarter results, however, also show signs of serious struggle: BP’s profit was down by 25 percent, Chevron’s 26 percent, ExxonMobil’s 57 percent, and Shell’s 60 percent compared to the same period last year. Even though oil prices are $100 per barrel or higher, the supermajors’ returns on investment are not what they used to be as they seem trapped in a “downward cycle” of spending more and producing less. The rise in capital expenditure across the sector coupled with the decline in supermajors’ reserve replacement ratios—a measure of the amount of oil discovered in comparison to production—accounts for this downward spiral.

The integrated supermajor international oil companies were created during the time of low oil prices in the late 1990s with the mergers of the “seven sisters”—Esso, Mobil, BP, Royal Dutch Shell, Gulf Oil, Chevron and Texaco. The seven sisters controlled about 85 percent of reserves in the 1950s. In stark contrast, over 90 percent of reserves today are controlled by national oil companies that used to rely on the technological expertise of the international oil companies to find, refine, and sell their oil. In 2012, national oil companies made up six of the ten largest producers of oil in the world. As most national oil companies have become self-sufficient in technological expertise and project management, they now own the majority of conventional reserves, which are some of the largest pools of oil and gas in easy-to-drill locations. Thus, the supermajors—no longer able to operate in large conventional reserves—are increasingly reliant on costly unconventional and deep-water oil reserves. It should not come as a surprise that oilfield operation costs are now at a record high. Even so, the supermajors are currently responsible for only 25 percent of capital spending in exploration and production: PetroChina, a national oil company, has superseded Exxon to become the world’s largest spender in exploration and production.

The opening up of unconventional natural-gas reserves in North America has made natural gas a quarter of the price of petrol, which is slowly being replaced in petrochemical plants as well as at the fuel pump. For most supermajors, natural gas accounts for more than 40 percent, and for Exxon as much as 50 percent, of production. Yet although the shale boom represents “a feast after years of famine” for the supermajors, the construction of expensive pipelines and liquefaction plants, and the possible glut of gas at the end of the decade might quell their appetite for the time being.

The decline in second-quarter profits for the supermajors has spurred yet another debate about fossil fuel subsidies. Many scholars argue that while such subsidies once supported incremental investment in a risky activity like exploratory drilling, technological advances and high prices of oil in recent years have reduced that risk. As Joseph Aldy of Harvard University states, “the U.S. government effectively transfers by way of tax expenditures more than $4 billion annually from taxpayers to fossil fuel producers.” According to Aldy, by allowing an oil and gas firm to hand off some drilling-related expenditures instead of depreciating them over the economic life of a well, the U.S. government is making an exception for the fossil fuel industry. Reuters reported that in 2011, the big three publicly owned U.S. supermajors—ExxonMobil, Chevron, and ConocoPhillips—paid relatively low federal effective tax rates, which were 13 percent, 19 percent, and 18 percent respectively, “a far cry from the 35 percent top corporate tax rate.” Whereas the U.S. subsidizes oil production, in developing countries most subsidies, which exceed U.S. subsidies, support consumption by lowering prices below market levels, increasing global consumption and hence higher market prices. According to the Natural Resource Defense Council, based on government data from around the world, ending fossil fuel subsidies would save governments and taxpayers $775 billion each year and would reduce global carbon dioxide emissions by 6 percent by 2020. While the fossil fuel subsidy debate ensues, in the meantime, the supermajors will be forced to streamline their portfolios and even “turn away from the oil that they prize so highly.”

Posted by: Sera Tolgay

Sources: ABC News, BP, Chevron, The Economist, Energy Information Administration, ExxonMobil, Financial Times, The Hamilton Project, Natural Resource Defense Council, Reuters, Shell

Photo credit: Great Ball of Fire courtesy of Flickr user nate2b

Reviving Entrepreneurship in America

hand drawn light landscape

There has been considerable concern regarding the current status of entrepreneurship in America. Overall, American entrepreneurs are producing less wealth than they have in the past. According to a recent study by Barclays, entrepreneurs in developing countries currently produce more wealth than their American counterparts. Demonstrating American entrepreneurs’ relative lack of entrepreneurial success, the same Barclays study determined that 21% of American millionaires cited business profits and sales as their primary source of wealth, as opposed to 58% of South American millionaires, 41% of European millionaires, 68% of South Africans millionaires, 48% of Middle Eastern millionaires, and 57% of East Asian millionaires.

The United States seems to engender a business environment that is favorable to entrepreneurial endeavors. For example, the world’s first venture capital industry was founded in America. In addition, American universities have ties to industries, creating additional opportunities for entrepreneurship. Open immigration policies have also historically contributed to entrepreneurial success in America. Even the American consumer culture is advantageous to developing entrepreneurial enterprises, as American consumers are generally willing and eager to test new products. However, today, entrepreneurs in America face certain challenges that largely result from burdensome taxing regulations and narrow immigration policies. Sam Graves, Chairman of the House Committee on Small Business, agrees. At a Committee hearing in May 2012 examining the state of entrepreneurship in America, Graves stated, “Entrepreneurship is a cornerstone of the American dream— having the freedom to take risks in order to chase your dreams and hopefully become successful and prosperous. The federal government should be encouraging this ingenuity which leads to job creation and economic growth, instead of impeding with more bureaucratic red tape.”

Regulatory red tape is especially detrimental to entrepreneurial opportunities, as federal taxes and regulations are disproportionally burdensome to small businesses. In the past four years, regulatory costs for small businesses have increased by almost $70 billion. The recession has also made it increasingly challenging for entrepreneurs and startups to find financial backing. In response, following the recession, crowdfunding has emerged as a prominent source of investment. As stated in the Crowdfunding Industry Report, “Crowdfunding shows to be a viable alternative for raising capital to fund small businesses and startups.” However, it is evident that regulations must be updated as crowdfunding and other novel forms of business financing continue to be embraced.

Realizing the significant role of immigrant entrepreneurs in America is imperative to revitalizing the U.S. economy. Over 40% of current Fortune 500 firms were founded by immigrants or their children. Furthermore, the National Venture Capital Association recently released a study demonstrating that companies backed by venture capitalists with at least one immigrant founder produce more IPOs and employment opportunities than they did before the recession. Congress is beginning to take notice of the value of immigrant entrepreneurs, proposing the possibility for “start-up visas.” This new class of visas would be available to foreign entrepreneurs who create at least five jobs through their business’s formation and also raise a minimum of $500,000 in investments from venture capitalists, angels, or other types of investors.

Clearly entrepreneurs are vital to the health of the American economy; entrepreneurs have consistently been integral to U.S. economic growth. In response to the struggling American economy, President Obama has placed significant emphasis on the concept of “middle-out” economics, which focuses on strengthening the middle class. As an added advantage, “middle-out” economics would simultaneously benefit American entrepreneurs. According to a study by the Kauffman Foundation, about 90% of American entrepreneurs are of middle or lower class origin. Therefore, if implemented effectively, Obama’s “middle-out” economic strategy would improve the state of American entrepreneurs, thereby strengthening the overall U.S. economy.

Posted by: Marjorie Baker

Sources: The Economist, House Committee on Small Business, Washington Post, Forbes, CNBC, the Kauffman Foundation, National Venture Capital Association

Royal Economics – or, why British taxpayers should celebrate the birth of a new prince…

Net Tax Revenue Royal Family

Whenever Buckingham Palace finds itself in the spotlight of global media attention, an ancient debate is revived, a debate that some experts estimate might be older than the monarchy itself: The debate of whether the royal family is still worth the taxpayers’ money in the 21st century.

At first, this might seem like a dispute that ought to be confined exclusively to British pubs, starring the Royals’ loyal supporters on one side and the isolated republican troublemaker on the other. Greatly diverging estimates of the costs attached to maintaining the Royal family can be exchanged  there, and then compared to the torrential flows of tourists who would have stayed at home were it not for the chance to catch the occasional glimpse of Queen Elizabeth II behind the windows of Buckingham Palace.

In these debates, the monarchists seem to have the edge over their subversive counterparts; for who could possibly argue that an average of GBP 42 million of Civil List payments (the Royal family’s annual income from the Treasury) in real terms over the past decade outweighs an added GBP 500 million in tourist spending on Royal castles, Royal towers, Royal mugs, and Royal mugs with Royal castles and Royal towers on them?

This squares well with 69% of British subjects agreeing that they would be worse off without the monarchy, against only 22% of unappreciative respondents in a 2012 survey by the Guardian. It is important to stress here that this argument is not based on the common misconception that the taxpayers receive about GBP 300 million from Royal assets every year. This income is generated by the Crown Estate, a collection of assets worth GBP 7.3 billion that has been surrendered to the Treasury by King George III as early as 1760 in return for a steady income through the Civil List.

Nevertheless, there is a case to be made to move the discussion out of the pubs and introduce economic reflection. So far, we have compared apples and oranges—government expenditure that has to be raised through tax revenue, and tourist spending, which needs to be taxed. This is like saying that it is reasonable for a simple employee to buy a GBP 40 million mansion because he just secured a GBP 500 million contract for his company.

Average Cost Royal Family

In order to answer the question, one has to make specific assumptions about how increased consumer spending will affect the economy. In traditional economic theory, an increase in demand for tourism represents an increased demand for exports. In a small open economy with flexible exchange rates and nearly perfect capital mobility, i.e. a country like the UK, an increase in export demand puts upward pressure on the interest rate, which draws in foreign capital. This increases demand for pound sterling on the foreign exchange market and therefore leads to an appreciation of the exchange rate until the pressure on the interest rate subsides. At this point, according to theory, the increased demand for tourism has been offset by a drop in exports (manufactured goods etc.) of the same magnitude. Overall, the output of the economy therefore remains unchanged.

Now what does this mean for tax revenue? Most tourist expenditures will be taxed at the VAT—so the tax revenue from increased spending on tourism is 20% of the increase in expenditure. At the same time, exports go down by an equal amount, but since exports are not usually taxed, tax revenue does not decline. While profits increase in the tourist sector, they decline in the export sector. Depending on gross profit margins in both sectors and the corporate tax rate, overall tax revenue therefore rises by slightly less than the VAT revenue due to increased tourist spending.

All of the following are assumptions within the framework laid out above and may be replaced by the reader in the attached Excel sheet.* The estimates have been chosen according to conservative estimates and available economic data. While most of the assumptions are self-explanatory, the fiscal multiplier can be used to assess the change in GDP due to an increase in domestic spending or an increase in export demand (both affect GDP and the exchange rate equivalently). In accordance with an econometric analysis by the IMF, it is here assumed to be zero—although an increase does not significantly change the results. Secondly, the VisitBritain estimate of the increase of consumer spending has been decreased by 30% because GBP 500 million in added tourist expenditure already include GBP 90 million in spending on admission to the Tower of London, Westminster Abbey, and the National Maritime Museum.

These figures include an estimated increase in consumer spending of GBP 413 million in 2011 due to the Royal Wedding, and an increase of GBP 243 million due to the Royal Baby. On the other hand, the wedding also increased security spending in 2011 by GBP 21.1 million. While this is a rough estimate, one also has to consider adverse incentives that reduce innovation and productivity increases in the export sector due to crowding out. Even without counting these long-term effects, it seems that the Royal Family is not worth the money.

Costs and Benefits

Obviously, these numbers will hardly impress staunch monarchists who have been supporting the Windsors for centuries—just like it will be difficult to convince die-hard republicans that the necessary inequality is acceptable as long as the Royals attract enough tourists. However, everyone can benefit from moving the argument beyond the exercise of shouting out the highest numbers in pubs. There is still cause for celebration: When everyone gets together and celebrates Royal weddings and babies, the monarchy heals Britain’s wounds of the financial crisis.

*Unless indicated as 2013 prices, the figures given refer to the respective year.

By: Marvin Gouraud

Sources: Centre for Retail Research, IMF, World Bank, The Economist, Yahoo Business, The Guardian, Slate, Intelligent Life, Reuters, Consultant-News, VisitBritain, The Telegraph, royal.gov.uk, European Commission, Office of National Statistics (UK)

A Generation at Risk: The Global Youth Unemployment Crisis

student protest

The world, according to the business leaders at Davos 2012, is “sitting on a social and economic time bomb:” global youth unemployment. Many leaders at the World Economic Forum’s meeting last year iterated that failing to employ the youth today amounts to a “cancer in society,” which not only affects economic growth now but will significantly stifle future growth. The figures have not improved since Davos 2012: as of last year  12.4 percent of people aged 15 to 24 worldwide were unemployed, which has increased to 12.6 percent in 2013. Now, young people are three times more likely to be unemployed than adults.

According to the International Labor Organization (ILO), in a global labor force of 3.3 billion, some 200 million people are unemployed, 75 million of which are between the ages of 15 and 24.  ILO’s Global Employment Trends for Youth 2013 report points out that the weakening of the global recovery in 2012 and 2013 has further aggravated the youth jobs crisis—youth unemployment increased by as much as 24.9 percent in the Developed Economies and European Union between 2008 and 2012. Both developed nations and emerging economies alike are struggling to create pathways to employment for their young citizens. Youth unemployment rates, which have continued to soar since 2008, are particularly high in three regions: Developed Economies and European Union, the Middle East, and North Africa. The lowest regional youth unemployment rates in 2012 were South Asia, with 9.3 percent, and East Asia at 9.5 percent. The highest were 28.3 percent in the Middle East and 23.7 percent in North Africa. In the advanced economies, the statistics are equally worrying.  In the European Union, the rate was at a 10-year high of 22.6 percent in 2012—with Greece at a staggering 54.2 percent and Spain at 52.4 percent—while  16.3 percent of the youth in the United States was unemployed.

Unemployment rates alone do not demonstrate the scale of the issue, given the 290 million young people more broadly classed as NEETs (not in education, employment or training). According to the Organization for Economic Co-operation and Development (OECD), 14.8 percent  of young Americans were qualified as NEETs in the first quarter of 2011, while the figure was 13.2 percent in the European Union. In the OECD area as a whole, one in six young people were without a job and not in education or training. The proportion of young people neither working nor studying illustrates how well economies manage the transition between school and work, which has become particularly problematic in developed economies.

The skills mismatch in youth labor markets is an underlying cause of this persistent and growing trend. McKinsey, a global management consulting firm, reported that in the nine countries that it studied (America, Brazil, Britain, Germany, India, Mexico, Morocco, Saudi Arabia and Turkey) 40 percent of employers were struggling to find candidates with adequate skills for entry-level jobs. In contrast, almost 45 percent of young people said that their current jobs were not related to their studies, and of these more than half viewed their jobs as temporary and said they were planning to leave. Another survey by Accenture found that in the United States, 41 percent of college graduates from the last two years had to take jobs that do not require a degree. The skills mismatch shows that over-education and over-skilling coexist with under-education and under-skilling.  This is particularly the case in most developed economies, where the job market is split between high-paying jobs that most workers are not qualified for and low-paying, low-skill jobs that do not provide a sufficient income.

Many economists think that such a systemic mismatch requires policymakers to reform rigid labor markets and implement education policies that would close the gap between the world of education and world of work. Creating vocational and technical programs and forging stronger relations between future employers and future employees are seen as remedies to ease the school-to-work transition. Germany, where apprenticeships and vocational training have long been the norm, has the second lowest rate (8.2 percent) of youth unemployment in the European Union. Such training programs, backed by a certification system, would allow employees to have skills transferable across companies and industries. However, only less than a quarter of education-providers offer similar practical courses involving hands-on learning in the classroom or training on the job.

It is also unclear if similar training programs would produce similar results in other countries, given that Germany’s export-driven economy is characterized by high-tech manufacturing, which employs many highly-trained manual workers. Thus, determining country-specific needs will be crucial for employing wide-ranging and well-targeted reforms. The ILO suggests that some labor market policies, such as targeting the employment of disadvantaged youth, promoting self-employment to assist potential young entrepreneurs, and implementing international labor standards ensuring that young people receive equal treatment at work, are necessary to revamp youth labor markets across countries.  Without significant reforms, it is estimated that there will be a global shortfall of 85 million high- and middle-skill workers for the labor market by 2020.Unless bold reforms are undertaken, many fear that the economic and social costs of long-term unemployment, discouragement and pervasive low-quality jobs will not only continue to undermine the growth of many economies but will also put a whole generation at risk.

By: Sera Tolgay

Sources: BBC News, Huffington Post, International Labor Organization, The Economist, Time Magazine, CNN, Business Week

Photo Credit: Paris January 15th, 2009 Student Protest courtesy of Flicker user frog and onion

Follow

Get every new post delivered to your Inbox.

Join 400 other followers