Societies under stress: why creating jobs for youth is vital

Since last year's Brexit and Donald Trump's election as US president, unpredictable politics was the major disruptor. But the underlying cause was the insecurity of the working class - adjusted for inflation, American median weekly earnings are today no higher than they were in the 1980s. Meanwhile, the CEO in an Indian IT firm earns 400 times the wages of his average worker.

We can trace this severe job disruption to the convergence of several forces - demographics, climate change, technology and policy neglect.

Our current business model centres on the post-war creation of a global supply chain that tapped global resources to feed American and European consumption. Technology enabled this supply chain to be built, first by "unbundling production from consumption", an insight of economist Richard Baldwin.

The arrival of IT and telecommunications in the 1990s created the second unbundling, distributing knowledge and technology around the world faster, causing convergence between the advanced countries and the emerging markets.

Baldwin thinks that the third convergence will be caused by cost reductions in moving people. But, as advanced markets age and become saturated in terms of consumption, the emerging markets are facing rising populations, rapid urbanisation and an inability of their governance model to adapt to new technology. The result is rising unemployment, especially among young people. When you add climate stress, food shortages, corruption and civil unrest, the outcome is war and spreading terrorism.

Europe is a rich region with an unemployment level of 8 per cent, roughly double that in the US. Worse, youth unemployment averages 19 per cent across Europe. The situation is creaking at the seams, stabilised only with welfare subsidies.

Europe's neighbours, moreover, are facing serious climate problems. The UN has already declared that large parts of Nigeria, Somalia, Yemen and Sudan are facing famine. Syria was previously a fairly rich country, but after four years of drought, civil unrest and regional interference led to civil war. The migration at the rate of over 1 million a year into Europe comes at a time when Europe is struggling with its own internal debt. With such social strains, European growth cannot recover as expected.

Inward migration will keep wages low, while the rise of robotics and artificial intelligence will cut the need for existing workers. In 2016, an Obama administration report estimated that just under half of existing jobs risk being eliminated over the next two decades. This doesn't mean jobs won't be created at the same time. In this so-called "gig" economy, more and more people are working independently and part-time.

The arrival of Uber and Airbnb has rebundled consumption and income. Consumption goods (cars and housing) are becoming sources of new income. Excess capacity is being utilised in the new sharing economy. But we have not yet found a way to use the excess capacity of labour.

The latest annual report by the Bank for International Settlements, published last month, warned about the rekindling of inflation. The real fear is stagflation - growth stagnation with consumer inflation that worsens social inequality.

The job situation is perilous in many countries. McKinsey estimated that 45 per cent of the global working-age population is underutilised, namely, unemployed, inactive or underemployed. Furthermore, more than 75 million youth are unemployed, many in areas with high population growth and low GDP income, and vulnerable to social unrest.

There is a generational gap in understanding the issue of job creation. The old supply chain benefited the large multinationals and local champions, at the expense of small and medium-sized enterprises. The establishment is owned by ageing baby boomers, whereas the start-ups are mostly the young.

Yes, many SMEs fail, but as the Silicon Valley (and even Shenzhen) experience has shown, their failure gave rise to new creativity and success at the next round. SMEs contribute to nearly half of gross domestic product and two-thirds of job creation. They are the real drivers of change.

We face three crucial imbalances. The regional imbalance occurs because the wealthy countries are ageing, whereas the poorer countries are still young. Within countries, the social imbalance stems from growing disparities in income and wealth. The job imbalance is even more skewed - the existing labour force fears retrenchment, whereas the young face intense competition for scarce jobs. These combine to create the swing towards populist and radical views for change.

It's time to focus policies on the young and their job creation.

This article first appeared in the South China Morning Post on July 7, 2017.The views expressed in the reports featured are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.