Recession's legacy: Lower earning power for young workers, weaker economy

OTTAWA – The loss of tens of thousands of youth jobs during the recession was not only painful for the young people involved but will impact them and Canada’s economy for years to come, says a new paper from TD Bank.

The report estimates that the legacy of unemployment for the young lasts up to two decades after the event and the hit to Canada’s gross domestic product will be about 1.3 per cent — or about $23 billion — in 18 years.

That’s fairly modest given the timeline, but the same can’t be said of some European countries that have seen unemployment among young people rise to above 50 per cent in the aftermath of the 2008-09 financial crisis.

For Ireland, the economy could suffer a GDP drain of about 12 per cent over the next two decades, the paper calculates, followed by Spain, Greece and Portugal among the hardest-hit European countries.

“Being unemployed at a young age can have a long-lasting impact on an individual’s career prospects” — a phenomenon known as “scarring” — the report, written by economist Martin Schwerdtfeger, states. It adds the economy also suffers from lost output and multiplier effects.

The estimates are based on studies showing that extended unemployment while starting out a career can negatively impact income levels for many years, even after individuals have found employment.

According to a British study, a period of unemployment ranging from seven to 12 months for workers in the 15-24 age group can, on average, cause a 10.9 per cent wage loss by the age of 33, and 7.6 per cent by the age of 42. A spell of unemployment lasting longer than a year can cause even more pronounced “scarring” later on.

While Canada never came close to youth unemployment rates experienced by some of the hardest-hit European countries, the increase was still more significant than for older workers.

Youth unemployment in Canada peaked at 16.4 per cent in July of 2009 from a pre-slump level of about 11 per cent. More than two years into the recovery, the rate remains elevated at 14 per cent, about twice the national average.

Using the same metric applied to the European situation, Schwerdtfeger estimates Canada will suffer a wage loss of $10.7 billion by the time youth employment is expected to return to pre-slump levels in about three years, and a $12.4-billion loss to GDP over an 18-year period.