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• Human Capital Investment: Would Higher-Order Skills Help Disconnected Youth?

Transcript

Tim Sablik: My guest today is Claudia Macaluso, a senior research economist at the Richmond Fed. Claudia, welcome back to the show.

Claudia Macaluso: Thank you so much for having me again. It's always a pleasure.

Sablik: We're going to be talking about a recent Economic Brief that you wrote examining disconnected youth in the United States. These are young people who are not employed, in school, or engaged in training. Based on the data that you looked at, what do we know about this population?

Macaluso: The phenomena of disconnected youth — or NEET, not in employment, education or training — is relatively large in the United States, especially for a developed economy like ours. In 2024, for example, about 12 percent of people age 16 to 24 were in this category. It tends to be more women than men. Black people are also overrepresented. This is true also if we expand the age categories up to 35 years, a looser definition of youth.

Apologies to all of our listeners who are above 35, including myself.

There [are] also [many] more people not in employment, education or training in rural areas. In fact, the peak is in rural areas, especially among minorities. Black men have about 30 percent rate of disconnection.

High school graduation is a bit of an inflection point. There's a system that follows youth through high school and that's where, if they were to fall off the wagon, that's when it happens. About half of disconnected youth have high school diplomas, but do not go far. They have no college degrees and they have no college experience at all.

Sablik: Thinking about inflection points or triggers, do we have any sense of what factors contribute to this disconnection?

Macaluso: The primary factors seem to be caregiving. About 54 percent — so a little over half — of disconnected young women and about a third of disconnected young men have this problem. They provide child care or face their own disabilities or that of an adult they live with. That is the root reason of their disconnection, their inability to access fully the labor market.

There are also other factors that certainly play a role, but they seem to be understudied, at least in economics. Certainly, there's a sense of nihilism that sometimes gets mentioned — the idea that there's nothing to do, there are no opportunities, nothing ever changes. There are some studies showing that it was also connected to the use of social media, which we know has increased among our youth. This is something that was emphasized by teachers, especially, in addition to social psychologists.

Something similar is what we call, sometimes, information deficits or information mismatches. This idea is going back to the fact that there are very deep inequalities in society that some pockets of society, especially minorities, may just not have the experience or the information that is needed to access jobs, to access education or training opportunities.

To put it simply, if your dad or your mom has never done it, or maybe there wasn't even a dad around, it's harder for a young person to imagine themselves in training, in education. This is something that we see with first generation college students, but it plays a role in other opportunities as well.

Then there are more economic factors. One is financial constraints that limit entrepreneurship, that limit mobility, especially in space. It takes a lot of money to go from one place to another for a job, but they also, of course, limit educational access to some extent.

Finally, one thing that disconnected youth themselves mention very often is poor labor market conditions. This is what interacts with that nihilism aspect that I mentioned at the beginning because sometimes the poor labor market conditions are real — there is, in fact, a downturn, but sometimes they're more perceived. So, it mixes a little bit of the perceptions, maybe that lack of information and the actual struggle in the economy.

Sablik: Why is the Fed interested in this population and, relatedly, what led you to start researching this topic?

Macaluso: I actually prepared a lecture to high school teachers. This was a meeting that the Richmond Fed organized with Baltimore-area econ teachers. This is part of a series on continuing education that the Fed organizes for multiple decision-makers, including teachers. This is a way to engage with the community to provide economic education at different levels. So that's how the specific of this one piece happened.

From a more general point of view, we all know that the Fed has a dual mandate: price stability and full employment. Of course, full employment has these components of those who seek jobs and look for jobs and do not find them, which we call unemployment, but also the components of workers who may just sit on the side and not participate in the labor market, the participation component. Disconnected youth is part of this participation margin — it's those people whom we think are just starting their experience in the labor market, but they don't want to seek education, they don't seek jobs or training.

I personally have always also been interested in human capital and human capital formation, human capital accumulation and depreciation at various stages of life. I think it's the most accessible form of wealth that can also propel people towards social improvement [and] economic improvement over the course of a few generations. If we do have a high rate of disconnection, we are stopping that ladder of economic improvement over generations. That's something that concerns me, personally, but also from an economic point of view.

There's this joke. It's an economist joke, so no one is going to laugh. [Laughter] At the beginning of the Ph.D. program, the one principle that your instructors try to drill into you is that there are no free lunches. People don't just leave opportunities on the table. They don't leave money on the table. Therefore, society doesn't work like we leave things on the table. But in the case of disconnected youth, that's exactly what we are doing. We are picking our societal priorities, leaving some human capital potential on the table. That seems to be just a waste.

Sablik: Thinking about how to pick up that untapped potential, have economists identified any solutions for re-engaging disconnected youth?

Macaluso: I think we have some good recommendations, some good evidence, but certainly some more research is needed.

One thing that I want to point out is that all of this depends on the availability of good quality data and high-frequency data so that we can observe people in their labor market experience, not once every four years.

There are some really interesting studies about mirroring and examples. What do I mean by that? There's a series of papers very suggestively titled "An [Community College] Instructor Like Me," "A Community Developer Like Me, "A Professor Like Me." For young people in general, but especially for young people at risk of disconnection after high school, having instructors or teachers or sport mentors, adult figures in their life that look like them in terms of race, in terms of socioeconomic background in general, seems to have a big impact. This may be that information or even a psychological aspect to it — I can now imagine myself being a teacher because I had a teacher that looked like me. But if all teachers look very different, then it's an alien experience. It's something I can't quite figure out.

There's also some more work on information sharing. One of my colleagues here at the Fed, Katka Borovičková, has done a study of high schoolers in Minnesota and shown that the more the high schoolers' peers talk about college and decide to go to college or apply to college, the more I am inclined to do so.

Then there's the part which I think needs more research and where the cost aspect becomes important, which is human capital interventions. Very often we hear about those early in life, but there are others also later in life that can be quite important. This is something I'll touch on.

One of the challenges that came out of that meeting with teachers is that these kinds of students, the ones that are at risk of disconnecting after high school, are not typically motivated by your "bread and butter" academic approach. The human capital interventions need to take a bit of a different approach in targeting, perhaps, different skills that can be valuable in the labor market but are not perceived as stale or useless by the students themselves.

Sablik: Yeah, definitely wanted to pick up on that. It was something that you focused on in your Economic Brief article — the role of human capital interventions.

As you mentioned, a lot of these programs have been focused on early childhood, based on a lot of research that shows that those are highly effective and have long-lasting benefits. So, when we talk about disconnected youth in their teens or 20s, are there still opportunities for effective interventions?

Macaluso: The body of work that focused on early childhood came out of a need to evaluate some of those programs which, in many other countries which are not the United States, are actually quite taken for granted, especially in Europe where the universal preschool, for example, is the law in many, many countries. In the United States, however, there was a different approach in which preschool was not universally established and most of the education happened at home. That's compounding the potential inequalities from different socioeconomic backgrounds.

There was a huge body of work — especially [by] Jim Heckman, who won the Nobel Prize for it — showing that early childhood intervention can really change the economic outcome of a person. While that is true, that led us to a bit of a fallacy. Early childhood intervention — I'm talking before kindergarten — has the highest return, but that doesn't mean all the other returns are zero. They're lower, but they're not low. So, if you think that the access to these preschool programs — Head Start is an example — is not universal, then you would want to do something else.

There's good research that shows that up to age 25 or so, many skills can be taught. This actually makes a lot of sense because we know that the human brain is not fully formed until your mid-20s, especially some areas of the prefrontal cortex develop later.

Sablik: You also mentioned thinking about other approaches to human capital development. What other types of interventions or training could be helpful?

Macaluso: One of the things that has been very interesting in this literature on human capital is the study of different types of skills. The beginning of the literature was looking at skill as an unidimensional thing — you're either high skilled or low skilled, you either have this IQ or smartness or you don't. But as we started studying the effect of skills on the labor market, we also started understanding that there are different aspects to intelligence. We have basic skills — say, numeracy and literacy — and then you have higher order skills. These higher order skills sometimes are described as grit, initiative, and collaboration, so the ability to work with others. These are more multidimensional. Sometimes they're called softer skills.

There are two things about these softer skills. One is they could be a good door into the hearts and minds of these disconnected youth. They might resonate a little bit more than a traditional approach. They're also more adaptable to interventions that reflect the current technological scenario, like using social media, using artificial intelligence. So, I think this could be a good way to go.

There's also good evidence — it mostly comes from Europe, but there's also been some experiments in California — that show that these skills can be taught. My favorite paper actually comes from Germany, and they divided high schoolers in their junior year between a group that was assigned a special course on financial literacy and financial education, and one that instead read about good financial planning, instead of having a role-playing game. They found that the first program, the one that had a role-playing component, increased not just their ability to make good decisions. They followed people for 15 years after their high school [and] they also increased their test scores and wages. They demonstrated better decision-making. They were better at waiting and dealing with frustration and setbacks. Those are the kind of skills that I think could both help in the labor market and motivate perhaps disconnected youth.

All of this is somewhat contingent on a basic level of literacy and numeracy — if you cannot read, none of this is accessible to you. For those type of skills, there's overwhelming evidence that we know what to do, and what to do is increase instructional time, lower class sizes, and guarantee good teachers and a good teacher-to-student ratio. This can be achieved typically by endowing schools with more money so that they can improve lecture quality.

For the other skills, it's sort of work in progress. But I have hope that the more we research it, the more we can get positive outcomes for disconnected youth.

Sablik: What do you think are the key lessons for policymakers that they can take away from all this research?

Macaluso: The overwhelming message of the literature is that schools and teachers matter. I don't know if it's a popular or unpopular opinion, but the truth is that giving money to schools, giving money to instruction [and] good quality public education is the number one way to deliver human capital to workers.

The other one, I think, is a bit more nuanced, and I talked a little bit about it in my EB. It's the idea of not thinking of students, or youth in particular, as simply a recipient of our interventions, but trying to develop those higher order skills by developing that grit, developing that initiative, that agency themselves. The way we intervene is the way we teach those particular skills: working together, advocating for yourself, bouncing back after a setback.

In the complex world that we live in and for the complex problems that these students are facing, I think a different approach is needed. The first step, in my opinion, will be to involve the population you're targeting in the change itself.

Sablik: Yeah, I thought that was a really interesting point from your article, and I definitely encourage listeners to go check that out. We'll include a link to it in the show notes.

Claudia, thanks so much for joining me today.