Unemployment is bad for anyone, but really hard on the young. That’s because prolonged periods of worklessness in your late teens or early 20s scar you for life. As academic studies have shown, it can cause depression and affect earning potential for years to come. There is a clear link between poor mental health and being unemployed.

That’s why Alan Milburn’s probe into youth unemployment won’t be one of the government-commissioned reports that is quickly filed away and allowed to gather dust. It makes uncomfortable reading for ministers. The number of people aged 16 to 24 not in education, employment or training (Neets) is rising, and the costs of inactivity are increasing. Britain has a jobs problem, and it’s getting worse.

Milburn’s solutions to the issues he has identified in his interim report won’t be out until the autumn, but the trend is worrying. The overall unemployment rate across all age groups is 5%, but for those aged 16-24 it is 16.2% – up from 14.2% a year ago, and one of the highest in Europe.

In March 2026, there were more than one million Neets in the UK, an increase of 89,000 from a year previously. That’s partly due to an increase in the number of young people, but even accounting for demographics, the percentage of Neets aged 16 to 24 had risen from 12.5% in March 2025 to 13.5% in March of this year.

In recent years, the number of young people claiming inactivity-related benefits, where the claimant doesn’t have to look for work, has also been on the rise. Nearly one in nine 18 to 24-year-olds now fall into this category. There are reasons for this increase. As many people predicted would happen, closing schools and forcing young people to stay at home during the Covid lockdowns created an epidemic of mental health problems.

Milburn is calling for a system reset. It is hard to fault that conclusion when for every £25 spent keeping young people on benefits, only £1 is spent on employment schemes that would help them find work. The benefits system has cliff edges that mean disabled young people are deterred from looking for a job for fear of being worse off.

Yet the notion that young people are gaming welfare is for the birds. As the economist Michael Burke has pointed out, 46% of Neets don’t claim benefits, while a further 20% are so unwell that they receive state support without any requirement to look for work. Of the remainder, many of those on out-of-work benefits would like to find a job, but lack the hands-on support to do so. Burke also makes the point that while the percentage of Neets in the UK has been rising recently, it remains below its long-term average.

Punitive action designed to force young people into work would be counterproductive because it is attacking the problem from the wrong end. The way to reducing welfare spending on Neets is to get more young people into work. Cutting benefits is not the solution.

A genuine action plan requires an education system that better prepares young people for work. It involves managing migration so that businesses have more of an incentive to hire and train Neets. It also means investing more money in further education, a sector that has suffered heavily from budget cuts since 2010. Germany and the Netherlands, which have lower Neet rates than the UK, have far more extensive vocational training systems.

But getting the big picture right matters, too. A study last year found a distinct split between levels of happiness in northern and southern European countries. In northern Europe over the past decade people tended to get happier as they grew older, while in southern Europe unhappiness among young people fell. The study concluded that youth unemployment had fallen sharply in countries such as Greece, Italy and Spain in the years since they were at the centre of the eurozone crisis, and that better job prospects had led to improved wellbeing.

Current conditions in the UK are not so favourable. One factor pushing up youth unemployment is that demand for workers of all ages is weak. If the Bank of England raises interest rates in response to the higher energy prices that have resulted from the Iran war, even fewer jobs will be available. Recessions hit the young the hardest.

Recent tax changes have not helped either. One of the government’s least sensible decisions in the past two years was to increase employers’ national insurance contributions in the 2024 budget, a move that raised the cost of hiring workers. While it’s true that the vast majority of people under 21 are not eligible to pay employer NICs, the 18-20 age group enjoyed big real-terms increases in the minimum wage of 12.2% in 2024, and 12.7% last year.

According to the Institute for Fiscal Studies, the costs of hiring have risen most sharply in sectors where young people tend to work, such as hospitality. The recent pickup in productivity has been most evident in those sectors also.

It is too early to say whether the above-inflation increases in the minimum wage for the 18-20 age group is leading to higher youth unemployment. But in the current labour market conditions, it is probably not helping.

Labour made a pledge at the last election to equalise the minimum wage by the next election, but ministers are now thinking about a delay. Given the Bank of England’s reluctance to cut interest rates, that caution seems warranted. Businesses would be much better placed to pay higher wages to young people if the economy was running hot. At the moment, it is running tepid at best.

• Larry Elliott is a Guardian columnist