Aggregate Effects of Youth Unemployment

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The financial crisis of 2008 gave rise to alarmingly high levels of youth unemployment. In the European Union and the United States the youth unemployment rate reached 25 and 20 percent, respectively, but several countries were hit much harder. For instance, among the young in Spain and Greece, only about every second or third person had a job in 2009. Recent research documents that the individual losses to earnings for the jobless young are severe and very persistent, disappearing only after about 10 to 15 years. However, even such high costs likely understate the overall burden imposed by youth unemployment because they ignore spillover effects to the rest of the economy.The proposed research project aims to highlight and quantify channels through which higher youth unemployment results in long-lasting scars not only for the young unemployed, but also for the young employed, and also in adverse spill-over effects on older workers. The analysis will build on a life-cycle model of the labor market incorporating a key, empirically grounded, feature: workers with a different amount of experience (gained during employment) cannot perfectly substitute for each other in production. Increased youth unemployment therefore impacts all workers (not just the young or the unemployed) because it changes the relative abundance and of workers with different experience.Youth unemployment can therefore have negative aggregate effects which go beyond the individual scars documented in the data. How severe are these negative aggregate effects? How do they change over time as the affected cohort of young workers grows older? Do existing hiring and firing laws dampen or exacerbate the negative aggregate effects? The proposed project will be able to address such questions.