IZA World of Labor

Do youths graduating in a recession incur permanent losses?

Penalties may last ten years or more, especially for high-educated youth and in rigid labor markets

Ghent University, Belgium, and IZA, Germany

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Elevator pitch

The Great Recession that began in 2008–2009 dramatically increased youth unemployment. But did it have long-lasting, adverse effects on the careers of youths? Are cohorts that graduate during a recession doomed to fall permanently behind those that graduate at other times? Are the impacts different for low- and high-educated individuals? If recessions impose penalties that persist over time, then more government outlays are justified to stabilize economic activity. Scientific evidence from a variety of countries shows that rigid labor markets can reinforce the persistence of these setbacks, which has important policy implications.

An increase in unemployment at ages 15–24
                        has persistent effects under high employment protection

Key findings

Pros

High-educated youth graduating during a recession incur a moderate, but long-lasting loss in earnings.

High-educated youth get locked into lower-quality jobs, especially in rigid labor markets.

Strict employment protection legislation and other rigid worker protections induce more unemployment and reinforce the persistency of losses.

Low employment protection for fixed-term contracts and high employment protection for regular contracts increase the likelihood of unemployment and churning between short-term jobs.

Cons

The earnings of low-educated youth entering the labor market in a recession fall considerably in the short-term, but the penalty dissipates quickly.

High-educated unlucky cohorts can eventually catch up if the labor market is sufficiently flexible.

A high minimum wage shields low-skilled youth against a wage penalty, while other worker protections reduce immediate negative impacts on employment and hours worked.

High-educated youth are less affected in terms of employment and hours worked, irrespective of labor market flexibility.

Author's main message

In flexible labor markets, low-educated entrants are harmed by economic downturns, but the penalties are short-lived. High-educated youth are less adversely affected, but the penalties persist longer. It takes about ten years for young cohorts that enter the labor market during a downturn to catch up to cohorts that did not. In rigid labor markets, however, while low-educated entrants are better shielded in the short term, both low- and high-educated workers never make up their earnings losses. Macroeconomic stabilization policies should be complemented by policies that aim at combining more job flexibility with job security.

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