Young people and the labor market: key determinants and new evidence.

Brada, Josef C. ; Marelli, Enrico ; Signorelli, Marcello 等

INTRODUCTION

Unemployment has again become a major concern of policymakers in the wake of the recent economic crisis. In the world, total unemployment is expected to remain at elevated levels for many years to come. Moreover, young people have been particularly affected by the crisis and by the weak and uneven recovery that followed (ILO, 2014). In many European countries, the situation is particularly serious.

Almost everywhere, youth unemployment is much higher, often two or three times as high as the adult unemployment rate. The main reason for this is that young people, despite possessing, on average, higher educational levels, are endowed with fewer skills and are less experienced than their older peers. Another worrying feature is that about one-third of youth unemployment is long term. All this has implications for wages, career opportunities and unemployment incidence in later life, the so-called 'scarring effect' of youth unemployment.

In this introduction to the symposium on Young People and the Labor Market we briefly review the key theories and determinants of youth unemployment in the section 'Young people and the labor market: theories and determinants'. Here a cautionary note is proper. Although the symposium is on Young People and the Labor Market, we focus on youth unemployment because two papers deal explicitly with this subject. A third paper analyses the behavior of an indicator, NEET (not in employment, education or training), that is strictly related to youth unemployment. The last paper refers to the transitions from unemployment to employment. Thus, in the review section we will not consider other issues concerning young workers and the labor market. (1)

Then, in the section 'Young people and the labor market: New empirical evidence', we present some recent empirical evidence on youth unemployment and NEET, also providing a brief summary of the empirical investigations carried out in the four papers of the symposium. The section 'Conclusions and policy implications' concludes with the policy implications that can be drawn from the empirical studies.

YOUNG PEOPLE AND THE LABOR MARKET: THEORIES AND DETERMINANTS

Unemployment has been a major concern of society for many decades. Since the Great Depression of the early 1930s, leading economists such as John M. Keynes devoted their analyses to the investigation of the causes of this 'pathology' and to the search for appropriate policy measures. (2) In the last half-century a large literature sought to uncover the key determinants of changes in labor market performance over time and of the persistent differences in labor market performance among countries, especially among developed countries such as the United States, Japan and the European economies, and regions, including the impact of the recent financial crisis and Great Recession (Brada and Signorelli, 2012). On a macroeconomic level, unemployment is a waste of productive resources and, through the loss of human capital, it also dampens long-run growth and also threatens social cohesion. From an individual standpoint, it affects individuals' health and diminishes their well-being. In the case of young people, unemployment is even a more serious problem since it not only erodes human capital, but it also prevents the accumulation of work experience, producing negative effects on lifetime income and career possibilities. Ultimately, it raises the risk of young people being excluded from the labor market for the long term (Bell and Blanchflower, 2011), increasing the risk of the rise of a 'lost generation' of people who never enter the labor market (Scarpetta et al, 2010).

In the next section, we illustrate how youth unemployment has been affected by the Great Recession (2008-2009) and the financial crisis in the European countries. Here we focus on the main theoretical explanations of the differences across countries in the youth unemployment rate (YUR) and of the higher level of YUR compared with total unemployment rates (TURs).

Let us begin with some definitions. In most countries, youth unemployment refers to individuals aged 15-24 years although other ages are sometimes considered. Moreover, the size of the group of youth left behind can be also proxied by the number of young people who are neither employed nor in education or training (NEET) (see O'Higgins, 2012; Scarpetta et al, 2010).

The theories concerning youth unemployment are part of the broader theories explaining unemployment in general. At least three groups of determinants of unemployment can be identified (see Marelli et al, 2013). A first group of causes includes macroeconomic cyclical conditions. The link between the unemployment rate and GDP growth is the so-called Okun's law (see Knoteck, 2007, also in relation to the estimation methods). Already at this level we observe that Okun's coefficients do vary across countries and over time, the main reasons being the various economic structures and the differing institutions and policies (IMF, 2010). We shall come back to this issue in a moment. A final issue worth mentioning is that most empirical studies have confirmed the greater cyclical sensitivity of the YUR compared with the TUR, because of the lower qualifications, less experience and weaker work contracts among young workers than among older workers. In fact, in most empirical studies, Okun's coefficients turn out to be higher for young people. Hutengs and Stadtmann (2014) compute age-cohort and gender-specific Okun coefficients, as explained in the section 'Young people and the labor market: New empirical evidence'. Also Bruno et al (2014b), by focusing on NEET rates rather than the YUR, find that NEET rates are persistent and that the persistence increases during crisis periods.

A second group of variables that are significant in determining unemployment and labor market performance includes demographic, individual, social and structural conditions. (3) Demographic variables refer not only to the composition and natural movements of the population, but also to migration flows. Thus youth unemployment may be kept lower if young people can emigrate to other countries, as is recognized in the case of Ireland by Kelly et al. (2014). (4) Individual determinants include the preferences of workers. (5) Individual preferences, for instance, explain the growing labor market participation of females. During bad cyclical conditions, the 'discouraged worker hypothesis' explains why YUR may not increase to a great extent because of temporarily falling participation rates; young people in particular may decide to remain in, or even return to, education during recessions (Kelly et al., 2014). Social variables include the role of the family, ties with parents and barriers to regional mobility. Structural determinants refer to various variables, such as trade specialization of countries, the links between the financial sector and real economic activities, the degree of competitiveness and so on. To many observers, the most important single variable is the industrial structure because the economic specialization of countries influences the sensitivity of unemployment to cyclical conditions. The effect of changes in the economic structure on unemployment rates is also discussed in Hutengs and Stadtmann (2014).

The third group of variables, policies and institutions, is particularly relevant, since almost two-thirds of non-cyclical unemployment changes over time are explained by changes in such variables (OECD, 2006). In addition to labor taxes, unemployment benefits, unionization and collective bargaining, employment protection legislation and active labor market policies that influence the general level of unemployment, institutional variables specific for youth unemployment include minimum wages and the extent to which temporary contracts may be used. The consensus result of empirical studies is that employment protection legislation and lay-off regulations affect worker turnover and duration of unemployment more than they do the unemployment level, thus such regulations are more significant for younger than for older people. For a recent account of labor market institutions, see European Economic Advisory Group (2013), while the role played by changes in labor market institutions in transition countries is discussed in Bah and Brada (2014). Some other institutions relevant for youth unemployment include the education system and the school-to-work transition (STWT) processes (Quintini et al., 2007). From this point of view, a dual educational system, such as the one implemented in Germany, where apprenticeship plays a key role together with formal education, is probably the best way to reduce the youth experience gap and improve the employability of young workers (Brunello et al, 2007). Another possible cause of high youth unemployment and low quality employment is the mismatch between the knowledge acquired through formal education and the skills required by the labor market. Education is a key variable, and it has been found that it has more influence on labor market outcomes as the recession persists.

YOUNG PEOPLE AND THE LABOR MARKET: NEW EMPIRICAL EVIDENCE

The empirical evidence on labor market participation, employment and unemployment of young people is extensive and has grown over the past few years. We have already mentioned that YURs are much higher than TURs in all countries. This fact has attracted a number of empirical investigations (Freeman and Wise, 1982; Blanchflower and Freeman, 2000; Ryan, 2001; O'Higgins, 2001; Hammer, 2003; Quintini et al., 2007; Caroleo and Pastore, 2007). (6) Furthermore, young people have been negatively affected to a greater extent by the recent crisis. This is related to the greater sensitivity of youth unemployment to cyclical conditions. According to recent empirical studies, there are two characteristics of the Great Recession that have been particularly detrimental to young people: the financial origin of the crisis and protracted recessions or stagnation, especially in the Eurozone. (7)

Recent empirical evidence, see Table 1, shows that YURs were in 2013 higher by half compared with 2007 values even in the United States (15.5% versus 10.5%). The increase was even greater in the EU-28 (23.5% versus 15.7%). Some countries exhibit exceptionally high values in 2013, including Greece, 58.3%; Spain, 55.5%; Croatia, 50.0%; and Italy, 40.0%. The ratio between youth and total unemployment rates in Europe and in the United States is similar, a little above 2; but in some countries the ratio is closer to 3 as in Italy, Romania, Sweden, Croatia, Luxembourg and Belgium. Moreover, the NEET rate has increased in the EU: from 14.1 % in 2007 to 17.0% in 2013 if we refer to the age group 18-24 years, while the NEET rates relative to the 15-29 age group are only slightly lower. Exceptionally high values can be found in Italy, where the NEET is close to 30% or 26% for young people aged 18-24 or 15-29, Greece, Cyprus, Bulgaria, Croatia and Spain.

Recent empirical evidence is provided by the four papers in this symposium. Three of them have to do with level of unemployment reflected by the traditional YUR or the more innovative NEET rate. One contribution (Kelly et al., 2014) examines the flows within the labor market and, in particular, the transitions from unemployment to employment for young people. All the studies in the symposium concern European countries. Despite the different econometric approaches, the conclusions are consistent and bear significant policy implications, as we shall discuss in the section 'Conclusions and policy implications'.

In the first paper, Hutengs and Stadtmann (2014) compute age-cohort and gender-specific Okun coefficients for the Scandinavian countries over the period 1984-2011. Considering different age-cohorts, the finding of the empirical analysis based on a fixed-effects model for each country estimated through a panel least squares dummy variable model, LSDV, is that the absolute value of the Okun coefficient decreases for older cohorts relative to the coefficients for younger cohorts, and the highest impact of GDP fluctuations is seen in the youngest cohort (15-24 years). Moreover, the YUR of men reacts more strongly to changes in GDP because males are predominantly employed in more cyclical sectors than are females. This is evident from the fact that, in many countries, the recent economic crisis caused a much sharper increase in the male YUR because of the greater presence of males in the construction and manufacturing sectors, which were more affected by the crisis. A comparison between countries shows that Okun coefficients are higher in those Scandinavian countries more dependent on industrial activities, and they are consequently the lowest in Norway.

The macroeconomic determinants of youth unemployment are also investigated by Caporale and Gil-Alana (2014) in the second paper. Following the well-known literature on hysteresis models, the authors investigate the persistence of the unemployment series, and particularly the short- and long-term properties of youth unemployment. The econometric methods used include autoregressive and fractional integration as well as fractional cointegration; the latter is used to investigate the main determinants of youth unemployment. The key finding is that youth unemployment is highly persistent in all the 15 European countries examined from 1980 to 2005. Among the macroeconomic determinants, GDP and inflation have negative and significant coefficients, which can be interpreted in line with Okun's Law and the Phillips' Curve literature, although in this paper the relationship is with YUR and not with the TUR.

The third contribution is by Bruno et al. (2014b), who analyze the impact of the recent crisis on the NEET rates in the EU regions, the key determinant being GDP growth. They focus on changes in coefficients from 2000-2008 to 2009-2010 and employ GMM and bias-corrected LSDV dynamic panel data estimators; all models incorporate dynamic feedback to identify the degree of persistence in the dependent variables. There is also a comparison with YUR and overall unemployment rates. The use of unemployment at the regional level allows for highly detailed cross-sectional variation. Indeed, in many countries, labor market performance and also the impact of the crisis vary widely between regions, and thus some spatial effects are also investigated. The key findings are that NEET rates, besides responding negatively to GDP growth are persistent and that persistence increases over the crisis period. Moreover, NEET rates became considerably less sensitive to GDP growth during the crisis years, 2009 and 2010. The results vary depending on which of five regional groups is considered; regional groups (aggregating the 90 EU regions in the sample] differ mainly because of differences in labor market institutions. While the general result of lower sensitivity to GDP during the crisis period is primarily because of the predominance of Continental, mainly German, regions in the estimation sample, Southern EU regions exhibit the highest persistence and a smaller response to GDP fluctuations. Finally, the spatial approach shows that there is a significant positive spatial propagation of NEET rates across EU regions.

In the last paper, Kelly et al (2014), rather than focusing on the YUR, investigate the transition of young people from unemployment to employment by focusing on the Irish case and comparing the profile of transitions to work before the recession (2006) and during the initial recovery [2011], The characteristics investigated are the following: gender, age, nationality, educational attainment, geographic location and previous unemployment duration. The changes in transition rates have been assessed by using a number of decomposition techniques, such as the Fairlie model, non-linear decomposition model and the Oaxaca decomposition. The dramatic fall in transitions to employment that the authors detected in Ireland is not because of changes in the composition or the characteristics of the unemployed group, but rather to changes in the external environment. In fact, for youth, education and nationality have become more important for finding a job. In particular, high educational qualifications raised the likelihood of transitioning into employment.

CONCLUSIONS AND POLICY IMPLICATIONS

The studies in this symposium emphasize the importance of the linkage between output and unemployment as well as the higher sensitivity of youth unemployment to overall macroeconomic conditions (see Bruno et al., 2014b; Hutengs and Stadtmann, 2014). Thus, if we compare the long stagnation of many European countries, with a double-dip and even triple-dip recession in the 2007-2014 period, with the better performance in the United States, we can say that the austerity measures imposed by EU institutions to overcome the Eurozone debt crisis have been too deep and widespread, with harmful and disproportionate consequences for youth unemployment. The situation is even more worrying since, although a recovery will be possible in the future, the risk is that it will be once more a 'jobless' recovery (see ILO, 2014).

In addition to a change in institutional governance, macroeconomic policies should become more expansionary in order to reduce the overall and YURs, and policymakers should stimulate economic growth in the short as well as in the long run. (8) As for long run and structural policies, the risk of a 'lost generation' highlights the need to adopt effective active and passive labor policies and adequate STWT institutions, including educational, placement and training schemes, to minimize the increase in the number of young people losing effective contact with the labor market and permanently damaging their employment prospects. In other words, policymakers should implement appropriate labor market reforms, adopt generous active policies for the labor market that should be integrated with the necessary passive labor market policies. The need for active labor market policies, aimed at preventing short-term unemployment from becoming structural or long term, is for instance confirmed by the empirical outcomes of Caporale and Gil-Alana (2014). On the other hand, some papers, Hutengs and Stadtmann (2014) and Kelly et al. (2014), stress that in economies undertaking structural change, for example from construction and manufacturing to services, specific labor market programs are important to enable youth to acquire the skills and competencies required in these new sectors. Moreover, given the increased importance of education to employment transition probabilities during recession, policies should facilitate moving students from lower secondary school to intermediate and advanced vocational training and on to third-level education while paying attention to the risks of bad matching or overeducation.

Before ending this section it is appropriate, in view of the fact that all papers in this symposium refer to European countries, to mention the most recent EU policies to tackle youth unemployment. Within the comprehensive package of EU policy initiatives called 'Youth on the Move' (European Commission, 2010), the new youth opportunity initiative is designed to prevent early school leaving, help youngsters in developing skills relevant to the labor market, assisting young people in finding a good first job and ensuring on-the-job training. More recently, the 'Youth Guarantee' scheme requires Member States, following a 'welfare-to-work' approach, to put in place measures to ensure that young people up to age 25 receive a good quality offer of employment, continued education, an apprenticeship or a traineeship within 4 months of leaving school or becoming unemployed. Some doubts arise not only because of the limited resources available, but also because the success of these policies largely depends on the efficiency of bureaucracies and administrative systems widely differing among the EU countries. Moreover, they are oriented toward the supply of labor, while the current problem is mainly on the demand side. Innovative institutional, economic and labor policies, at different levels of government, are essential to halt the dramatic economic and social problem of high youth unemployment in the countries of the Eurozone. (9)

REFERENCES

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Brada, JC and Signorelli, M. 2012: Comparing labor market performance: Some stylized facts and key findings. Comparative Economic Studies 54(2): 231-250.

Brunello, G, Garibaldi, P and Wasmer, E. 2007: Education and training in Europe. Oxford University Press: New York.

Bruno, GSF, Choudhry, M, Marelli, E and Signorelli, M. 2014a: Youth unemployment: Key determinants and the impact of crises. In: Malo, MA. and Sciulli, D (eds). Disadvantaged Workers: Empirical Evidence and Labour Policies. Springer: Berlin-Heidelberg.

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(1) We note that, as for labor economics in general, the theoretical and empirical studies are either macro or micro oriented. Three papers in this symposium use aggregate data, but the paper on transitions uses micro data. Another distinction is the analysis of stocks or flows, and only the paper on transitions examines flows into and out of unemployment. Moreover, the focus here is on the unemployment condition and its persistence over time, not on other topics concerning youth and the labor market.

(2) In the United States, where unemployment reached a proportion as high as one quarter of the labor force, the fiscal policies of President Roosevelt helped to reduce it.

(3) This group of variables also reminds us that aggregate models are often unsuited to represent in an appropriate way the functioning of real labor markets that are characterized by dualism, heterogeneities and so on.

(4) In the case of educated people, the brain drain is harmful for the countries of origin because it reduces potential growth. In the past it mainly affected developing countries, but, after the recent economic crisis, it also affects many peripheral countries in Europe.

(5) Also a record of employment, for example in temporary jobs rather than permanent ones, plays a role in transitions from unemployment to employment (Dolado et al, 2013).

(6) This line of research also led to more work on the structural and cyclical determinants of youth unemployment (Bruno et at, 2014a; Marelli et al, 2013; Demidova et al, 2013; Choudhry et al., 2012; Demidova and Signorelli, 2012).

(7) In fact, according to Choudhry et al. (2012), financial crises may continue to affect youth unemployment up to 5 years after their onset.

(8) As for the key reasons of the Eurozone crisis and on the necessary innovative institutional and economic policies, see Marelli and Signorelli (2014a). Regarding macroeconomic policies, not only should EU fiscal rules (Fiscal Compact, Stability Pact etc.) be enforced in a more flexible way, otherwise the austerity measures mandatory for many countries at the same time contribute to the current stagnation situation. Moreover, monetary policy, which since 2012 has been able to calm financial markets after President Draghi's declaration 'we shall save euro whatever it takes' and the launch of the 'outright monetary transactions' plan, should become even more accommodating, for example following an approach similar to the quantitative easing program successfully implemented by the Fed in the United States over the last 5 years. Unconventional monetary policy is even more important in this moment when deflationary conditions tend to prevail. On the contrary, as we have seen in the previous section in discussing the paper by Caporale and Gil-Alana (2014), a bit of inflation is helpful in reducing unemployment.

(9) Otherwise the common currency, the euro, may disappear not only because of financial problems, such as high public debt, solidity of banks, functioning of the credit system and so on, but rather from the macroeconomic conditions of the member economies: recession and stagnation, deflation, high unemployment, especially among the youth and so on. Marelli and Signorelli (2014b) present some proposals for avoiding stagnation and persistent unemployment in the Eurozone.

JOSEF C BRADA [1], ENRICO MARELLI * [2] & MARCELLO SIGNORELLI [3]

[1] Department of Economics, Arizona State University, Tempe, AZ 85287-3806 USA.

E-mail: josef.brada@asu.edu

[2] Department of Economics and Management, University of Brescia, via San Faustino, 74/B, Brescia, 25122 Italy.

E-mail: enrico.marelli@unibs.it

[3] Department of Economics, Universita di Perugia, via A. Pascoli, 20, Perugia, 06123 Italy.

E-mail: marcello.signorelli@tin.it

Table 1: Youth unemployment, youth to total unemployment ratio and
NEET rates (2007 versus 2013)

                         YUR 15-24        YUR/TUR

Countries             2007    2013    2007    2013

EU-28                 15.7    23.5     2.2     2.2
Eurozone-18           15.4    24.0     2.1     2.0
Belgium               18.8    23.7     2.5     2.8
Bulgaria              14.1    28.4     2.0     2.2
Czech Republic        10.7    18.9     2.0     2.7
Denmark                7.5    13.0     2.0     1.9
Germany               11.9     7.9     1.4     1.5
Estonia               10.1    18.7     2.2     2.2
Ireland                9.1    26.8     1.9     2.0
Greece                22.7    58.3     2.7     2.1
Spain                 18.1    55.5     2.2     2.1
France                19.5    24.8     2.4     2.4
Croatia               24.0    50.0     2.4     2.9
Italy                 20.3    40.0     3.3     3.3
Cyprus                10.2    38.9     2.6     2.4
Latvia                10.6    23.2     1.7     1.9
Lithuania              8.4    21.9     2.0     1.9
Luxembourg            15.6    16.9     3.7     2.9
Hungary               18.1    27.2     2.4     2.7
Malta                 13.5    13.0     2.1     2.0
The Netherlands        7.0    11.0     1.9     1.6
Austria                8.7     9.2     2.0     1.9
Poland                21.6    27.3     2.3     2.7
Portugal              20.6    38.1     2.3     2.3
Romania               20.1    23.6     3.1     3.2
Slovenia              10.1    21.6     2.1     2.1
Slovakia              20.6    33.7     1.8     2.4
Finland               16.5    19.9     2.4     2.4
Sweden                19.2    23.6     3.1     3.0
The United Kingdom    14.3    20.5     2.7     2.7
Iceland                7.1    10.7     3.1     2.0
Norway                 7.2     9.1     2.9     2.6
The United States     10.5    15.5     2.3     2.1
Japan                  7.7     6.8     2.0     1.7

                         NEET 18-24     NEET 15-29

Countries             2007    2013    2007    2013

EU-28                 14.1    17.0    13.2    15.9
Eurozone-18           13.8    16.9    13.0    15.9
Belgium               14.4    16.0    13.0    14.9
Bulgaria              24.0    25.9    20.3    25.7
Czech Republic         9.3    11.8    11.6    12.8
Denmark                5.5     8.1     5.3     7.5
Germany               12.6     8.8    11.6     8.7
Estonia               11.2    14.5    11.6    14.3
Ireland               12.5    20.5    11.9    18.6
Greece                15.7    28.6    15.5    28.9
Spain                 13.6    24.0    12.8    22.5
France                13.7    14.6    12.6    13.8
Croatia               14.8    25.4    12.8    20.9
Italy                 20.1    29.3    18.9    26.0
Cyprus                12.7    27.1    10.3    20.4
Latvia                14.4    16.2    13.9    15.6
Lithuania              9.7    15.2    10.1    13.7
Luxembourg             7.3     6.7     7.3     7.2
Hungary               14.9    20.1    15.3    18.8
Malta                 11.1    10.1    13.7    11.3
The Netherlands        4.7     6.7     4.9     7.1
Austria                8.8     8.7     8.9     8.3
Poland                14.5    16.4    14.4    16.2
Portugal              13.6    18.8    12.7    16.7
Romania               16.0    21.2    14.8    19.6
Slovenia               7.8    11.5     8.2    12.9
Slovakia              16.1    17.8    16.9    19.0
Finland                9.7    12.6     8.4    10.9
Sweden                10.1     9.9     7.9     7.9
The United Kingdom    14.9    17.3    12.9    14.7
Iceland                4.6     6.6     4.6     6.4
Norway                 6.1     7.7     5.6     7.0
The United States      --      --      --      --
Japan                  --      --      --      --

Notes: YUR = youth unemployed (15-24 age group) as percent of the
corresponding labor force (employed +unemployed); TUR = TUR as
percent of the corresponding labor force; NEET (18-24 or
15-29) = young people (18-24 or 15-29 age group) neither in employment
nor in education and training as percent ofthe corresponding age
group population.

Source: Authors' calculations from the Eurostat database