Youth unemployment: A review of facts and institutions

AutorFrancesca Fazio
CargoPostdoctoral Fellow at the «Marco Biagi», Department of Economics at the University of Modena and Reggio Emilia
Páginas103-128

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1. Introduction

Youth have been more and more at the centre of the public debate of the recent years, complicit the fact that, starting from 2009, the economic crisis hit younger generations disproportionally and almost six years later still exhibit its persistent effects on their labour market prospects. Different data manifestly show the increasingly difficult conditions of young people. From the widespread high youth unemployment showing no sign of decreasing, to the discouraged youth seeing no prospects and postponing their entrance either in the active society or in school and university, to the demographic pyramid showing youth shares wearing thinner and thinner, the balance is rather grim for youth.

If the crisis has exacerbated young difficulties in the labour market and, more in general, in the society, the roots of this phenomenon go back far beyond the crisis, being structurally embedded in the cultural, economic and institutional characteristics of the countries. Young people hard times are often compared (and sometimes opposed) to the conditions of other generations, adults and elderly in particular, that, though strongly affected by the economic crisis, is proving to be more resilient, given a (generally) stronger safety net provided by greater stability and protection. Adding to this, the ageing population is putting pressure not only on public finances, mining the robustness of social security systems and welfare states, but also on the fundamental inter–generational solidarity. In this view, the present contribution aims at providing a picture of youth labour market conditions six years after the start of the crisis, also showing trends in the institutional determinants of youth unemployment in 21 OECD countries, in order to shed light on the long-term institutional factors hindering (or vice versa improving) youth labour market outcomes, with a focus, besides traditional labour market institutions, on the role of school–to–work transition.

2. International stylized facts

Starting from the ‘90s, young people in the industrialized countries have been facing increasing difficulties in the labor markets compared to the previous decades, culminated in the recent economic crisis, which caused the youth unemployment rate to increase more than double of that of adults, and that, according to statistics, is still higher than pre–crisis levels almost everywhere.

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As Figure 1 shows youth unemployment rate varies greatly across countries, ranging from 8% in Germany to over 50% in Greece (2012)1.

Youth unemployment is dangerously high in Southern European countries, especially in Spain (53% in 2012) and Greece (55%), but also in Italy (35% in 2012, it reached 40% in September 2013) and Portugal (38%). Conversely, youth unemployment is lower than 10% in Germany (8%), Austria (8,7%), Norway (8,6%), Switzerland (8,4%, source: OECD) and the Netherlands (9,5%) and below 20% in Finland and Belgium, while it is slightly higher than 20% in the United Kingdom (21%) and France (24,5%). In other developed non-European countries, youth unemployment rate in 2012 was 11,7% in Australia, 14,3% in Canada, 7,9% in Japan, 17,7% in New Zealand and 16,2% in the United States (source OECD.Stat Extracts, http://stats.oecd.org/).

Figure 2 shows youth unemployment rates in 2012, compared to 2007. Almost six years after the start of the crisis, most of these countries still register youth unemployment rates higher (up to 4 times) the pre-crisis level (brown colored countries), with the notable exception of Germany (in yellow), where youth unemployment in 2012 was even lower than in 2007 and Austria, where it was equal to pre-crisis level. Across non European industrialised countries, only in Japan youth unemployment is returned to pre–crisis level. On the contrary, in the majority of the other countries youth unemployment is still from two to four times higher than before the crisis. As a consequence, long-term unemployment rate (over 12 months) both for youth and at the total level soared in many countries from 2007 to 2012 (Figure 3), though with some exceptions.

Figure 3 – Long-term unemployment rates (15-24 years old and total). 2007 - 2012

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In 2012, compared to 2007, longer cues out of employment are to be found almost everywhere, with the notable exception of Norway, Finland, Austria, the Netherlands, Belgium and Germany, where young and total long-term unemployment rates are equal or lower than pre–crisis levels.

The share of long-term unemployment represents an important signal of the degree of labour market dynamism, i.e. the extent to which people can easily exit from the status of unemployment and find a new job. Dynamism in this sense is important for keeping skills updated and avoiding scar, stigma effects and discouragement. Since youth are yet to start their careers, it is therefore crucially important for them to avoid long periods outside employment. During the crisis, however, dynamism collapses due to decrease in the demand of labour by firms, pushing up long–term unemployment2.

As Figure 3 shows, long–term unemployment for youth is generally much lower than total levels, obviously because youth have just entered the labour market, and also because of higher youth mobility, driving them to change job more frequently, to move to an other city more easily and therefore to experience shorter unemployment spells. However, some exceptions can be found. In fact, differently from other countries, in Italy and Greece youth are not less likely to be long–term unemployed than the average, registering instead similar shares of long–term unemployment.

As explained in the literature review, large consensus exists on the fact that young people have been hit the most by the crisis because of larger share of temporary contracts compared to adults and older workers. Notwithstanding this general evidence, it is possible to identify differences across countries in the extent to which youth have been disproportionally affected.

Figure 4 – Youth and adult unemployment rates and youth relative ratio. 2012

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Figure 4 shows youth and adult unemployment rates (bars) and the ratio between the two rates (red squares) in selected OECD countries in 2012. The already noted wide heterogeneity in youth unemployment rates is comprehensibly mirrored in the adult unemployment data, as a signal of structural and macroeconomic differences among the labor markets and the economies, however, some differences exist. Looking in fact at the youth relative unemployment rate, i.e. at the ratio between young and the adult data, what emerges is the negative Italian record (overtaken by Sweden), where young people are over four times more likely to be unemployed than the adult counterpart. On the contrary, at the top of the inter-generational equality one can find Germany, representing the only case where youth unemployment rate is nearly equal to that of adults.

3. Determinants of youth unemployment

Some determinants of youth conditions in the labour market can be considered as structural, being not directly connected to cyclical factors, but being instead inborn to the condition of youth or to the aggregate economy (macro-structural factors). Demographics has been considered as a central structural determinant of youth unemployment3. Even though this is not the case today, since most developed countries are rather facing a dramatic ageing of the population and a reduction of the youth relative cohort–size, the baby boomers era economic literature included demographics as one of the causes of youth unemployment. The fact that the more young people are in the labour markets and the more jobs will be needed to accommodate them has been extensively explained. Other structural reasons for youth unemployment and joblessness’ seem to be deeply–rooted in the youth age. In this view, key structural factors could be the high mobility and short job tenure (low-seniority) of the young, also linked to the fact that young people are generally hired on a temporary basis, becoming more sensitive to the economic cycle according to the «last–in, first–out» mechanism. Moreover, the long permanence of youth by family’s household is connected to lower job mobility which is, in turn, connected to higher equilibrium unemployment.

Besides structural causes, one of the most important determinants of youth unemployment, as well as of the overall level of unemployment, is the economic cycle.

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Indeed, notwithstanding the fact that the business cycle affects overall unemployment, there is strong consensus on the observation that youth are disproportionally hit in economic downturns and youth unemployment is one of the most highly sensitive variables in the labour market. Other than general economic conditions and age– specific characteristics, labour market and educational institutions have been mainly addressed to explain the wide heterogeneity existing across countries, as well as the disparity between youth and adults labour market conditions. In what follows it will be shown from a descriptive point of view how countries differ, from an institutional side. The analysed variables will then serve as explanatory variables in the empirical analysis in order to assess more firmly their role for youth unemployment.

3.1. Shape of labour market institutions: regulation, policies and industrial relations

Differences in labour market performances across countries can be better explained «structurally», by looking at their institutional frameworks4. The...

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