Labor-Market Institutions and Long-Term Effects of Youth Unemployment

Graduating from a school during a time of adverse economic conditions has a persistent, harmful effect on workers' subsequent employment opportunities. An analysis of panel data from OECD countries during the 1960-2010 periods reveals that a worker who experiences a 1 percentage point higher unemployment rate while the worker is 16-24 years old has a 0.14 percentage point higher unemployment rate at ages 25-29 years and 0.03 percentage points higher at ages 30-34 years. The persistence of this negative effect is stronger in countries with stricter employment protection legislation. A composite index for labor-market rigidity is constructed and the index is shown to have positive correlation with the persistence. Moderating macroeconomic fluctuations is more important in countries that have more persistent labor-market entry effects on subsequent outcomes.