HOW TO VALUE THE POORER PROSPECTS OF YOUTH IN THE EARLY 1990s?

Abstract

Young workers in the 1990s can expect greater economic insecurity, as well as lower average earnings, compared to older workers, or compared to the youth of previous decades. The cost of greater insecurity depends upon an individual's probability of unemployment, marginal utility of income gains/losses and the extent to which individuals can smooth consumption over time by borrowing and drawing down assets. Since unemployment insurance cutbacks and higher unemployment have increased the risk exposure of youth, changes in the expected value of their income may understate utility losses as measured by the change in certainty equivalent income.This paper uses a behavioural microsimulation model to compare the impacts of 1971 and 1994 unemployment insurance legislation and unemployment rates in Canada. It calculates both the expected value of income changes and, using a Stone‐Geary utility function, the change in inequality of well‐being (as measured by certainty equivalent income) for youth and for prime age workers. Both calculations reveal that youth were disproportionately affected by Canada's changing labour market environment. Very few youth have enough assets to finance consumption during spells of unemployment.