Modeling the employment decisions of young men and women in nine European countries: An application of random utility theory and revealed preference

Abstract

In this paper we examine the decisions of over 15,000 young adults aged 18–35 from nine European countries to choose employment over unemployment or remaining in education. Instead of focusing only on who makes those decisions as is typically done, we attempt to answer the question of why a particular decision is made. Using data from the Cultural Pathways to Economic Self-sufficiency and Entrepreneurship (CUPESSE) project, we estimate a series of country and gender-specific conditional logit (CLGT) models adjusted for individual work values, soft skills, demographic characteristics and local labor markets. We find that young women in Czechia, Germany, Greece, Hungary and Italy and both men and women in Spain and the United Kingdom, respond to exogenous wage offers providing some evidence for job search theory and for the reservation wage hypothesis. Our uptake rate simulations show that a 10% increase in wages have the potential to increase employment by as little as 2 percentage points in the UK and by as much as 14 percentage points in Czechia and Spain. Further, if unemployment benefits are also simultaneously reduced by 10% employment increases in these latter countries by 20 and 17 percentage points. We demonstrate the ways that revealed preference (RP) analysis can aid policy makers through strength of preference, uptake rate and willingness-to-pay applications.