Abstract
This paper investigates whether the early experience of non-employment has a causal impact on workers’ subsequent career. The analysis is based on a sample of low educated youth graduating between 1994 and 2002 in Flanders (Belgium). To correct for selective incidence of non-employment, we instrument early non-employment by the provincial unemployment rate at graduation. Since the instrument is clustered at the province-graduation year level and the number of clusters is small, inference is based on wild bootstrap methods. We find that one percentage point increase in the proportion of time spent in non-employment during the first two and a half years of the career decreases annual earnings from salaried employment six years after graduation by 10% and annual hours worked by 7% (unconditional effects). Thus, any policy that prevents unemployment in the first place will be beneficial. In addition, curative policies at the micro level may be required, depending on the actual cause of the scar.
Highlights
High levels of youth unemployment are a great concern for policy makers, especially since the start of the Great Recession (Bell and Blanchflower 2010)
Based on a very rich database combining survey with administrative data, we focus on a representative sample of low educated school-leavers graduating in Flanders in the 1994– 2002 period and evaluate the impact of the early experience of non-employment on a range of later labour market outcomes: hours worked and earnings for salaried public and private sector employment as well as indicators of salaried and self-employment
The main identification problem is the presence of unobserved individual characteristics that may affect labour market performance as well as the incidence of early non-employment. This introduces an endogeneity problem in that the relationship between the early experience of non-employment and later labour market outcomes may be driven by individual unobservables rather than causality. We address this problem by means of an Instrumental Variable (IV) approach, where the provincial unemployment rate at graduation is used as instrument for early non-employment
Summary
High levels of youth unemployment are a great concern for policy makers, especially since the start of the Great Recession (Bell and Blanchflower 2010). This implies assuming that the scars of graduating in downturns for the low educated are determined exclusively by early non-employment This assumption is consistent with the results of Cockx and Ghirelli (2015), who find that, for the low educated, the unemployment rate at graduation entails a persistent negative effect on hours worked and earnings but not on wages. This means that the low educated who graduate in downturns experience longer periods of nonemployment at the start of the career, and this has repercussions in the long-term. The bootstrap F statistic is the critical value of the F(1, G − 1) distribution that corresponds to the bootstrap P-value of the t statistic of the instrument in the first stage.
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