Lessons learned from the OECD

Spotlight: Are baby booms necessarily employment busts? No

The post World War II OECD baby boom offers lessons on how to absorb large youth cohorts into the labor market. What groups are most affected? What policies help youth most? Do bad policy choices cause more damage to youth employment prospects than large youth populations?

OECD youth unemployment is due to weak demand and bad policy and not the baby boom

1) One year after the end of World War II and for about twenty years thereafter, the G7 countries experienced a surge in the birth rate relative to period s before and since. As a result, there was an unusually large share of youth entering the labor force from the mid 1960s until the early 1980s with the peak occurring between 1967 and 1973 (Figure 1). Since then, the youth share of the labor market has fallen steadily. One might expect that youth in the baby boom cohorts would have had much more difficulty finding work than would the relatively small youth cohorts entering the labor market in the 1990s. However, the opposite is true: average youth unemployment rates across the G7 countries are 7 percentage points higher than during the peak of the baby boom. In contrast, adult unemployment rates in the G7 countries have risen less than 2 percentage points.

2) Youth unemployment rates did rise modestly as the baby boom cohort entered the labor market. But while larger youth cohorts experience higher unemployment rates, youth unemployment rates in OECD countries are affected much more by the overall strength of the labor market.[1] Youth unemployment is extremely sensitive to the business cycle: they benefit greatly when labor demand is increasing, but they suffer disproportionately when the economy is in recession or growing slowly. One lesson derived from the OECD experience is that even a modest deterioration in the strength of labor demand, as measured by the rising unemployment rate for older workers in OECD countries, has caused much greater difficulty in the youth transition from school to work.

The less educated and minority youth have the greatest problems with unemployment

3) Are youth receiving too much education so that they become overqualified for the jobs that are available? No. Evidence suggests that it is the least educated that face the greatest mismatch between skills and job vacancies. In almost every industrialized economy, average unemployment rates fall as years of schooling increase. Nor does job training tend to reduce the disadvantage faced by the less educated. The gap in access to jobs continues as the cohorts age because it is the most educated who get the most job training. College graduates in the OECD are 7 times more likely to receive training than are high school dropouts. Similarly dramatic gaps in access to training exist between the highest and lowest literacy groups.

4) Unemployment rates are uniformly higher for minority youth in OECD countries (Ryan, 2001). Such groups are atypically disadvantaged by recessions and by policies that tend to limit new job creation. They are also atypically disadvantaged in education completion which exacerbates any disadvantages related to discrimination faced in the labor market. In France, where government statistics do not recognize ethnicity, youth unemployment rates in predominantly ethnic urban enclaves are around 40%, nearly double the already high French average youth unemployment rate.

High youth unemployment can cause them and the country permanent harm

5) Does early unemployment cause permanent scarring of youth, resulting in employment difficulties later in life? Answers vary. In the United States, most studies find that spells of unemployment after leaving school do not result in persistent unemployment later in life. This corresponds to relatively high transition rates from unemployment into employment: 46% of unemployed youth are employed one month later. Corresponding transition rates in France, Germany and the United Kingdom are much lower, ranging from 4 to 14%, and there is more evidence that early unemployment results in persistent unemployment in those countries. One-third of the unemployed in France have been unemployed over one year compared to 8.5% in the United States. In France, the persistent adverse effects of early unemployment on later employment stability can last seven years compared to two in the United States.[2] The degree of persistence appears to respond to business cycles with less permanent damage from early unemployment in economies experiencing job growth. In addition, the scarring effect of early unemployment tends to be greatest for the least educated and disadvantaged youth. [3]

6) Weak youth labor markets tend to delay other transitions. In Europe, the average age at which youth leave the home has increased, especially in southern European countries. In Italy, 80% of malkes aged 18-30 still live with their parents compared to 25% in the U.S.. Across OECD counmtries, the average age of marriage has increased while the average number of children per household has fallen. Weakening youth labor markets have at least a partial role to play in explaining these changes in life transitions. Youth tend to delay leaving their parents’ homes during recessions. Differences in the relative strength of country youth labor markets can explain observed differences across countries in the average age of home leaving.[4] In Germany and Spain, the likelihood of leaving home increases significantly with youth employment status and labor earnings.[5]

7) When youth face constraints in their access to legal employment, they may engage in illegal activities. Studies based in the U.S.A. and the U.K. have shown that weakening wages for low skilled youth are correlated with increases in criminal activity.[6] Less consistent evidence exists linking long-term youth unemployment with crime, although discontent with high rates of youth unemployment in minority communities has been cited as a contributing factor to the weeks of rioting in various French cities in November 2005. One recent study, also based in France, shows that cities with higher youth unemployment have higher rates of burglaries, thefts and drug offences.[7]

Efforts to protect job security do not help and may hinder youth

8) The youth unemployment problem appears to be exacerbated by policies aimed at preserving jobs. Many countries have enacted Employment Protection Legislation (EPL) that makes it more difficult or costly for firms to lay off workers. These policies are designed to insure workers against income loss from fluctuations in labor demand. However, such legislation also makes it more costly for firms to hire workers, and so stricter EPL tends to depress the rate of new job creation.[8] These adverse consequences of EPL are borne most by groups that are disproportionately first-time job seekers, and so youth tend to be atypically disadvantaged.[9] Because EPL appears to retard new job creation, it can also exacerbate the persistent effects of early unemployment on employment prospects later in life. Stricter employment protection legislation does not appear to create unemployment problems for older workers and may even insulate them from competition with younger workers, as shown in Figure 2. However, in both eras of large and small youth cohorts, Figure 2 shows that stricter EPL is correlated with higher youth unemployment rates.

9) Similar findings hold for legislation that diminishes wage flexibility such as high minimum wages or policies that extend union negotiated wages to nonunion workers. Such policies reduce wage inequality across workers, but risk making it too expensive to hire those lacking schooling or prior labor market experience. The OECD (2004) reports that many of the countries with the strongest youth labor market outcomes over the past 15 years (Ireland, the Netherlands, New Zealand, U.K., U.S.A.) have tended to be those that experienced rising wage inequality. The implication is that wage flexibility has helped these economies to adjust to shocks and to create new job opportunities for youth, but at a cost of increased income disparities in the population.[10]

10) Countries with stronger EPL have experienced growth in temporary and fixed term jobs that are frequently exempt from firing restrictions (OECD, 2004). This allows new job growth to occur, but it creates a dual labor markets with protected jobs held predominantly by “insiders” (older male workers) and temporary jobs held by “outsiders” (women, minorities, and youth). Insiders have an incentive to maintain and expand employment protection which protects their jobs at the expense of youth and other outsiders. Perhaps that is why all but a few countries have found it so difficult to relax the employment protection, even when their youth unemployment rates are so high.

Efforts to fix the youth labor market have mixed success

11) OECD countries have used various policies to try to fix the youth unemployment problem. One option that appears unsuccessful is to try to “make room” for youth employment by encouraging older workers to retire. The limited evidence suggests that older and younger workers may be complements and not substitutes in production. Countries with higher retirement ages for men and women have higher employment rates for male and female youth.[11] Similarly, efforts to limit hours of work in order to force firms to hire additional workers in France appear not to have resulted in appreciable job growth.

12) The average OECD country spends around 2% of GDP on active labor market policies, with training being the largest component of those expenditures. However, public expenditures are about one-tenth of the total, and private training is weighted heavily toward the most educated. Private training is unlikely to offer a significant second chance option for those who failed to attain a sufficient level of prior education. Publicly subsidized training tends to have the greatest success with more educated recipients. Nevertheless, the experience of youth training programs in Europe suggests that they have been successful in improving transition into employment, although impact on earnings is more mixed.[12] Of other active labor market policies, job search assistance and wage subsidies appear to be the most promising for raising employment rates of disadvantaged youth, but public employment programs have not worked. Evidence also suggests that youth are more successful in transiting to employment in countries where unemployment benefits are conditioned on active job search and willingness to accept jobs when offered.[13]

13) The bulk of the evidence suggests that the large baby boom cohorts did not result in serious problems for the transition into steady employment. In fact, the large cohorts, particularly if highly skilled, can be a positive for economic growth. The access to skilled labor can induce skill-using technological change (Acemoglu, 2002). Baby booms can also influence intergenerational transfers, although not necessarily in sustainable ways. OECD countries made their old-age security systems more generous (younger retirement ages, better access to medical treatment, and rising real value of pensions) as the baby boom entered the market. As the baby boom retires and fertility rates declined, those old-age security systems may prove a drain on the economy due to the tax overhang. Countries are faced with raising taxes, reducing benefits or both. In addition, as large cohorts exit the labor market, they may create political pressure for further social transfers at the expense of new labor market entrants.

References

Acemoglu, Daron (2002) “Technical Change, Inequality, and the Labor Market.” Journal of Economic Literature 40: 7-72.

Bertola, Giuseppe, Francine D Blau, Lawrence M Kahn (2005) “Labor market institutions and demographic employment patterns.” Universitá di Torino, mimeo.

Blanco, Almuden and Jochen Kluve (2002) “Why not stay home: Nest-leaving behavior in Western Europe.” University of California, Berkeley, mimeo.

Blanchard, Olivier and James Wolfers. (2000) “The role of shocks and institutions in the rise of European unemployment: the aggregate evidence.” The Economic Journal 110: C1-C33.

Blau, Francine D. and Lawrence M. Kahn. "Institutions and Laws in Labor Markets." in Ashenfelter and Card eds. Handbook of Labor Economics Vol 3A, Chapter 25. 1999.

Burgess, Simon and Hélène Turon (2005) “Unemployment Dynamics in Britain.” Economic Journal 115: 423-448.

Burgess, Simon, Carol Propper, Hedley Rees and Arran Shearer. (2003) “The class of 1981: the effects of early career unemployment on subsequent unemployment experiences.” Labour Economics 10:291-309

Card, David and Thomas Lemieux (2000), "Adapting to Circumstances – The Evolution of Work, School and Living Arrangements among North American Youth", in D.G. Blanchflower and R.B. Freeman (eds), Youth Employment and Joblessness in Advanced Countries, NBER: Chicago University Press.

Fougère, Denis, Francis Kramarz, and Julien Pouget (2003) “Youth Unemployment and Crime in France.” IZA Discussion Paper no. 2009.

Gould, Eric, Bruce Weinberg and David B. Mustard (1998) “Crime Rates and Local Labor Market Opportunities in the United States.” Review of Economics and Statistics 74:100-106.

Grogger, Jeffrey. (1998) “Market Wages and Crime.” Journal of Labor Economics 16:756-791.

Jimeno, J.F. and Rodriguez-Palenzuela. 2002. “Youth Unemployment in the OECD: Demographic Shifts, Labour Market Institutions, and Macroeconomic Shocks”. FEDEA. Working paper.

Kletzer, Lori G. and William L. Koch (2004) “International Experience with Job Training: Lessons for the United States.” In O’Leary, Straits and Wandner eds. Job Training Policy in the United States Kalamazoo, MI: Upjohn Institute.

Kluve, Jochen. (2006) “The Effectiveness of European Active Labor Market Policy.” IZA Discussion Paper no. 2018.

Korenman, S. and D. Neumark. 2000. “Cohort Crowding and Youth Labor Markets: A Cross-National Analysis”. in D.G. Blanchflower and R.B. Freeman, eds., Youth Employment and Joblessness in Advanced Countries, NBER: Chicago University Press.

Machin, Stephen and Costas Meghir (2000) “Crime and Economic Incentives.” The Institute for Fiscal Studies Working Paper no. 00/17.

Martin, John P. and David Grubb (2001) “What works and for whom: A review of OECD countries’ experiences with active labour market policies.” OECD Working Paper 2001:14.

Neumark, David and William Wascher, 1999. "A Cross-National Analysis of the Effects of Minimum Wages on Youth Employment," NBER Working Papers 7299, National Bureau of Economic Research, Inc.

Nickell, Stephen and Richard Layard. "Labor Market Institutions and Economic Performance" in Ashenfelter and Card eds. Handbook of Labor Economics Vol 3C, Chapter 46.1999.

OECD (2004) Employment Outlook Paris: OECD.

Ryan, Paul (2001) “The School-to-Work Transition: A Cross-National Perspective.” Journal of Economic Literature 39: 34-92.

[6] Gould et al (1998), Grogger (1998), Machin and Meghir (2000),

[8] Blanchard and Wolfers (2000). Nickel and Layard (1999) and Blau and Kahn (1999) provide comprehensive reviews of the literature on how labor market institutions affect the labor market.

[9] Jimeno and Rodriguez-Palenzuela (2002).

[10] Neumark and Wascher (1999) found that minimum wages had the most severe effects when imposed in combination with other employment protection rules.