The scars of youth: Effects of early‐career unemployment on future unemployment experience

• DOI: http://doi.org/10.1111/ilr.12079
• Author: Matthias UMKEHRER,Achim SCHMILLEN
• Date: 01 December 2017
• Published date: 01 December 2017

International Labour Review, Vol. 156 (2017), No. 3–4

Copyright © The authors 2017

Journal compilation © International Labour Organization 2017

* World Bank, Washington, DC, email: aschmillen@worldbank.org. ** Institute for

Employment Research (IAB), Nuremberg, email: matthias.umkehrer@iab.de. The authors would

like to thank Joachim Möller, Joshua Angrist, Stefan Bender, Philipp vom Berge, David Card,

Bernd Fitzenberger, Hans-Jörg Schmerer, Michael Stops, Mariana Viollaz and Till von Wachter

as well as conference and seminar participants in Bayreuth, Bonn, Boston, Freiburg, Göttingen,

Halle, Kallmünz, Malaga, Mannheim and Nuremberg for their helpful comments and sugges-

tions. The ndings, interpretations and conclusions expressed in this article do not necessarily

represent the views of the World Bank, its afliated organizations, its Executive Directors or the

Governments they represent.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

The scars of youth: Effects of early-career

unemployment on future unemployment

experience

Achim SCHMILLEN* and Matthias UMKEHRER**

Abstract. Does early-career unemployment cause future unemployment? The au-

thors approach this question using German administrative matched employer–

employee data that track almost 700,0 00 individuals over 24 years. Instrumenting

early-career unemployment with rm-specic labour demand shocks, they nd

signicant and long-lasting “scarring effects”. In the mean, each additional day

of unemployment during the rst eight years on the labour market increases un-

employment in the following 16 years by half a day. However, quantile regressions

show that the scarring effects are much stronger for individuals who already suf-

fer from lengthy and repeated spells of unemployment.

A

ccording to the ILO (2015), almost 74 million people aged 15 to 24 were

looking for work in 2014: youth unemployment rates remained high

across all regions of the world and many countries were likely to experience

a substantial increase in youth unemployment in the coming years. In addition

to arguments about the direct costs associated with youth unemployment, this

situation has raised concerns among politicians and pundits about the emer-

gence of a “generation jobless”. The popular argument is that “people who

begin their careers without work are likely to have [...] greater odds of future

joblessness than those who don’t” (The Economist, 2013, p. 12). Indeed, a num-

ber of theoretical models explain that if early-career unemployment delays the

accumulation of productive skills and knowledge or prevents the formation

International Labour Review466

of tight employer–employee matches then unemployment might “exhibit true

state dependence”. In other words, unemployment early in the professional

career might then causally lead to more unemployment later in life.1

Ultimately, the question of whether common fears are justied and early-

career unemployment actually causes future unemployment can only be an-

swered empirically. In this study, we approach it with administrative matched

employer–employee data that contain the universe of social security records

in Germany. We detail the dynamics of unemployment during a professional

career and document that unemployment is highly persistent. Moreover, we

reach the conclusion that this persistence is due to true state dependence

(at least to an extent that is economically signicant). According to our pre-

ferred specication, on average and ceteris paribus, every day of unemployment

during the rst eight years of the professional career induces an additional

half-day of unemployment during the subsequent 16 years. Furthermore, the

“scarring effect” of early-career unemployment varies considerably across the

(conditional) distribution of prime-age unemployment. It is strongest in its

right-hand tail: at the median, an additional day of youth unemployment leads

to an increase in prime-age unemployment of less than 0.2 days, but at the 95th

percentile each day of early-career unemployment induces more than two-and-

a-half days of prime-age unemployment, ceteris paribus. These numbers imply

that the long-term scarring effect of youth unemployment is not only statistic-

ally signicant but also economically important.

From our administrative matched employer–employee data, we extract

the complete employment biographies of almost 700,000 men who graduated

from Germany’s dual education system between 1978 and 1980.2 This system

combines apprenticeship in a rm with vocational education at a school into

one course. In our view, it is an ideal institutional environment to study the

effects of early-career unemployment, not only because the majority (around

60 per cent) of young people enter the German labour market through the

dual education system, but also because apprentices constitute a fairly homo-

geneous group in regard to their experience, training and background and

because by focusing on the system’s graduates we avoid problems caused by

unobserved initial conditions (see Hoffmann, 2010).

Our data make it possible to identify the exact time and place of labour

market entry for all individuals and to track them for every day of the rst

24 years of their professional careers. We exploit the full longitudinal dimen-

sion of the data to investigate the medium- and long-run scarring effects of

youth unemployment. More specically, we examine whether an individual’s

total amount of unemployment during the eight years after graduation inu-

ences the overall duration of unemployment spells in the subsequent 16 years.

1 If “unemployment [...] alters preferences, prices or constraints that determine, in part, fu-

ture unemployment”, Heckman and Borjas (1980, p. 247) call this true state dependence. On state

dependence in the context of youth unemployment, see also Ellwood (1982).

2 We concentrate on men because data problems make it conceptually difcult to extend

the analysis to women (see Appendix A).