The Wage Scar from Youth Unemployment

Abstract

In this paper we utilise the National Child Development Survey to analyse the impact of unemployment during youth upon the wage of individuals up to twenty years later. We find a large and significant wage penalty, even after controlling for educational achievement, region of residence and a wealth of family and individual specific characteristics. We employ an instrumental variables technique to ensure that our results are not driven unobserved individual heterogeneity. Our estimates are robust to the test, indicating that the relationship estimated between youth unemployment and the wage in later life is a causal relationship. Our results suggest a scar from early unemployment in the magnitude of 12% to 15% at age 42. However, this penalty is lower, at 8% to 10%, if individuals avoid repeat incidence of unemployment.

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