Finding a job is not significantly harder for young people: what is important is staying in the job. And the relatively low employment rates of older age groups are less a result of early retirement than the fact that workers over the age of 50 who have lost a job are discouraged from going back into the labour force.
These are among the findings of research by Sekyu Choi, Alexandre Janiak and Benjamín Villena-Roldán, which explores the reasons why both unemployment and labour market participation rates in the United States vary so dramatically over the lifecycle. Their study, which is published in the December 2015 issue of the Economic Journal, has direct implications for the design of policies aimed at reducing unemployment among specific age groups, including unemployment insurance and retraining programmes.
Explaining why workers of different ages experience different rates of joblessness has important implications for many policy questions. Should unemployment benefits be age dependent? Should labour regulations differ by age? And are social security regulations providing the right incentives for deterring or encouraging retirement?
The researchers tackle the question using the idea that unemployment and labour market participation rates are intimately linked to the chances of moving between three different labour market states: employed (with a job); unemployed (without a job but searching); and inactive (no job and not searching).
For example, unemployment rates among the young (25 or less) are significantly higher than for the rest of the workforce. Is this because younger workers have a harder time finding a job? Is it because they can lose a job more easily? Or is it because they drop out of the labour force (become inactive) for other endeavours?
The study analyses data from the US Current Population Survey (CPS) to answer these questions in a precise way. By following workers across consecutive months, it is possible to compute the probability of going from any labour market state to any other. The researchers estimate these probabilities by age and gender, and use them to learn how much of the observed lifecycle unemployment and participation patterns can be accounted for by specific transition probabilities.
The results stand in stark contrast to conventional wisdom. For example, though it is popular in the press to claim that youth unemployment is high because youngsters cannot find a job easily, the data actually show that this is mostly a consequence of the larger rates of employment exit to unemployment and inactivity for this group of the population. This means that finding a job is not a significantly harder task for the young compared with the prime aged. What is relevant is staying in the job.
Similarly, while it is common to claim that early retirement is the main reason behind low participation rates of workers older than 50, the study shows that this is not the case: the culprit is the fact that workers who have lost a job after age 50 are discouraged from going back into the labour force.
These results have a direct implication for policy, the researchers conclude:
”If we want to reduce the unemployment rate of specific age groups – young, first-time job searchers or older, close to retirement workers – or increase the labour market participation of others, we need to understand the magnitudes and direction of transition probabilities at different ages. These include inactivity-related transitions that are often neglected in most theoretical analysis.
”The design of policies, such as unemployment insurance and retraining programmes, should carefully consider the incentives that affect the relevant labour market transitions at play.”
”Unemployment, Participation and Worker Flows over the Life-Cycle” by Sekyu Choi, Alexandre Janiak and Benjamín Villena-Roldán is published in the December 2015 issue of the Economic Journal. Sekyu Choi is at the Universitat Autonoma de Barcelona. Alexandre Janiak and Benjamín Villena-Roldán are at the Universidad de Chile.