Mroz, Thomas A., and Timothy H. Savage. 2006. “The Long-Term Effects of Youth Unemployment.” Journal of Human Resources 41(2): 259–293.
Using NLSY data, we examine the long-term effects of youth unemployment on later labor market outcomes. Involuntary unemployment may yield suboptimal investments in human capital in the short run. A theoretical model of dynamic human capital investment predicts a rational “catch-up” response. Using semiparametric techniques to control for the endogeneity of prior behavior, our estimates provide strong evidence of this response. We also find evidence of persistence in unemployment. Combining our semiparametric estimates with a dynamic approximation to the lifecycle, we find that unemployment experienced as long ago as ten years continues to affect earnings adversely despite the catch-up response.
Thomas A. Mroz is a professor of Economics at the University of North Carolina at Chapel Hill and the Carolina Population Center; tom_mroz@unc.edu. Timothy H. Savage is a researcher with the ERS Group, tsavage@ersgroup.com. The authors are grateful to Donna Gilleskie and David Guilkey for their valuable comments on prior drafts. They thank Brian Surette for his FORTRAN code and Alex Cowell for supplementary state-level data on schooling expenditures and tuition costs. Tetyana Shvydko provided excellent research assistance. Many useful comments on earlier drafts came from seminars at Duke, UNC, the Stanford Institute for Theoretical Economics, the World Bank, the Federal Reserve Bank of New York, the University of Iowa, and Yale. The authors take responsibility for any remaining errors. The Employment Policy Institute provided partial funding for this research project. The confidential GEOCODE NLSY data used in this article are available to other researchers if they apply to the Bureau of Labor Statistics. The application to obtain the GEOCODE can be obtained at www.bls.gov/nls/geocodeapp.htm. The authors would be happy to provide guidance to another researcher pursuing use of these data.