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The Impact of Young Workers on the Aggregate Labor Market

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  • Robert Shimer

Abstract

This paper estimates the response of the unemployment rate and labor force participation rate to exogenous variation in the youth share of the working age population, using cross-state variation in lagged birth rates as an instrumental variable. A one percent increase in the youth share reduces the unemployment rate of young workers by more than one percent, and of older workers by more than two percent, holding conditions in other states constant. It raises the labor force participation rate by about a third of a percent for young workers, and by much less for older workers, again ceteris paribus. These results are consistent with increasing returns to scale ('thick market externalities') in the labor market. Young workers are frequently mismatched in their employment, and firms create jobs to take advantage of this mismatch. Data on gross job creation and destruction in manufacturing support this theory. I also reconcile these results with existing evidence on the labor market impact of young workers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7306.

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Date of creation: Aug 1999
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Publication status: published as Shimer, Robert. "The Impact Of Young Workers On The Aggregate Labor Market," Quarterly Journal of Economics, 2001, v116(3,Aug), 969-1007.
Handle: RePEc:nbr:nberwo:7306

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  1. Sanders Korenman & David Neumark, 2000. "Cohort Crowding and Youth Labor Markets (A Cross-National Analysis)," NBER Chapters, National Bureau of Economic Research, Inc, in: Youth Employment and Joblessness in Advanced Countries, pages 57-106 National Bureau of Economic Research, Inc.
  2. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262540932, December.
  3. Steven J. Davis & Prakash Lougani & Ramamohan Mahidhara, 1997. "Regional Labor Fluctuations: Oil Shocks, Military Spending, and Other Driving Forces," JCPR Working Papers, Northwestern University/University of Chicago Joint Center for Poverty Research 4, Northwestern University/University of Chicago Joint Center for Poverty Research.
  4. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195060119, October.
  5. Robert J. Gordon, 1981. "Inflation, Flexible Exchange Rates, and the Natural Rate of Unemployment," NBER Working Papers 0708, National Bureau of Economic Research, Inc.
  6. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  7. Kenneth Burdett & Dale T. Mortensen, 1989. "Equilibrium Wage Differentials and Employer Size," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3), pages 411-448.
  9. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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