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The Blighted Youth: The Impact of Recessions and Policies on Life-Cycle Unemployment

Author

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  • Bernabe Lopez-Martin
  • Naoki Takayama

Abstract

We construct a theoretical model of labor markets with human capital accumulation to understand and quantify the earnings losses for young workers generated by unemployment: unemployment represents time forgone in terms of human capital accumulation, which adversely affects long-term income prospects of individuals. We show that lifetime earnings losses generated by job-displacement are larger for individuals with lower capacity to accumulate human capital and during an economic downturn, as documented in the empirical literature. At the aggregate level, the framework delivers youth unemployment rates that are higher and more sensitive to fluctuations in aggregate productivity than total unemployment rates. Additionally, in economies with a higher tax-wedge, unemployment rates are more sensitive to aggregate productivity shocks. A higher tax-wedge and minimum wage increase the long-term earnings losses produced by job-displacement, especially for low-skill individuals.

Suggested Citation

  • Bernabe Lopez-Martin & Naoki Takayama, 2015. "The Blighted Youth: The Impact of Recessions and Policies on Life-Cycle Unemployment," Working Papers 2015-22, Banco de México.
  • Handle: RePEc:bdm:wpaper:2015-22
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    More about this item

    Keywords

    aggregate fluctuations; directed search; unemployment; worker heterogeneity; life cycle; human capital.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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