The long-term effects of youth unemployment

Abstract

Using NLSY data, we examine the long-term effects of youth unemployment on later labor market outcomes. Involuntary unemployment may yield sub-optimal 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 semi-parametric 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. © 2006 by the Board of Regents of the University of Wisconsin System.