Youth Unemployment Rate and Impact of Financial Crises

The purpose of this paper is to assess the impact of financial crises on the youth unemployment rate. We consider different types of financial crises (systemic banking crises, non-systemic banking crises, currency crises and debt crises) and different groups of countries, according to their income level. After a review of the existing (theoretical and empirical) literature on the determinants of the youth unemployment rate in general and at the occurrence of economic crises, we present empirical estimations on the impact of past financial crises on young workers. We investigate the relationship between financial crises and youth unemployment rate (YUR) by employing fixed effects panel estimation on a large panel of countries (about 70) around the world for the period 1980-2005. The "persistence" over time of the impact is also investigated. Finally we estimate the Arellano-Bond dynamic panel, confirming the significance of the results. According to our empirical estimates, two key results are relevant: (i) financial crises have an impact on the YUR that goes beyond the impact resulting from GDP changes; (ii) the effect on the YUR is greater than the effect on overall unemployment. The inclusion of many control variables – including in particular GDP growth – does not change the sign and significance of the key explanatory variable. Our results suggest that financial crises affect the YUR for five years after the onset of the crises; however the most adverse effects are found in the second and third year after the financial crisis. Although we are fully aware of the peculiarities of the last crisis, we believe that our econometric results facilitate a better understanding of the impact of the 2007-08 financial crisis on the youth labour market. The main policy implication is that effective ALM (active labour market) policies and better STWT (school-to-work transition) institutions are particularly needed to reduce the risk of persistence and structural (long-term) unemployment, since young people have been worst affected by the last crisis. There are many studies on the characteristics and causes of youth unemployment; considerable research has also been carried out into the labour market impact of financial crises. This paper brings the two strands of literature together, by econometrically investigating the impact of financial crises on YUR.