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References

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1

We are grateful to Petya Koeva Brooks for her guidance on the project. We would also like to thank Shekhar Aiyar, Céline Allard, Larry Ball, Helge Berger, Olivier Blanchard, Rodolphe Blavy, John Bluedorn, Jörg Decressin, Prakash Loungani, Paulo Medas, Mahmood Pradhan, and other IMF colleagues, and seminar participants at the European Commission and the European Central Bank for their insightful comments. We are grateful to Xiaobo Shao and Katherine Cincotta for their excellent assistance with research and document preparation respectively.

2

For example, there is evidence that Latvian emigrants during the crisis were slightly younger and slightly more educated than the average population (Hazans, 2011, Blanchard et al., 2013). Arpaia et al. (2014) show that a quarter of immigrants are in the age group of 15–24 years old, and 40 percent are in the age group of 15-29 years old.

3

Henceforth, youth refers to individuals aged 15–24 years, and adults refer to individuals aged 25–64 years. Unemployment refers to the unemployment rate.

4

The youth labor force tends to be smaller than that for other age cohorts because young individuals may choose to pursue full-time education, although participation in education does not necessarily exclude participation in the labor force (e.g., part-time work or apprenticeships). The youth labor market is also characterized by frequent search and matching as individuals look for better jobs, using intermediate stages for accumulating experience (and perhaps, occasionally, dropping out of the labor force).

5

Top areas of economic activity for adults vary more by country. The dominant ones are human health and social work activities, wholesale and retail trade as well as manufacturing.

6

The unemployment ratio is defined as the unemployed as a share of total population.

7

The NEET referred to in this paper is the definition adopted in most European countries (Eurofound, 2012). In the United Kingdom (Coles et al., 2002; McGregor et al., 2006) and in New Zealand (Hill, 2003), the NEET mainly capture teenagers. The Japanese definition of NEET refers to people aged 15–34 years old who are not in the labor force, not attending school and not housekeeping (OECD, 2008a), while in Korea NEET refers to people aged 15-34 years who have left school, are not preparing to enter a company, do not have a job, do not have family responsibilities (or children) and are not married (OECD, 2008b).

8

The OECD’s Product Market Reform indicator is only available every five years. We therefore focus on the Goods Market Efficiency: Competition sub-indicator compiled from the Global Competitiveness Report and the cost of starting a business from the World Bank Doing Business Indicators.

9

See Ball et al. (2013) for an extensive discussion on this topic and theoretical derivation of the reduced form relationships in (1) and (1a).

10

Bassanini and Duval (2006) estimate a reduced-form equation consistent with a variety of theoretical models of labor market ui,t = Σj βj Xj + χGi,t + αi + λt + εi,t equilibrium (job search, wage setting), where unemployment is regressed on a series of structural variables (in vector X), an output gap measure (G), as well as country and time fixed effects. We depart from this specification by including interaction terms and excluding time fixed effects (equation 2).

11

SMEs are defined as firms with less than 250 employees, turnover of less than 50 million euro or a balance sheet less than 43 million euro.

12

Even in those cases, some studies have found that the Okun’s law holds for measures of hours worked. For instance, instead of layoffs, German companies resorted to a decrease in average hours worked per worker (Reisenbichler and Morgan, 2012).

13

Not surprisingly, the magnitudes differ somewhat from Ball et al. (2013) because our analysis focuses on specific age groups of the unemployed.

15

Young workers may not be entitled to full unemployment benefits given their short employment histories. However, OECD (2006) finds a negative impact of generous unemployment benefits on youth employment that is comparable in magnitude to other age cohorts.

16

We rely on the OECD gross replacement rate measure due to its availability for a longer period of time (1983-2011, on a biannual basis).

17

These results are in line with some recent studies—labor market duality has been associated with lower youth employment rate in a sample of 17 OECD countries over 1960–1996 (Bertola et al., 2007), and flexible labor market is found to help improve youth labor market outcomes (OECD, 2006, and Choudhury et al., 2012a).

18

The rating is on a scale from 1 (least protection) to 6.

19

This result is based on the OECD’s indicator on union density which measures the incidence of unionization among the employed, but does not measure the degree of centralization.

20

Not reported in this paper, but available upon request.

21

However, micro-level studies find that the effectiveness of ALMPs varies, and that programs similar at appearance can yield very different outcomes (e.g., Card, et al., 2010; Kluve, 2010). ALMPs need to be designed and monitored properly as analysis of such programs shows that the impact and cost-effectiveness of ALMPs vary significantly based on their design. Studies also show that ALMPs that target young people are not very effective regardless of the type of the program. See “Youth Unemployment in Advanced Economies in Europe: Searching for solutions,” IMF SDN14/11, Box 1.

Youth Unemployment in Advanced Europe: Okun’s Law and Beyond
Author: Angana Banerji, Ms. Huidan Huidan Lin, and Mr. Sergejs Saksonovs