This paper uses UK administrative data to study the long-term effects of unemployment on earnings. It is the first paper to pinpoint accurately the relative importance of the timing of employment shocks within workers’ lives. We find a strong effect of events in the first few years after entry into the labour market: each month of unemployment between ages 18 and 20 causes a permanent income loss of 1.2% per year. This scar effect of youth unemployment is lower when it happens when the worker’s age is between 21 and 23, and it disappears altogether in the next three-year age period. The scar effect is most severe for individuals at the lower end of the ability distribution.
Figure 4: Longterm effects of early unemployment experience.
De Fraja, G., Lemos, S. and Rockey, J. (2021), The Wounds That Do Not Heal: The Lifetime Scar of Youth Unemployment. Economica, 88: 896-941. https://doi.org/10.1111/ecca.12384