Author: Andrew Berger-Gross
We recently published a piece explaining why youth labor force participation is on the decline in North Carolina. The article concluded with a graph depicting the gulf between the unemployment rate for youths (age 16 to 24) and much lower unemployment rates for older age groups:
Such a disparity is to be expected — high youth unemployment has been a persistent feature of the U.S. labor market as a whole. But why is this the case? Is there a good explanation for why there are so many unemployed job seekers among the youth labor force?
Youth unemployment is highly correlated with the business cycle — the gap between unemployment rates for the youngest workers and their older counterparts grows widest after recessions and narrows during expansions.
However, explaining the persistence of high youth unemployment throughout multiple business cycles requires us to dig below the headline numbers. The Current Population Survey (CPS) follows up with respondents for several months after their first interview, allowing us to track not only how many young people are unemployed, but how many are transitioning in and out of unemployed status in a given month.
Let’s first examine job finding rates (defined here as the percentage of unemployed persons who find work in a given month) by age group in North Carolina. Although the numbers are somewhat volatile, it appears that job seekers of all ages found employment at similar rates during the past nine years.
However, when we look at job separation rates (defined here as the percentage of employed persons who become unemployed in a given month), a different story emerges. The separation rate for young North Carolinians is around two times the rate for the prime working age (25 to 54) population. This gap persisted throughout the period under consideration, during both recession and recovery.
There is an influential line of economic research that attributes the age difference in separation rates — which is also a regular feature of U.S. labor markets — to a process of on-the-job learning over the life cycle. It is difficult for a young person with limited labor market experience to know whether their first job will be a “good fit”— nor will potential employers have much information about their capabilities due to lack of a track record or reputation. This situation can result in unhappy job matches for young people, which subsequently lead to job separations (either voluntary or involuntary.) This is not typically a permanent situation; however, the likelihood of separating from employment declines as workers age and become more attached to their employer.
Another recent paper from economists affiliated with the National Bureau of Economic Research attributes the age profile of job separation to a more general process of occupational learning, whereby workers gradually find their “true calling” as they gain more experience in the labor market and fall into stable career paths.
These models do a fairly good job at explaining the gap between separation rates for younger and older workers. Moreover, they suggest that much of youth unemployment is a result of what economists call a “market failure” — specifically, that employees and employers have imperfect information about each other, which can lead to bad job matches even in an otherwise competitive marketplace. This becomes less of a problem over time as individuals gain more labor market experience, often leading to better job matches, higher productivity, and higher earnings as workers age — impacting not just individual workers but their organizations and the economy as a whole.
Despite their potentially useful role in the matching process, job separations (particularly involuntary job losses) have disruptive consequences for some young workers that might last long after the separation date. The workforce development community can help reduce youth unemployment by addressing a labor market failure — a lack of information — that results in poor job matches among young workers.
Programs such as internships or apprenticeships that expose young people to different workplace environments may help them to “find their calling” earlier in their working lives. Educational and training resources offered by the community college system can help young workers make the most out of job changes, which are an important contributor to early-career wage growth. Lastly, efforts such as NCWorks that aim to make it easier for job seekers to find quality information about employment opportunities — and for employers to learn about the capabilities of potential hires — might make for a smarter job matching process that results in better outcomes for our next generation of workers.
General disclaimers:
The Current Population Survey (CPS) estimates are based on a survey and are subject to sampling and nonsampling error. Note that the state-level CPS estimates are not directly comparable to state-level labor force estimates from the Local Area Unemployment Statistics (LAUS) program due to differences in methodology. Any mistakes in data management, analysis, or presentation are the author’s.