Youth unemployment, finding a career, and labor market churn

High levels of youth unemployment, particularly in the wake of the Great Recession, continue to be a concern in the United States. But why is the unemployment rate for young workers consistently higher than the rate for older workers? A new paper released yesterday by the National Bureau of Economic Research tries to find an answer and comes up with one: the search for the right career.

The paper, by economists Martin Gervais of the University of Iowa, Nir Jaimovich of Duke University, and Henry Siu and Yaniv Yedid-Levi, both of the Vancouver School of Economics, is built around a model of the labor market that seeks to understand what causes this generational inequality of unemployment. The kind of model they work with is “frictional,” meaning there are costs to finding a good match between worker and job.

In their model, the authors posit that younger workers aren’t sure what their “true calling” is in the labor market. Workers need to try out a few different kinds of jobs before they are sure that they want to stay in an occupation for the long-term. The authors find support for this view in the data, which is from the U.S. government’s Current Population Survey and covers from June 1976 to November 2012.

They find that what drives the difference in unemployment rates across ages is the difference in the rate at which workers leave jobs, also known as the job separation rate. Younger workers are more likely to lose or leave a job than older workers. Leaving a job allows a worker to find a better occupational match.

Interestingly, the authors find that the rate at which a worker can find a job doesn’t vary much across ages as much as the job separation rate does. In fact, younger workers are more likely than older workers to find a job. This finding suggests that explanations for high young unemployment that rely on overregulation or barriers to employment aren’t particularly strong.

The act of finding your “true calling” is just another way of looking at the role of labor market churn in the U.S. economy. Churn, or the rate at which workers leave jobs and enter new ones, has been on the decline in the United States since the 1980s. If workers are less likely to leave jobs then they may be less likely to find their best occupational match.

But this decline in churn also could be benign. A paper by economists Raven Molloy and Christopher Smith at the Federal Reserve and the University of Notre Dame’s Abigail Wozniak suggests that churn has gone down because the pay-off for switching jobs has decreased. Workers are better matched to employers than in the past, they find, so workers don’t have to move as much as to find their “true calling.”

Reduced churn might not be entirely a positive phenomenon, so better understanding its causes and consequences is incredibly important.