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BOK Working Paper No.2018-37, The Analysis of Hysteresis in Youth Unemployment

Economic Research Institute (82-2-759-5481) 2018.11.22 2877

Title : The Analysis of Hysteresis in Youth Unemployment

Author : Namju Kim(BOK)


Initially entering into job market in a hard time with unfavorable market institutions has a persistent, negative effect on young workers’ subsequent job conditions. This paper analyzes these hysteresis in youth unemployment by using composite fixed-effect panel data model. Data sets on age-cohort unemployment rate and labor market institutions are constructed from OECD 21 advanced economies, including Korea, during the 1985-2017 periods, and readjusted to match with the peculiarity of Korea. In Korea with less-aggressive stance on active labor market policy spending, a male worker who experiences a 1 percentage point higher youth unemployment rate when he was 20-29 years old has a 0.146 percentage point higher unemployment rate at ages 30-34 years and 0.035 percentage points higher at ages 35-39 years. These figures are larger than those of most countries with more aggressive spending scheme. This finding points out that hysteresis in Korea labor market can be mitigated by expanding the active labor market policy spending more aggressively.