Youth unemployment, particularly long-term unemployment, is always a concern given the economic and social ramifications that it brings. Using data from the Longitudinal Surveys of Australian Youth, this report looks at the extent to which a previous spell of unemployment determines current unemployment. If unemployment can be attributed to an earlier period of unemployment, we describe that earlier spell as having a 'scarring effect'. The report also examines the extent to which post-school educational qualifications can reduce the scarring effect of unemployment. Scarring does occur but its effect quickly diminishes over time. Post-school qualifications are found to help reduce this effect.
About the research
Up until the global financial crisis in late 2008, youth unemployment in Australia had been at its lowest recorded level since the 1970s. However, at just over 8%, this was still twice the rate for all people. Following the downturn, unemployment rates for those aged 15–24 years have increased to around 10%, a figure still twice that for all people. Young people are more vulnerable to potential unemployment as they are new entrants to the labour market. Unemployment becomes particularly problematic if it increases the chance that the individual is more likely to be subsequently unemployed.
Using data from the 1995 and 1998 cohorts of the Longitudinal Surveys of Australian Youth (LSAY), this report examines the extent to which a previous period of unemployment determines current unemployment. If unemployment can be attributed to an earlier spell of unemployment, we describe that earlier event as having a 'scarring effect'. The period of investigation is 2001–06. The two cohorts are used to investigate if and how scarring differs between cohorts facing different labour market conditions. Given that having no or low skills and qualifications can contribute to unemployment, the authors also examined the extent to which post-school educational qualifications can mitigate the adverse impacts of the scarring effect of a period of unemployment.
- Scarring effects, in terms of prior unemployment playing a role in subsequent unemployment, do exist. However, they diminish as time since being unemployed passes, and no scarring occurs after a year in employment.
- In general, having a post-school qualification, at any level, will lessen the scarring effect of unemployment. For the older cohort, but not the younger cohort, completion of a recognised post-school VET qualification does appear to offer protection against scarring.
- Scarring effects are more pronounced in females than in males and for the younger (1998) cohort. A stronger tendency for women to have a series of jobs of shorter duration, and, for the younger cohort, a lesser number of years to gain work experience, are plausible explanations.
- The probability of being unemployed in any given month does reduce during the period 2001-06, more likely due to the members of the cohorts gaining greater work experience.
Managing Director, NCVER
This report focuses on the scarring effect of prior unemployment for Australian youth. It does not address scarring at a psychological level (that is, reduced levels of happiness), but purely concentrates on the increased risk of being unemployed today due to prior unemployment. This is an ongoing concern for policy-makers of all persuasions. Preventing repeated or entrenched unemployment in the first place would be desirable, but equally it is important to understand how scarring effects vary for different individuals. Recognising these differences enables scarce resources to be directed to where scarring is most prevalent. The recent global economic downturn has only made the issue of youth unemployment and scarring more pressing, as new labour market entrants are disproportionally affected when demand for labour drops.
In this report we use the 1995 and 1998 (Y95 and Y98) cohorts from the Longitudinal Surveys of Australian Youth (LSAY). Individuals are followed from the moment they complete their schooling and study; that is, the early years of their working career when they are fully committed to the labour market.
The probability of being unemployed over time is examined through econometric modelling. The scarring effects are captured by the inclusion of indicators for prior unemployment. Additional factors of influence that drive unemployment probabilities over time represent educational attainment, ability, parental background information, ethnicity, geographical information, personal characteristics, and time and cohort effects.
The general pattern that emerges is that scarring effects are larger for women than for men and are larger for the Y98 cohort than the Y95 cohort. For the Y95 cohort, the scarring effects are reduced to almost zero when prior unemployment occurred six (or more) months ago. For the Y98 cohort the scarring effects are much reduced when prior unemployment occurred six (or more) months ago.
The study found that the three-month scarring effect for young females from the Y95 cohort who have completed Year 12 but who have no post-school qualifications is close to nine percentage points. That is, a female in this group would have a nine-percentage point higher probability of being unemployed today if she were unemployed three months ago. For their male counterparts, the scarring effect is just over six percentage points. Changing the schooling level from Year 12 to Year 10, holding all else equal, will slightly increase the scarring effect further by less than one percentage point.
Possession of post-school qualifications is shown to reduce the three-month scarring effects for all levels of post-school qualifications. In the case of a certificate I/II or diploma, the reduction is largest, at almost one-and-a-half percentage points and also statistically significant at conventional levels.
A female from the Y98 cohort with Year 12 but no post-school qualifications will have a scarring effect that is almost two percentage points lower than a similar female from the Y95 cohort (whose scarring effect was close to nine percentage points). However, for the Y98 cohort, possession of a certificate I/II increases the scarring effect by more than three percentage points, relative to a female from the Y98 cohort with no post-school qualifications.
Increasing the lag of prior unemployment from three to six months reduces the scarring effects. For a female from the Y95 cohort who completed Year 12 but who has no post-school qualifications, the scarring effect decreases to just below three percentage points—from about nine percentage points for the three-month lag. Post-school qualifications are again shown to reduce the scarring effect. In practical terms, for women with any form of post-school qualifications, the scarring effect of unemployment six months ago is effectively nil. However, substantial scarring effects do remain for females from the Y98 cohort, of up to eight percentage points for women with Year 11 schooling and certificate I/II post-school qualifications.
Any level of post-school qualification in the Y95 cohort will lead to a reduction in this three-month scarring effect. This reducing effect of any post-school qualification on the scarring effect of prior unemployment is only present for the Y95 cohort. As was the case for females in the Y98 cohort, post-school qualifications actually increase the scarring effect, with the exception of a bachelor degree or higher. In the case of the latter, the scarring effect is reduced. It is also the only level of post-school qualification for which the effect is found to be statistically significant.
At the point where an episode of prior unemployment occurred six months earlier, any remaining scarring effects for males in the Y95 cohort are barely perceptible, and only a small scarring effect can be identified for the Y98 cohort when the young males have post-school qualifications at a level lower than bachelor degree.
We find strong evidence for seasonality effects and the business cycle. The first quarter is the quarter with the highest probability of being unemployed, holding all else constant, with the probability peaking in March for both males and females. The calendar year indicators capture the role of the business cycle and are shown to be both statistically and economically important. Relative to the reference year, 2001, the probability of being unemployed in a given month steadily and sharply reduces in subsequent years, so much so that the probability of being unemployed in a given month is about five to six percentage points lower in 2006 than it is in 2001. Of course, part of this could be capturing the effect of the cohorts ageing and gaining work experience.
Although males experience smaller scarring effects than females, both are shown to benefit from vocational education and training (VET) acting as a buffer to insulate them, in part, from scarring effects. However, this only holds in the case of the Y95 cohort, but not the (younger) Y98 cohort. It thus seems that VET at very early stages in the career (that is, at younger ages) may actually increase scarring effects, but that over time a recognised post-school qualification does indeed work as a buffer to insulate individuals from scarring effects. The current emphasis on school completion and the goal to halve the proportion of Australians without at least certificate III-level qualifications by 2020 are consistent with a policy objective of reducing scarring effects for young people.