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Who Bears the Cost of the Business Cycle?
Labor-Market Institutions and Volatility of
the Youth Unemployment Rate
Abstract
The way age-specific unemployment rates fluctuate over the business cycle differs significantly across countries. This paper examines the effect of labor-market institutions on the fluctuations of age-specific unemployment rates based on panel data of 18 Organisation for Economic Co-operation and Development (OECD) countries between 1971 and 2000. Empirical results suggest that the cost of the business cycle disproportionately falls on youths in countries with stricter employment protection and higher union coverage. These results are consistent with a theoretical prediction that a higher adjustment cost of an existing workforce induces the employment adjustment of new entrants into the labor market.
