Abstract: Recessions are known to be particularly damaging to young workers’ employment outcomes. I find that during recessions the hiring rate falls faster for young workers than for more-experienced workers. I show this cannot be explained by the composition of jobs or workers’ labour supply decisions, and I conclude that firms preferentially hire experienced workers during periods of high unemployment. I develop a new model of cyclical upgrading that relaxes the classic assumptions of exogenous firm size and rigid wages. I show this model predicts larger log wage decreases during recessions for young workers than for experienced workers, a prediction that is supported by the data. I conclude that policy makers should consider extending unemployment insurance coverage during recessions to new labour market entrants.
U of I News Bureau: “Paper: Young workers hit hardest by slow hiring during recessions” (May 2016)