Youth Unemployment and Retirement of the Elderly : The Case of Italy

This paper shows that the quot;lump of laborquot; assumption fails in Italy. The direct relationship between the unemployment rate of the young and the labor force participation of the old is pro-cyclical, i.e. a higher labor force participation of the old is related to a lower unemployment rate of the young. Hence both vary with the business cycle. In order to overcome endogeneity problems in explaining unemployment of the young, we resort to a simulated variable: quot;the inducement to retirequot;, which is constructed by simulating the social security benefits. We related the unemployment rate of the young to this incentive measure and find that a higher inducement to retire is associated to a higher unemployment rate - quite the opposite of the quot;young-in-old-outquot; story