The Effects of Unemployment on the Earnings of Young Australians

The high rates of youth unemployment experienced in a number of OECD economies has raised concerns about the effect of this on subsequent earnings. Using the Australian Youth Survey (AYS) a longitudinal survey of Australian youth, we estimate the effects of unemployment on subsequent hourly and weekly earnings. The estimates suggest that, when unobserved heterogeneity is taken into account, it is only long histories of unemployment which have a negative effect on hourly wages. On the other hand, even relatively small amounts of unemployment history are associated with weekly earnings losses. The effects of unemployment on weekly earnings is shown to be mostly due to shorter working hours, with only a small part being due to lower hourly wages. These findings are consistent with the fact that Australia has binding minimum wages which limit the extent to which hourly wages can be reduced and so the impact of unemployment on earnings occurs through shorter working hours. Evidence is presented that this loss of working hours is involuntary and can therefore be counted as a cost of unemployment.