Youth employment decline and the structural change of skill

Abstract

Labor market prospects for youth have deteriorated significantly in many OECD countries over recent decades. While the extent and consequences of falling youth employment are commonly studied, attempts at understanding its causes have been much more limited. The present paper attempts to fill this explanatory gap. We suggest that the secular decline in youth employment can be accounted for by the structural change of skill. This process of structural change has two interrelated components: (a) one part where skill supply (individual educational attainment) and skill demand (educational requirements of jobs) grow together in what can be called matched upgrading and (b) another part where excess skill supply leads to mismatch and crowding-out. These components of skill growth have commonly been treated separately and incompletely in the literature. We build on both of them in developing our account of why the labor market for youth has weakened. Using data on 10 European countries from the EU Labor Force Surveys over the period 1998 to 2015, we estimate associations between the structural change of skill and youth employment decline. The main conclusion is that both matched skill upgrading and overeducation are strongly and negatively linked to young people’s employment chances.