Youth Unemployment and Government Policy

Young people of working age tend to be particularly prone to labor market inefficiencies that keep their wages excessively high and their employment excessively low. These inefficiencies are usually magnified through unemployment benefit systems. This paper examines how these problems can be tackled through "employment vouchers," i.e., hiring subsidies or tax breaks for the unemployed. It examines how vouchers to the young unemployed should differ from those to the adult unemployed. The employment vouchers considered here reduce unemployment and impose no cost on the government, since they are financed by the induced fall in government expenditures on unemployment benefits. Among other things, we find that young workers should receive lower vouchers as displacement of the old rises and as deadweight from providing vouchers to the old increases.

Kiel Institute Expert