Labor Market Scars When Youth Unemployment Is Extremely High

The aim of this study is to assess how the duration of the unemployment spell of Macedonian youth affects later employment (the employment 'scarring' effect) and wage outcomes (the wage 'scarring' effect). For this purpose, we first devise a model in which the unemployment spell is determined by individual and household characteristics, and work attitudes and preferences. A discrete-time duration method is used to estimate this model. Then, we rely on standard employment and Mincer earnings functions. We repeatedly impute missing wages to address the selection of observables, and use the regional unemployment rate when the individual finished school as an instrument to mitigate the selection of unobservable. The School to Work Transition Survey 2012 is used. Results robustly suggest a presence of an employment scar as those young persons who stayed unemployed over a longer period of time were found to have lower chances of finding a job afterwards. On the other hand, the study does not provide evidence for the existence of a wage scar.