Scarred by unemployment

A new study carried out at NHH finds that unemployment has disturbing long term negative effects. Young people who have been unemployed are scarred by the experience. The younger they are, the more likely they are to be jobless later in life. Some of them drop out of the labour market for good.

10.01.2013 - Sigrid Folkestad

'People's early employment history turns out to be a decisive factor in relation to later success in working life. I believe this finding can be used to justify substantial efforts targeting young people,' says Professor Øivind Anti Nilsen.

Scarring effects

In the article 'Scarring effects of unemployment', Nilsen and doctoral candidate Katrine Holm Reiso present their research, in which they have studied the long-term effects of having experienced unemployment.

Nilsen and Reiso use the term scarring effects.

'I think scarring effects is a good description. It refers to something that doesn't just go away, but stays with you for a long time,' says Reiso. Scarring is the long-term effect of unemployment on future opportunities in the employment market.

The study shows that young employees can be badly affected by a period of unemployment. The probability of them experiencing several periods of unemployment or dropping out of the labour market is higher than for people who have never been unemployed. And there are no observable differences between the groups. They have all completed an education and been in employment for at least two years. Simply having experienced unemployment leads to people being scarred for many years.

'When a young person has been unemployed for a period, this gives a stronger signal about his or her qualifications and abilities than is the case with older people,' says Reiso, 'and if it leads to them permanently leaving the labour market, it is far more serious, because they have their whole career ahead of them.'

Welfare benefits and selection

The Norwegian labour market is interesting for several reasons, according to the two researchers from the Department of Economics, not least because of the low level of unemployment and good welfare benefits.

'That is why it was natural to assume that there could be clear scarring effects,' Nilsen says. 'If you are one of relatively few unemployed people, an employer might see this as a strong indication of your abilities, compared with a situation in which very many people are unemployed. Moreover, Norway has a welfare system that can result in people being unemployed longer and in negative selection in relation to disability pension.'

The researchers believe that these histories of unemployment reveal a certain dependence on the state.

Professor Øivind Anti Nilsen and doctoral candidate Katrine Holm Reiso present their research on the long-term effects of having experienced unemployment. Photo: Helge Skodvin

Clear effect after ten years

The sample in the study is based on data from Statistics Norway, comprising several hundred thousand inhabitants of Norway who were in employment during the period from 1990 to 1998. Because the researchers were interested in scarring effects early in people's careers, they limited their sample to individuals who completed their education a few years before the period of unemployment commenced. Everyone had worked for a minimum of two years. They were therefore entitled to unemployment benefit, which meant it was financially advantageous for them to register with the Norwegian Labour and Welfare Service (NAV) when they lost their jobs.

A control group that did not experience unemployment in the 1990s, but that was similar in terms of observable factors, such as age, education, income, gender, born in or outside Scandinavia, and that worked in different types of industries, enabled the researchers to form a clear picture of how unemployment can affect people's future status in the employment market. There were 356,000 people in the control group, who were not unemployed. The sample consisted of nearly 30,000 people who had experienced a period of unemployment during the years in question.

The researchers have compared the two groups every year for ten years after the period of unemployment occurred. They were then either employed, unemployed or outside the labour force.

Individual qualities

Many people still do not have a job a year after a period of unemployment, Reiso explains. After five years, the likelihood of being unemployed is 17.2%. That is considerably higher than for the control group, for whom the likelihood is 7.8%.

'The negative effect decreases over time, but the scarring effect is clear even ten years after a period of unemployment,' says Nilsen.

The two economists believe that it is unemployment in itself that scars people who have been unemployed, and that there are several unobservable factors behind this.

'There may be individual qualities at play that lead to people experiencing repeated unemployment. A selection process may take place, and it is probably not just a matter of chance who actually fails to find a job again,' they explain.

The researchers discuss this issue in the introduction to their article. Some individuals seem to learn to live with unemployment.

'They've tried it and found out that it is a viable option; it is socially acceptable in some circles, and some people get used to not getting up in the morning. During this learning process, individuals develop different attitudes to being unemployed,' says Nilsen.

Employers

'The term scarring means that it is clear that something has happened. This may be due to both individual qualities and the negative signals sent to potential new employers. Both factors play a role. Whatever the reason, it will have personal and social consequences. The cost of a period of unemployment can be very high,' Reiso says.

Nilsen believes that certain tendencies indicate that the welfare system in Norway is under pressure. He points to the growth in disability among young people, especially young men. This is often attributed to our modern education system, which is poorly adapted to boys' needs and more suited to feminine values, he believes.

'At the same time, we have a highly developed welfare state with generous compensation arrangements. It should be possible to live off benefits. Most people completely agree with this, but perhaps we're beginning to see that things have gone too far. It is a challenge to the benefits system if living on benefits prevents people from making a big enough effort to actually find paid work.'

A year on benefits

This spring, the Norwegian Broadcasting Corporation carried reports about young people saying that they wanted to take a year off to live on benefits. Lower and upper secondary school pupils are considering taking a break from school and expect to receive benefits from NAV. This group is not unemployed and is therefore not part of the two NHH researchers' sample, but Nilsen believes that taking a year off to live off benefits can have a negative effect, also in the long term.

'It can be a dangerous strategy. I would be extremely careful about taking a year off because of the long-term effects. It sends a signal to potential employers. They will ask themselves what an applicant spent the year doing and will probably assume that he or she spent the whole morning in bed, played computer games and generally lazedaround. In such case, it can prove to be an expensive year off.'

'When welfare schemes have existed for a certain period, the chances of their being misused tend to increase. These benefits originally targeted specific groups, but it seems that, over time, others also tend to want to take advantage of them. That is a risk when people who are not part of the intended target group also make use of these benefits,' Nilsen believes.

In conclusion, Reise and Nilsen say that the results clearly show that a person's early employment history is a decisive factor in relation to subsequent success in working life.

'These findings can be used to justify public efforts targeting young people,' Nilsen says.

This article is taken from the English version of NHH Bulletin for 2012.