The Impact of Young Workers on the Aggregate Labor Market

Abstract

This paper estimates the response of the unemployment rate and labor force participation rate to exogenous variation in the youth share of the working age population, using cross-state variation in lagged birth rates as an instrumental variable. A one percent increase in the youth share reduces the unemployment rate of young workers by more than one percent, and of older workers by more than two percent, holding conditions in other states constant. It raises the labor force participation rate by about a third of a percent for young workers, and by much less for older workers, again ceteris paribus. These results are consistent with increasing returns to scale ('thick market externalities') in the labor market. Young workers are frequently mismatched in their employment, and firms create jobs to take advantage of this mismatch. Data on gross job creation and destruction in manufacturing support this theory. I also reconcile these results with existing evidence on the labor market impact of young workers.