Is youth unemployment more sensitive to business cycles than adult unemployment? Evidence from European countries

Abstract

Youth and adult unemployment rates have sharply risen in almost all European countries since the 2008 economic and financial crisis, leading the European Commission to take initiatives to counter this rise. Despite the decrease of youth and adult unemployment rates since 2014, the European Union still faces unemployment challenges. This paper investigates the relationship between the real gross domestic product (GDP) growth and the unemployment rate (known as Okun's law) in 28 European countries between 2000 and 2017. By revisiting Okun's law, this paper first evaluates whether or not the youth unemployment rate is more sensitive to business cycles than the adult unemployment rate. Subsequently, it tests the hypothesis of a higher sensitivity of the men unemployment rate to business cycles compared to the women unemployment rate. First, in order to study the relationship between the unemployment rate and the real GDP growth, a non-linear functional form is used. Second, the econometric model includes factors that might influence the unemployment rate such as the labour force participation rate, the part-time employment rate, the share of temporary contract and the employment rate in industry. As a result, this empirical study highlights three main findings. First of all, the existence of a negative relationship between the unemployment rate and the real GDP growth for every age cohorts and gender groups is revealed in European countries. Then, the hypothesis that the adult men unemployment rate is more sensitive to business cycles than the adult women unemployment rate is confirmed. Finally, it has been found that the youth unemployment rate is not significantly more sensitive to business cycles than the adult unemployment rate. From a policy perspective, it can be inferred that an increase in the economic growth will decrease the unemployment rate of young people and adults. Moreover, it will result in a greater decline of the adult men unemployment rate than the adult women unemployment rate.