Youth Unemployment , Labor Market Transitions , and Scarring : Evidence from Bosnia and Herzegovina , 2001 - 2004

Relatively little is known about youth unemployment and its lasting consequences in transition economies, despite the difficult labor market adjustment experienced by these countries over the last decade. This paper examines early unemployment spells and their longer-term effects among the youth in Bosnia and Herzegovina (BiH), where the labor market transition is made more difficult by the challenges of a post-conflict environment. This paper uses panel data covering up to 4,800 working-age individuals over the 2001 to 2004 period. There are three main findings from the analysis: First, youth unemployment is high, about twice the national average. Younger workers are more likely to go into inactivity or unemployment and are also less likely to transition out of inactivity, holding other things constant. Second, initial spells of unemployment or joblessness appear to have lasting adverse effects on earnings and employment. There is no evidence, however, that the youth are at a greater risk of " scarring, " or suffer disproportionately worse outcomes from initial joblessness compared to other age groups. Third, higher educational attainment is generally associated with more favorable labor market outcomes. Skilled workers are less likely to be jobless and are less likely to transition from employment into joblessness. However, there is evidence that the penalty from jobless spells may also be higher for more educated workers. We speculate that this may be due in part to signaling or stigma, consistent with previous findings in the literature. This paper was prepared as a background for the World Bank's World Development Report 2007. The responsibility for the content of this paper is entirely that of its authors and should not be attributed to the World Bank or its Executive Directors or the countries they represent. Any remaining errors are our own.