Tackling Youth Unemployment: Evidence from a Labor Market Experiment in Uganda

Monday, 2 October, 2017
Abstract: 
Youth unemployment and underemployment are key policy challenges in the developing world. In this paper, Rasul et al. (2017) present evidence from a two-sided labor market experiment, involving treatment and control workers and firms, both tracked over four years. The experiment examines two explanations for youth unemployment: that young workers lack skills, or because they face labor market entry barriers. To do so, the authors measure impacts on workers and firms of experimentally varying: (i) the offer of vocational training to workers before they enter the labor market; (ii) incentivizing firms using wage subsidies, to train workers on-the-job. Relative to control workers, vocationally trained (VT) and firm-trained (FT) workers increase employment rates by 24% and 15% respectively, and total earnings returns for VT workers are near double those for FT workers (40% vs. 22%). Structurally estimating a job ladder model of worker search reveals the mechanisms driving this: VT workers receive higher rates of job offers when unemployed, and higher rates of job-to-job offers. This greater labor market mobility causes the wage profiles of VT workers to diverge away from FT workers. The firm-side of the experiment reveals that some of the higher returns to VT workers are driven by them matching to higher productivity firms, the net employment effects of both forms of training are zero, and under wage subsidies, there is a degree of rent sharing between firms and workers. The results highlight that although policies raising worker skills or relaxing firm constraints can both tackle youth unemployment in low-income labor markets, the former are more effective from a worker’s perspective.