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

Monday, 2 October, 2017
Rasul et al (2017) design a labor market experiment that compares demand-side and supply-side policies to tackle youth unemployment, a key issue in low-income countries. The two-sided experiment tracks 1700 workers and 1500 treatment and control firms over four years to evaluate the effect of offering workers vocational training before they enter the labor market, to offering firms wage subsidies to train workers on-the-job. Relative to control workers, the employment rate of vocationally trained (VT) and firm-trained (FT) workers increases by 21% and 14% respectively, and total earnings increase by 34% and 20%. Structural estimates of a job ladder model reveal that 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 over time. The firm-side of the experiment further shows that some of the higher returns to VT are driven by workers matching to higher productivity firms, that most of the surplus generated by firm-trained workers is captured by firms in higher profits, and that the long run net effect on the number of firm employees is zero. The authors conclude that although both vocational and firm-provided training reduce youth unemployment, from a worker’s perspective, tackling the issue by skilling youth using vocational training pre-labor market entry, is more effective than by incentivizing firms through wage subsidies to hire young labor market entrants.