Does Early Career Unemployment at the Peak of a Recession Leave Economic Scars? Evidence from Estonia

Abstract

On average, individuals who have experienced unemployment are disadvantaged in terms of later lifetime earnings. Those who graduated from school during the Great Recession are especially prone to have experienced bouts of unemployment, but we know little about how much they suffer in later career earnings. Estonia was heavily hit by the economic crisis but recovered relatively quickly. This study explores poverty and earnings effects for a cohort of recession graduates in Estonia, finding that early career unemployment is not a direct trigger for poverty risk and income loss five years later. The main mechanism for disadvantage among recession graduates is recurring unemployment, meaning that the scars of initial unemployment are avoided only if graduates succeed in avoiding unemployment later. Findings also indicate that during an economic downturn, employers may not regard unemployment as a signal of lower productivity or depreciation of skills.