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Recessions, labour-market uncertainty and health

Periodic Reporting for period 1 - RecessionsHealth (Recessions, labour-market uncertainty and health)

Reporting period: 2016-03-01 to 2018-02-28

The aim of the project was to provide a comprehensive analysis of how individual health is affected (both in the short and in the long-run) when recessions cause uncertainty on the labour-market. To achieve this aim, I exploited major European recessions as well as particularly rich administrative data. The two objectives of the project were to answer the following policy-relevant questions:
(i) Do recessions at career entry negatively affect health over the life-course – and in particular in the long-run?
(ii) Do individuals who experience major labour-market uncertainty during by recessions suffer from health disorders in the short-run?

These questions were both timely and appealing from a policy point of view, as the current 2008 Great recession had generated massive uncertainty on the labour-market; the youth, in particular, had disproportionately suffered, and young cohorts who began their careers in the late 2000s had experienced major difficulties accessing employment.

Due to the early termination of the project, only the first objective was addressed. To address this objective, I have collaborated with Prof. Skans and Dr. Engdahl (both Uppsala University and IFAU, two leading institutions in labour economics) and exploited a unique set of Swedish linked administrative data over 1986-2013. The observational period (1986-2013) provided the required exogeneous variation in macroeconomic conditions – here the 1990s Swedish Great Recession – to identify the effects of interest. It allowed taking a life-course perspective, from career entry up to 19 years later. Our identification strategy relied on sharp and sizeable increases in unemployment rates from one year to another, where students were exogeneously pushed in the labour-market in different years. The specific objectives within objective (i) were twofold: (a) to produce a causal estimate of recession at career entry on hospitalization and mortality hazards over the life-course (from graduation year up to 19 years later (b) to understand the underlying mechanisms – in terms of labour-market and family formation – in the relationship of interest. Due to data availability and the early termination of the project, we addressed (b), but (a) only partly.
During the reported period, I worked in several directions to achieve objective (i). I first had to gather and to clean the data for analysis. This was an important amount of work, as several administrative records – covering the entire population annually during 1986-2013 – were used. Then, I had to set up an convincing empirical strategy. The key issue in our framework was that graduation year should be exogeneous to individual characteristics. I discussed this issue with my co-authors over the whole reporting period, and especially in November 2016 during a one-week visit to the University of Uppsala. We focus on vocational students who graduated during the deep Swedish economic crisis of the early 1990s. Our empirical strategy exploits the fact that during 1987-1991, some vocational students were given the choice of attending a three- rather than an ordinary two-year track at the end of compulsory school. Using a difference-in-differences approach, we compare individuals enrolling in vocational studies the same year, but graduating a year apart (hence, different economic conditions). For each enrolment cohort, the choice to enrol in two- versus three-year track was made before 1992, before the crisis hits, so anticipation effects are unlikely.

During the reporting period, I produced a causal estimate of recession at career entry on labour-market outcomes and family formation in the life-course (Objective (i)-(b)). Our results show that individuals who graduate in a bad economy temporarily withdraw from the labour-market (up to 4 years after graduation). A one-percentage point increase in unemployment rate at graduation decreases by 4% the probability of being employed that year, and earnings by 6%. These estimates are comparable to the ones obtained for the US and Germany for low-educated workers. The catch-up process is rather quick, as both men and women have the same employment and earnings as their luckier counterparts four years after graduation. Interestingly, individuals who enter the labour market when unemployment rates are high have a higher probability of staying at their parents’ home in the two subsequent years. Initial economic conditions affect both the timing and the occurrence of marriage. Women who graduate in a recession marry more, but also earlier than their counterparts. They also yond timing effects, completed fertility seems to be impacted too, as women facing adverse initial economic conditions have more children on average at age 38. These results for women can be seen as conservative, in the sense that Sweden is an equal country, where labour participation among women is historically very high. They suggest that as the opportunity cost of childbearing and marriage decreases, women temporarily withdraw from the labour-market and accelerate their entry into marriage and childbirth. What remains for future analysis is to what extent these results are linked to health in the longer-run.
Europe has recently gone through the most important recession since 1929. The so-called “Great Recession” has been associated with major uncertainty on the labour market, with a sharp increase in unemployment rates and a surge in atypical employment. Those who began their careers in the late 2000s recession have suffered disproportionately; it is likely that this “scarred generation” will not fare well in terms of career outcomes over the long-run.
Using a natural experiment in Sweden, we provided evidence that career and family formation are indeed affected by recession at career entry. The Swedish recession of the early 1990s is an interesting case-study, as many observers of the Great Recession in 2008 compared it to the Swedish crash of the 1990s (New York Times, September 22, 2008; Time, September 24, 2008). There was a rapid increase in the unemployment rate, and in both cases, real estate sector played an important role (in downtown Stockholm, the price of real estate decreased by 35 percent in 1991). This ensures – somehow – the external validity of our results for the recent crisis. Our results can contribute to the debate on recessions, career and family formation, and can provide policy makers with better knowledge to design public labour-market policies. These policies will help maintaining a well-functioning labour market that utilizes and maintains human resources, which is particularly crucial in a context where populations are rapidly ageing. This should translate in a sustainable Europe in a social sense.