Young, Educated, Unemployed

In a number of European countries, unemployment rates for young college graduates are higher than for young high school graduates. This presents a challenge for canonical models of unemployment that suggest that unemployment should decrease with education. I disentangle two potential explanations for the pattern: “labor market frictions” versus “relative productivity.” Here, labor market frictions are obstacles to labor market flows (such as employment protection regulation), whereas relative productivity refers to features that lower the output of educated workers already matched to firms (such as an education system that does not provide the right skills or a lack of jobs that make good use of workers’ skills). The analysis builds on a search and matching model with endogeneous productivity differences and the possibility of mismatch (educated workers working in low skilled jobs). I show that when young educated workers have productivity levels close to uneducated workers, they have higher unemployment rates, because firms create fewer skilled jobs. My counterfactual analysis shows that the relative productivity channel explains a substantial part in accounting for unemployment of young educated workers. The results suggest that improving education policy and fostering firms’ demand for skills may have important roles to play in addressing high unemployment among young workers.