June 1, 2017
This thesis aims to analyse the determinants and scarring effects phenomenon of economic inactivity and unemployment – NEET (Not in Education, Employment or Training) – in the UK. We are particularly interested in examining the impacts of different business cycle periods and investigate the presence of true state dependence or the ‘scarring effect.’ Utilizing the British Household Panel Survey (BHPS) Waves 1-18 and the Understanding Society (US) survey Waves 1-5, we analyse both static and dynamic models of NEET. Our results from the static models reveal that young people are more likely to be unemployed than adults. However, for most of these youths, their probability of being inactive is lower. Meanwhile, the adult age groups, particularly the oldest age group (50-64), face both the risk of being unemployed and of being inactive. The recession periods do have a larger effect on youths than for adults, particularly for the older youths aged 20-24. Meanwhile, during recessions, teenagers (16-19 year olds) are also more likely to be in education. The dynamic probability estimates using the Markov models and the discrete-time duration analysis, which control for unobserved heterogeneity, provide evidence of true state dependence. Specifically, we find that individuals who were unemployed in the last year’s interview, are about 17 percentage points more likely to be unemployed at the current interview relative to those who were previously employed. While the corresponding persistence in inactivity state accounts for about 43 percentage points. The duration dependence result reveals that individuals who have been in a particular state for some time are more likely to occupy that state in the future, hence less likely to exit the state. Moreover, in the case of labour market transitions from unemployment and inactivity, we find that occurrence dependence is not scarring, but it is the lagged-duration dependence that is scarring. This suggests that having a one-time long spell of previous unemployment (or inactivity) in the past is worse than having multiple short spells of being in-and-out of the unemployment (or inactivity) state. Therefore, our policy recommendations are directed towards assisting both youths and adults from the risk of being NEET as early as possible in their careers, as well as promoting a flexible labour market system which is balanced with employment security.