Scarring effects A review of Australian and international literature

Abstract

Scarring occurs when an adverse experience for a worker – associated with macroeconomic conditions - has negative long-term impacts on their labour market outcomes. For example, a worker who is entering the labour market during a macroeconomic downturn may experience a spell of unemployment or have to take a job for which they are over-qualified – and those experiences then affect the worker’s labour market outcomes in future years. Recent studies find that scarring effects are substantial: for example, the main Australian study on scarring finds that graduates entering the labour market at a time when the youth rate of unemployment rate is 5 ppts above average lowers annual earnings of graduates by about 8 per cent at the time of entry and by 3.5 per cent after five years. This article reviews Australian and international evidence on scarring; and provides an overview of the main channels through which scarring occurs.

JEL Codes: J23, J30, J60