Are youth in Serbia, Macedonia and Montenegro scarred on their road from school to work?

Youth in transition countries in a much worse position than their EU counterparts

Youth who acquired their first job are experiencing long transitions from school to work: on average, from about 21 months in Montenegro, to 24 months in Serbia and 25 months in Macedonia, being much longer than that of their EU peers. This may leave scars for their future employment outcomes.

Macedonia, Montenegro and Serbia, once part of the same state, Yugoslavia, shared the same economic and political systems. After 1991, they embarked on transition to a market economy, with somewhat similar paths, largely shaped by the International Monetary Fund (IMF) and the World Bank, though with country specifics and peculiarities which sometimes produced different economic outcomes. Contrary to other socialist countries which had zero open unemployment, the ex-Yugoslav republics had relatively high unemployment even at the beginning of 1990s (prior to the Yugoslav dissolution) (Mojsoska, 2005; Bartlett, 2007). There was also large underemployment. Serbia had the lowest unemployment rate (10.5% in 1991), then Montenegro (15.7%), while Macedonia even then had an astonishing 26.6% (similar to the unemployment rate today). Unemployment further increased over the 1990s with the economic restructuring, including the privatization process, with the new private owners usually implementing mass layoffs, coupled with state-offered pre-retirement packages for older workers.

By 2015, the three countries achieved similar labour market performance: employment rates are close to 40% (Figure 1a), still much lower than the EU-28 average of 65.6%. Youth employment rates range between 15% and 19% (Figure 1b), compared to 33% in the EU-28. A distinct feature of the labour market in Montenegro is the large seasonal employment of foreigners in the construction, tourism and hospitality sectors (MLSW, 2015). This phenomenon is present for a long time, though increasing in the recent years.

In the period 2000-2015, the overall unemployment rate in Serbia increased (from 10.3 to 16.7%), in Montenegro stayed still at about 17.6%, while in Macedonia it recently decreased to 26.7% (Figure 2a). Among the three countries, youth are most disadvantaged in Macedonia, facing about 50% unemployment rate (and close to 60% in 2000) (Figure 2b).

However, young people in Serbia experienced the largest worsening of their labour market position in the observed period. Overall, while nowadays the three countries experience comparable labour market outcomes, they followed potentially distinct trends over the transition period.

Youth in the three countries are in a much worse position than their EU counterparts (the EU-28 average youth unemployment rate in 2015 is 20.4%), although some EU countries have been exhibiting very high youth unemployment rates after the recession (for instance, Greece-49.8% and Spain-48.3%). 

Additional feature of the labour markets in the three countries is the large long-term unemployment. According to the KILM data (2014 for Macedonia and 2012 for Serbia and Montenegro), about 80% of the unemployed in Macedonia and Serbia are in that status for more than a year. The share of long-term unemployed in Montenegro is slightly lower, at 55.7% in 2013 (MLSW, 2015). Young people are also not immune to the long-term unemployment: 67.2% and 64.5% of youth in Macedonia and Serbia, respectively, were unemployed for more than a year. Moreover, youth who acquired their first job are experiencing long transitions from school to work: on average, from about 21 months in Montenegro (Djuric, 2016), to 24 months in Serbia (Marjanovic, 2016) and 25 months in Macedonia (Mojsoska-Blazhevski, 2016).

Loss of human capital during unemployment to blame for subsequent outcomes

The theoretical foundations for the existence of employment scarring are laid down in two theories: i) the human capital theory of Garry Backer (1964) and ii) the signalling theory (Spence, 1973). According to the first, it is the loss of human capital (skills and knowledge) while a person is unemployed that reduces his/her productivity and leads to long-term reduction of labour market returns. On the other hand, the signalling theory predicts that due to insufficient information, employers face uncertainty about workers’ productivity when hiring. Hence, they use statistical-screening device in the hiring, which is based on the group to which the worker belongs (for example, age, gender, ethnicity, etc.) whereby previous unemployment (its frequency and/or duration) is signalling lower productivity, and therefore lower employment probability (also called a stigma effect).

The loss of human capital over time spent in unemployment is usually the underlying notion justifying the presence of employment scarring.

Studies, in general, confirm the presence of employment scars. For instance, Gregg (2001) finds that the early labour market experience of young persons affects future employment probabilities. Cockx and Picchio (2013) focus on young individuals who are already long-term unemployed in Belgium and finds that prolonging unemployment significantly reduces employment probability. The study of Nilsen and Reiso (2011) focuses on young individuals in Norway and finds long-term scars from unemployment (about 10 p.p. higher chance of being unemployed at year five), which then decreases over time (to about 5 p.p. in year eight and onwards).

Employment scarring sparked less interest in developing economies, despite being severer problem.

Weak institutions, large informal economy and jobs, different culture and norms in developing relative may either exacerbate or break the link between early unemployment and the long-term employment prospects of young individuals. To our knowledge, there are two micro studies focusing on employment scarring in developing country/region. Fares and Tiongson (2007) find a significant employment scar in Bosnia and Herzegovina: young people who experienced joblessness in 2001 had 11% larger probability of being unemployed and 30% larger probability of being jobless (unemployed or inactive) in 2004 compared to their peers who were employed in 2001. Lupi and Ordine (2002) find that the unemployment experience does not produce employment scars in the Italian regions with high unemployment rates. In those regions, the majority of workers experienced a period of unemployment which did not necessarily signal low worker productivity.

Overall, while studies focusing on developed countries find evidence for the existence of employment scars, the literature and theoretical predictions suggests that a high unemployment context could potentially weaken the link between the early unemployment experience and later labour market outcomes. 

Youth labour market transitions for Macedonia, Montegro and Serbia are analysed using School to Work Transition Surveys

We use the School to Work Transition Surveys (SWTS), being representative household surveys for young persons aged 15-29 years. Data for Macedonia are for 2014, whereas for Montenegro and Serbia for 2015.

Employment scar is clearly present in countries with high unemployment

Several factors are found important in explaining how long a young persons stays unemployed: work experience, gender, education, financial condition of their household, internship pursuance, reservation wage and the development level of the country.

Results prevalently suggest higher similarity between Macedonia and Serbia than compared to Montenegro. Young females in Macedonia and Serbia have 24.4% and 21.3% lower chance to exit unemployment than young males, respectively. Experience is significant in Montenegro only. Secondary education matters only in Serbia and Montenegro, but with opposite direction. In Montenegro, those with secondary education have lower chance to exit unemployment relative to those with primary education; this could be related to the more prevalent demand for primary-educated workers in the booming construction sector in Montenegro. On the other hand, in Serbia, the more a person is educated, the higher the chance to get employment. Only mother’s education in Montenegro works positively and with potentially large effect for the employment of the child. In all three countries, the worse the financial situation of the household is, likely corresponding to the scarcity of family ties and network, the longer it takes to exit unemployment. The effect is the strongest in Montenegro.

The results undoubtedly suggest presence of employment scar for the whole sample and for the three countries individually. The country-specific results suggest that the employment scar is the largest in Serbia for all unemployment durations. This especially holds for the longer spells. Young people in Serbia who were unemployed for 1 to 2 years have 24.3% probability to stay unemployed, being statistically different than the probabilities of 14.8% for Macedonian and 11.8% for Montenegrin youth. Similarly, the probability of staying unemployed for those in that condition for more than 2 years in Serbia is 50.6%, compared to 46.2% in Macedonia and 32.1% in Montenegro. Young individuals in Montenegro seem to be the least scarred by the previous unemployment compared to the youth in the other two countries, especially for the medium-term scarring.

The results clearly suggest presence of employment scar even in countries with high unemployment.

Although labour markets of these three transition countries are similar in their performance, we still find differences in the factors and their intensity with which they affect the duration of the unemployment spell of young persons. This can be related to the peculiar developments during transition, and the relatively better performance of the Serbian labour market until the Great Recession. Still, the labour market in Serbia has always been relatively harsher for young people than in Macedonia and Montenegro, probably giving support to our finding that employment scar is the largest in Serbia. In addition, Serbia lags behind with the privatization process, while Macedonia achieved significant progress in labour market flexibilization recently. The slightly better labour market situation in Montenegro relative to the other two countries, as well as the very large internship program for young graduates, seem to have lessened the scarring effect in Montenegro. 

Early interventions – during or right after schooling – indispensable for reducing scars

We assessed whether the unemployment experience of young people early in their career has a negative effect on their subsequent labour market performance, in three high-unemployment transition economies: Macedonia, Montenegro and Serbia. We found several factors to be important in explaining how long a young persons stays unemployed: work experience, gender, education, financial condition of their household, internship pursuance, reservation wage and the development level of the country. Macedonia and Serbia were found to exhibit more similarities than compared to Montenegro.

The results find strong presence of employment scar: those young persons who stay unemployed over a longer period of time have lower chances to find a job afterwards.

This main finding is valid for all three countries, but with potentially different patterns. The scars are found the largest in Serbia, for all durations of unemployment spell which may be attributed to the worse position of youth relative to the prime-age workers in Serbia. Next, the scars are middle-ranked in Macedonia, which can be explained by the worse labour market developments compared to Montenegro, and by the advances in labour market flexibilization compared to Serbia. The scar is the smallest in Montenegro likely due to the very large internship program for university graduates.

Countries should implement early interventions before a young person experiences a protracted unemployment.

The findings provide a useful guide for the employment and education policies in the three countries. The persistent employment scarring calls for measures preventing young people from falling into unemployment at the exit from education, i.e. countries should implement early interventions before a young person experiences a protracted unemployment. The interventions can range from internship programs (through active labour market policies), flexible forms of employment (for instance, trial work for a limited time period), subsidized employment, training measures and so on.

This blog featured on the MONS platform and could be accessed in Serbian. It is entirely based on the paper: Mojsoska-Blazevski, N., Petreski, M. and Bojadziev, M. (2017) Youth survival on the labour market: Comparative evidencefrom three transition economies. The Economic and Labour Relations Review, 28(2), pp. 312–331.

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