WHY DON'T FIRMS HIRE YOUNG WORKERS DURING RECESSIONS?

Recessions are known to be particularly damaging to young workers' employment outcomes. I find that during recessions the hiring rate falls faster for young workers than for more experienced workers. I show that this cannot be explained by the composition of jobs or workers' labour supply decisions, and I conclude that firms preferentially hire experienced workers during periods of high unemployment. I develop a new model of cyclical upgrading that relaxes the classic assumptions of exogenous firm size and rigid wages. I show that this model predicts larger log wage decreases during recessions for young workers than for experienced workers, a prediction that is supported by the data. I conclude that policymakers should consider extending unemployment insurance coverage during recessions to new labour market entrants.