Scarring effects: a review of Australian and international literature

[Coronavirus Disease 2019] COVID-19 has caused a decrease in the demand for labour in Australia at a scale and speed never experienced before. Underlying the immediate effect of COVID-19 on total employment are individual-level impacts. For thinking about the labour market impacts of COVID-19 in Australia it is relevant to consider both impacts on young people who will be seeking to enter the labour market and on the workforce who were already in jobs. Understanding the phenomenon of scarring is of considerable importance for forecasting future impacts of COVID-19 on labour market outcomes in Australia; and for policy-makers in seeking to address those impacts.

Scarring occurs when an adverse experience for a worker - associated withmacroeconomic 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.

Excerpts from publication. Show less