The Long-term Effect of Macro Shocks at Labor Market Entry: Evidence from Taiwan

Abstract: The hit of the pandemic brought out an increasing unemployment rate in the labor market. Young workers coming of age are hugely influenced when going through the school-to-work transition, an early life stage impacting future careers. Literature has pointed out scarring effects - long-term effects of unfavorable labor market entry due to macro shocks. This paper complement the literature by studying the case of Taiwan which has a relatively flexible labor market in East Asia. I investigate the long-run effects of initial labor market conditions on earnings and employment status for individuals entering the labor market between 1978 and 2017. Using data from Taiwan's Manpower Utilization Survey, I find both persistent wage reductions and temporary unemployment penalties, a distinguished result given the nature of the flexibility of the labor market in Taiwan. Moreover, the scarring effects are heterogeneous in that men experience more persistent but smaller wage losses than women, and highly-educated graduates experience earning reductions while lower-educated counterparts tend to endure a higher probability to be unemployed. Together, these results confirm that even after temporary shocks disappeared, long-term penalties exist.