The COVID-19 pandemic hit the Australian economy hard in 2020, ending nearly three decades of growth and causing serious disruptions to the Australian labour market. The recession occurred on the back of a decade of high unemployment and stagnant earnings for young workers that followed the Global Financial Crisis (GFC). Young workers always suffer more than older workers during recessions, but the COVID-19 economic shock was particularly bad. Many young people work in contactintensive sectors, such as hospitality and arts and recreation services, which serve as important ports for labour market entry. With these sectors being partially closed, it was hard for young people to get a foot onto the first rung of the job ladder.

Since the economic shock in 2020, however, the Australian labour market has rebounded strongly. Macroeconomic forecasters expect the unemployment rate to fall to levels not seen in half a century and remain there for some time. Many young Australian workers have benefited from this recovery, with the youth unemployment rate declining significantly. But, as this paper shows, not all young Australians have shared in the economic recovery and some have been left behind.

History tells us that recessions can have ‘scarring effects’ on job market outcomes of young people for up to a decade after the event, with the Global Financial Crisis being a clear example.

Despite the current exceptional strength in the labour market, the share of young people that are employed remains below levels observed in the period prior to the GFC, and the share of young workers that have been out of a job for a long period of time remains elevated. The labour market needs to remain very strong for a sustained period to allow more young people to benefit from the recovery.

Guided by history, we develop a conceptual framework for identifying potential long-term scarring effects on the Australian youth labour market. This framework highlights four potential channels through which scars might appear:

• Reduced job match quality: Recessions decrease labour mobility, the quality of the first job and the quality of the job match for those entering the labour market for the first time. This can make it harder for young workers to climb the first rungs of the job ladder, which in turn can have significant effects on their lifetime incomes.
• Delayed labour market entry: Recessions cause delays for young people transitioning to employment, with these delays causing skill atrophy, diminished labour market attachment, lower motivation and increased employer stigma.
• Lower education participation: Recessions make it harder to pay for formal education which reduces the quality of learning and lowers investment in human capital. This reduced investment can then lead to lower lifetime earnings.
• Psychological scarring: Recessions cause young workers to become more pessimistic and uncertain about their future job prospects, which can reduce the effort they put into searching for jobs.

Through this analysis we identify four specific groups of young Australians that have not shared in the benefits of the economic recovery and are most vulnerable to such long-term
scarring effects. Policies should thus be designed to consider the needs of:

1. Young workers who are not well matched to their jobs
2. Young people who have not been working for a sustained period, including the long-term unemployed and those not in the labour force
3. Young people who have not been working and not studying, particularly men aged between 20 and 24 years
4. Young students who have been disproportionately affected by school closures and the shift to remote learning

In partnership with the Paul Ramsay Foundation, the e61 Institute will develop and publish real-time trackers of the youth labour market that focus on these vulnerable groups going forward. This will allow the ongoing effects of the COVID-19 pandemic on young Australians to be identified and quantified. A companion paper examines the potential policy responses to mitigate these impacts on the youth labour market. Taken together, this research is expected to provide an evidence base for policy actions to mitigate the scarring effects of the pandemic on the employment outcomes and welfare of young Australians.