Youth Unemployment and Retirement of the Elderly: the Case of Italy

This paper shows that the “lump of labor” assumption fails in Italy. The direct relationship between the unemployment rate of the young and the labor force participation of the old is pro-cyclical, i.e. a higher labor force participation of the old is related to a lower unemployment rate of the young. Hence both vary with the business cycle. In order to overcome endogeneity problems in explaining unemployment of the young, we resort to a simulated variable: “the inducement to retire”, which is constructed by simulating the social security benefits. We related the unemployment rate of the young to this incentive measure and find that a higher inducement to retire is associated to a higher unemployment rate – quite the opposite of the “young-in-old-out” story.