Analysis of youth underemployment in Macedonia, Montenegro, and Serbia

The vulnerability of working youth in Western Balkan countries is a major policy concern because their unemployment rates lie far above the EU average. We investigated the effect of youth underemployment on wages in three countries in the Western Balkans: Macedonia, Serbia, and Montenegro. Our empirical analysis built on a recent ILO school-to-work transition survey and controlled for sample-selection bias and endogeneity between underemployment and real hourly wages. The identification of the causal effect relied on traditional and novel instruments. In the former, the main instrument was a regional-unemployment indicator; in the latter, we exploited the conditional heteroskedasticity of underemployment to generate valid instruments. Our findings verified the negative relationship between underemployment and wages, which is strongest in Macedonia, followed by Montenegro and Serbia. These findings support the need for more aggressive youth-employment policies, including internship and traineeship programs, qualification, re-training, and adequate assessment of skills and competence.