The effects of test scores and truancy on youth unemployment and inactivity: A simultaneous equations approach

In this paper we analyse the interactions between, and determinants of, test scores, truancy and the risk of youth unemployment and NEET in a simultaneous equations framework. This approach allows us to disentangle the observable direct and indirect effects of truancy and test scores on the risk of unemployment and NEET from their unobserved effects. We use a unique data source, combining the Youth Cohort Study, the School Performance Tables, and the School’s Census, enabling us to control for a large number of personal, family, school, peer group and neighbourhood effects on the three response variables. Our findings suggest that models of the determinants of youth unemployment and NEET that ignore correlation between the unobservables of the determinants test scores and truancy will lead to misleading inference about the magnitude and strength of their direct effects. However, our findings also suggest that truancy has a indirect effect on labour market outcomes via its effect on test scores. Truancy does have an unobserved effect on the risk of unemployment and the risk of NEET insofar as the correlation between latent variables for truancy and labour market outcomes are positive and statistically significant. Test scores have a direct effect on labour market outcomes, and through the estimation of ATTs, we show a good performance in high stakes tests (i.e. GCSEs) can mitigate the effect of truanting from school on labour market outcomes