The problem here is that there is no incentive for the companies to do things reasonably, because as many people is saying in these comments, there is a virtually unlimited supply of young, exploitable workers.
For any midsized or large company, the system is working as intended (small companies often have legitimate problems, though). For the workers, not so much; but again, the companies don't give a shit.
There are a lot of bullshit excuses for not having unions (half of them come from propaganda from the managerial class and pro-corporation ideologues, the other half from people parroting said propaganda), but I'm yet to see a single one that outweighs the benefits of having an union and having workers actually stand for their rights and for the respect they deserve.
Is it working well? Even OP used the "but the majority of the less successful studios are stuck in this seemingly unbreakable cycle" expression. While I guess that similar dynamic can be found in successful studios, the focus here were less successful studios.
While the supply of exploitable young people is large, they leave industry after 5 years on average. I am willing to bet that they get more productive after few initial years of experience - but they leave pretty much as the benefits of it should kick in.
Then there is self-selection. Passionate dreamers are heavily over-represented in your pool. People who investigate before they do major decisions and people who based their decisions on more practical considerations underrepresented. To large extend, games are art and as such require that emotional side in their creators. However, work might be more effective when there is presence of the other type of personality - the people who will tell you openly that "feature is cool, but we should postpone it to dlc anyway".
For any midsized or large company, the system is working as intended (small companies often have legitimate problems, though). For the workers, not so much; but again, the companies don't give a shit.
There are a lot of bullshit excuses for not having unions (half of them come from propaganda from the managerial class and pro-corporation ideologues, the other half from people parroting said propaganda), but I'm yet to see a single one that outweighs the benefits of having an union and having workers actually stand for their rights and for the respect they deserve.