Graduating in a recession leads to large initial earnings losses. These losses, which amount to about 9 percent of annual earnings in the initial stage, eventually recede, but slowly -- halving within five years but not disappearing until about ten years after graduation.
In the first ten years of work, individuals experience 70 percent of their overall wage growth, change jobs frequently, and often settle on a particular line of business or industry. Those college graduates who enter a robust job market are often considered lucky because more job opportunities are available to them. Those who graduate during a recession have more difficulty finding a job that fits. But, how long lasting is the impact of that good or bad luck? In The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates (NBER Working Paper No. 12159), co-authors Philip Oreopoulos, Till von Wachter, and Andrew Heisz turn to three large administrative data sets for some answers.
They analyze data on about 70 percent of Canadian college students and graduates from a wide range of disciplines in the years 1976-95, and individual income tax records and payroll information from 1982-99. The data also include information on the students' courses of study, their annual earnings, and other aspects of their employment or unemployment, including information on the characteristics of the workers' employers early in their careers. The period under study encompasses two distinct recessions.
The researchers first analyze the long-term effect of on earnings of a typical recurring shock - an economic downturn - affecting a large group of workers. Then they use the information on employment, job mobility, and employer characteristics over a 10-year period to assess the sources of persistent effects of early labor market conditions. Finally, information about the individual's academic program allows them to investigate whether workers predicted to be less advantaged from the outset actually suffer larger long-term losses and adjust differently to an initial shock.
There are three central findings in this study. First, luck matters, because graduating in a recession leads to large initial earnings losses. These losses, which amount to about 9 percent of annual earnings in the initial stage, eventually recede, but slowly -- halving within five years but not disappearing until about ten years after graduation. Second, initial random shocks affect the entire career. Graduating in a recession leads workers to start at smaller and lower paying firms, and they catch-up by switching jobs more frequently than those who graduate in better times. Third, some workers are more affected by luck than others. In particular, earnings losses from temporarily high unemployment rates are minimal for workers with two or more years of work experience and are greatest for labor market entrants. Among graduates, those with the lowest predicted earnings suffer significantly larger and much more persistent earnings losses than those at the top.
The results suggest that changes in the quality of jobs and job mobility are important in explaining the long-term effects of bad luck for those graduating in a recession. For example, Oreopoulos, von Wachter, and Heisz note that mobility among jobs and industries initially will rise and then, gradually, will decline in response to an initial adverse shock -- this implies that graduating from college in a recession reduces the quality of initial employment. However, moving from job to job proves to be highly productive for young graduates, and this is even more the case for workers affected early on by restricted job markets. The subsequent increased job search can explain about 30 percent of the reversion in initial wage losses, the authors find.
They also find that recessions lead workers to start out with employers that are smaller on average and pay less. The data suggest that declines in the size and average wages of first employers of young college graduates could explain about 30-40 percent of the initial wage losses from starting a career in a recession. Labor market entry in bad times leads to less desirable job placement, or mismatches of workers into firms, and workers catch up by searching for and getting themselves into more desirable firms.
Oreopoulos, von Wachter, and Heisz further find that college graduates at the bottom of the wage-and-ability distribution experience larger and more persistent losses, while for those at the top the effects are small and short-lived. The researchers believe that the (present discounted value of) losses in annual earnings could be three to four times larger for the least relative to the most advantaged workers. This suggests an even larger degree of dispersion in the costs of recession, even within the group of college graduates. The patterns discerned in the data support the importance of job mobility and changes in firm quality, the authors conclude, with the exception of those least advantaged, who suffer permanent earnings losses and are permanently relegated to lower wages.
-- Matt Nesvisky