Economic downturn can impact young job-seekers for decades

December 16, 2020
A help wanted sign on the door of a Target store in Uniontown, Pa. (AP Photo/Gene J. Puskar)

A help wanted sign on the door of a Target store in Uniontown, Pa. (AP Photo/Gene J. Puskar)

High school and college graduates entering the workforce during a recession may see lower wages and lower levels of employment even after the economy recovers, with adverse impacts potentially lasting into middle age, researchers found.

In a study of employment data, University of California at Los Angeles professor Till von Wachter found that young labor market entrants are more vulnerable to adverse labor conditions than more experienced workers, especially in the U.S. where little to no safety net exists for individuals with little work experience.

Using U.S. and Canadian employment data from the 1980s and 1990s, von Wachter studied how individual earnings, job mobility and company characteristics were impacted by the economic cycle, creating a model to examine the persistent effects of entering the job market during an economic downturn.

On average, individuals entering the labor market during a typical recession experience a reduction in earnings of about 10-15% compared to their “luckier peers,” von Wachter said. 

Workers also tend to start jobs at less prestigious occupations or smaller and lower-paying firms; the average “unlucky” college graduate loses about 10% of cumulated discounted annual earnings over the first 10 years of their career, amounting to 3/4 of average earnings during that period. Less-educated and non-white labor market entrants are even more adversely affected, losing up to 13% of cumulated discounted earnings.

For some groups, such as those with a doctorate or master’s degree, an initial occupation choice can permanently affect their entire career. 

“If you start making investments specific to that occupation, then you’re stuck,” von Wachter told The Academic Times.

It can take 10 to 15 years for these “unlucky labor market entrants” to recover, von Wachter said, as they find a job better suiting their skills or income requirements and work their way up through the company or career path.

The adverse impacts often recur in middle age, though, because the “unlucky” workers don’t have as much experience as their colleagues and therefore are the last to be chosen for a promotion and the first to be chosen in the event of any layoffs, von Wachter said.

“Your career never quite recovers, and you’re always at the risk of something bad happening to you again,” he said.

What’s more, these effects also reach beyond employment outcomes — entering the labor market during a recession can impact health, marriage and divorce, fertility and mortality, even into middle age, according to von Wachter’s research.

“What’s puzzling, and worth keeping in mind, is that these effects seem to be there even for a short-lived reduction in economic condition,” von Wachter said. “It’s not surprising that a long, drawn-out recession would lead to these drawn-out adverse effects. What’s more troubling in a way is that if the labor market is bad in the year you were entering the labor market, that is what matters, even if the second year things start going better.”

Compounding the issue is that the U.S. provides very little support to high school and college graduates looking for work. Low-income individuals who have little wealth may be eligible for food stamps and Medicaid, but they remain at a higher risk of poverty and likely don’t qualify for unemployment insurance.

“It’s worth asking ourselves as a society, you know, given … evidence of these adverse effects, what can we do for these individuals?” von Wachter said. “Certainly thinking about waiving debt from college is a good idea. But there’s a group out there that would not be affected by policies oriented toward educational debt. So that is certainly a good debate worth having.”

An alternative strategy, von Wachter said, would be subsidizing the employment of young workers, as other countries have done. France, for example, enacted a law earlier this year that provides EUR 4,000 (approximately $4,864) to employers who hire someone younger than 26 years old. The U.S. has yet to consider such a policy.

For those entering the labor market during the current recession, von Wachter said it’s important to remain flexible, remember that finding a job can take time and keep in mind that this isn’t your fault — it’s the labor market.

“Also keep in mind that all our results are for the average individual, meaning you’re not necessarily going to experience this cycle … and you have agency in the process,” he said. “You are somebody who’s at bigger risk of these adverse outcomes, but that’s just the mean and distribution, and you can influence a particular path.”

The study “The Persistent Effects of Initial Labor Market Conditions for Young Adults and Their Sources,” published in the Fall 2020 edition of The Journal of Economic Perspectives, was authored by Till von Wachter, University of California at Los Angeles. 

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