College graduates entering the recession face a lifetime of consequences — and more education isn’t going to solve the problem.
A new Federal Reserve Bank of San Francisco paper, Recent College Graduates and the Labor Market by Bart Hobijn, Colin Gardiner, and Theodore Wiles, argues that unemployment is particularly bad for those just graduating from college. It explains how this puts pressure on structural or “recalculating” arguments of unemployment:
The current labor market outcomes of recent college graduates closely mirror those observed during the 2001 recession and the subsequent jobless recovery. This is important because recent college graduates are not subject to the kinds of structural factors that have been posited as the main sources of weakness in the overall labor market. Unemployment rates during the 2001 recession are widely recognized as cyclical in nature. Similarities in the experiences of recent college graduates in the labor market during the two recessions and recoveries are evidence that high unemployment rates in the current downturn and recovery are also mainly cyclical.
(h/t Mark Thoma, who has additional comments.) Check it out.
Children: Teach them well and let them lead the way. Or not.
I say hamburgers because Roosevelt Institute intern Charlie Eisenhood and I were working on a similar paper. Looks like it’s getting absorbed into another project. I’m going to dump Eisenhood’s summary of the long-term effects of graduating into a recession that we had in draft form to help supplement this argument, because it can’t be said enough.
Eisenhood dug up the data for what I think is the most shocking graph. Here’s the employment-population ratio for 20-24 year olds with a college degree, unadjusted monthly (they don’t produce it adjusted) and the yearly average:
This is a cohort with mobility, fresh degrees, low health care costs, low wage rigidity, etc. etc. I don’t shine the flashlight here to ignore the pain that those without college degrees experience in this economy. But if young people with college degrees can’t survive in the post-recession era, nobody can. And this explodes the idea that education alone, instead of monetary and fiscal policy, is the way out of our current high unemployment rate.
I’ve been on a kick of watching the employment rates of 20-24 year olds with college degrees as a barometer for our economy’s health for some time. Some people on the right get that this is going to kill a generation – David Frum in particular has done great work. But in general everyone on the right is screaming about the Europeanization of the U.S. economy. Ironically, they have been screaming about the part where we could get universal health care and some decent trains and not the part where the young generation that is supposed to start building their careers, innovating and creating the future of the economy, is sitting idle. The part where a generation becomes permanently detached from the formal labor markets. An economy of insiders and outsiders.
Blog-Level Literature Summary
Handing the microphone off to Eisenhood:
Even considering both un- and underemployment rates may not be enough to describe the impact of the recession. As an Economic Policy Institute briefing paper points out, the unemployment rates might “underestimate the severity of the labor market problem for young college graduates because they do not indicate whether they are employed in a job that matches their skill level.” That can mean lower wages and a more arduous upward mobility path.
Research suggests that this effect is very real. Paul Beaudry and John DiNardo found “that every percentage increase in the [national] unemployment rate is associated with a 3-7 percent drop in entry-level contract wages.” Lisa Kahn found an estimate on the high end of that spectrum, discovering an “initial wage loss of 6 to 7% for a 1 percentage point increase in the unemployment rate measure.”
Finding a job nowadays is more challenging than ever. Many online degrees offer higher education options that might be suitable for differentiating yourself in the competitive job market.
Phillip Oreopoulos, Till von Wachter, and Andrew Heisz found a smaller, but still strong effect in a study of Canadian graduates. They determined that “a typical recession — a rise in unemployment rates by five percentage points in [their] context — implies an initial loss in earnings of about 9 percent…”
Unfortunately, the recession’s effect is not limited just to the initial job search and wages. The negative impact persists far beyond that. Kahn found that the effect “falls in magnitude by approximately a quarter of a percentage point each year after college graduation. However, even 15 years after college graduation, the wage loss is 2.5% and is still statistically significant.”
Oreopoulos again found a smaller impact — a wage effect that “halves within five years and finally fades to zero by 10 years” — but attributed the discrepancy between his finding and Kahn’s “partly due to [Kahn’s] focus on graduates entering the strong recession of the early 1980s.” That provides little solace to students graduating in this recession, considering that it is deeper and markedly more prolonged than the 1981 downturn.
Job mobility is also affected. Kahn found a “negative correlation between the national unemployment rate and occupational attainment (measured by a prestige score) and a slight positive correlation between the national rate and tenure.” She concludes that “workers who graduate in bad economies are unable to fully shift into better jobs after the economy picks up.” Worse, Oreopoulos found permanent wage effects on workers with low expected earnings (based on occupational prestige).
Considering that Paul Devereux and Robert Hart determined that wages are notably more pro-cyclical among job movers (particularly those changing employers) than among job stayers, longer tenures in periods of growth are likely to depress wages.
It’s important to note that it’s not just lower-skill workers who experience these effects. Paul Oyer showed that “macroeconomic conditions have a large effect on the likelihood of [Economics Ph.D.s] obtaining desirable academic positions” — those who searched for jobs in periods of high unemployment were more likely to take a position at a lower-ranked institution. Once again, it appears that the initial placement has a long-term effect on the workers career. As Oyer puts it, “it appears that getting a good initial job has a causal effect on having a good job later.” His research suggests that those Ph.D.s in better first jobs are more productive in their research, leading them to better future jobs, perhaps through the mechanism of increased human capital.
 Beaudry, Dinardo. The Effect of Implicit Contracts on the Movement of Wages Over the Business Cycle: Evidence from Micro Data. 1991.
 Kahn. The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy.
 Oreopoulos, Von Wachter, Heisz. The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates. 2006.
 Devereux, Hart.
 Oyer. Initial Labor Market Conditions and Long-Term Outcomes for Economists. 2006.
Snake Oil, Paul Krugman, Student Loans & Consumer Credit by Steven Hansen
Inequality, Leverage and Crises by Michael Kumhof and Romain Ranciere
Underneath the Happy Talk, Is This As Bad as the Great Depression? by Washington’s Blog
Wealthiest States by John Lounsbury
China Leads in Education by John B. Lounsbury
Decline – We Are Doing It to Ourselves by John Lounsbury