The career effects of graduating in a recession

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?

Researchers Philip Oreopoulos, Till von Wachter and Andrew Heisz discovered three major trends:

Luck matters, because graduating in a recession leads to large initial earnings losses; these losses, which amount to about 9 per cent of annual earnings in the initial stage, eventually recede, but slowly – halving within five years but not disappearing until about ten years after graduation.

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.

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 labour 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 researchers 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. They 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.

Source: Matt Nesvisky, The Career Effects Of Graduating In A Recession, NBER Digest, November 2006; based upon: Philip Oreopoulos, Till von Wachter and Andrew Heisz, The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates, National Bureau of Economic Research, Working Paper No. 12159, April 2006.

For text: http://nber.com/digest/nov06/w12159.html

For working paper: http://papers.nber.org/papers/w12159

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 21 November 2006