Timing is Everything: What's the Impact of Graduating Into A Recession?
What happens to young people who have the misfortune of graduating into a recession? That’s the question that researcher Bart Cockx of Ghent University, Belgium, and IZA, Germany tries to answer (here’s his one-pager summarizing the research.) This research provides further evidence of importance of education as demonstrated by the differing outcomes based on educational attainment.
I found this research of interest since I saw this phenomenon first-hand in my family. My older brother graduated from college into a recession in 1981 and struggled to find work. He took a job as a bellhop to get out of the house and ultimately talked his way into an interview and then into an engineering job (yes, initiative does matter!). So, it took him about six months after graduating to find this job. Clearly his technical degree (engineering) came in handy and then once he got that good-paying job in his field his career was back on the right track.
Now onto the key takeaways from the research:
- “High-educated youth graduating during a recession incur a moderate, but long-lasting loss in earnings.”
- High-educated unlucky [graduate during a recession] cohorts can eventually catch up if the labor market is sufficiently flexible.
- However, it can take a a long time to catch up. Why?
- “Thus, college students graduating during a bust phase in the business cycle end up working in lower-quality jobs paying lower wages and offering fewer opportunities for promotion and training than students graduating during a boom phase. When labor demand recovers, these college-educated youths will have forgone valuable human capital accumulation and will have invested instead in task-specific competencies that have little value in higher-quality jobs, putting them behind their luckier cohorts who graduated during a boom , .”
- The outcomes for the highly educated also differ based on major as my brother’s experience demonstrated:
- “The evidence also shows that the penalty differs by field of study, with high-paying majors being less affected by initial conditions than lower-paying ones…”
- “The earnings of low-educated youth entering the labor market in a recession fall considerably in the short-term, but the penalty dissipates quickly.” Why?
- “Such skills do not erode during periods of inactivity. Thus, low-educated youth entering such a labor market in a downturn are expected to experience only temporary penalties in wages and earnings. However, because they are at the bottom of the qualification ladder, they cannot shield themselves against negative shocks by moving to a lower-skilled job (downgrading). In addition, because they are more financially constrained, low-educated youth are less mobile geographically than higher educated or older workers. This makes the short-term impact of a recession more severe for low- than for high-educated youth.”
- What’s the impact? “In the case of a severe recession (defined as a four percentage point rise in the unemployment rate), the year-one average wage falls by 16%, hours worked decline by 28%, and earnings fall by 45%. These effects are largely gone after the first year, however ”
- Such a sharp drop in earnings highlights the importance of emergency savings to help cushion the blows.
Questions [using the one pager will teach students how to read and analyze a research report]:
- Ask your students to predict what happens in a recession based on level of education? What do they think happens to recent college graduates? To recent high school graduates?
- Who typically does best in an economic downturn? Why?
- The research indicates that it can take up to 10 years for a college graduate from a recessionary period to catch up to their peer who had the good fortune of graduating during a boom. Are there steps the recession period graduate can take to try and catch up faster?
- Find out what year your parents graduated from high school (if that is their highest degree) OR college (if that was their highest degree)? How was the economy when they graduated? Did it have an impact on their ability to find a job?
- Did this research impact how you think about education?
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.