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Bad News for College Grads October 26, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Education.
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Now is not a good time to graduate from college. Peter Orzag, Director of Management and Budget, writes:

We often hear about people who are unlucky in love, but what of those who are unlucky in the business cycle? What is the impact of being born two decades before a significant economic downturn, such that you graduate from college and enter the labor force in the middle of a period of high unemployment?

As the class of 2009 is keenly aware, entering the labor market during a recession has immediate negative effects. Job offers are harder to find: according to the National Association of Colleges and Employers, less than 20 percent of the class of 2009 graduated from college with a job offer in hand, compared to 25 percent in the class of 2008 and more than 50 percent in the class of 2007. Whereas year to year starting salaries on average tend to increase, with the tough competition in this year’s labor market, average starting offers for the class of 2009 are slightly down.

I recently read a paper that suggests that, for this cohort, the wage effect of graduating during a period of high unemployment will continue well beyond the end of the recession and even the labor market rebound. In examining the cohorts of college graduates that entered the labor market before, during, and after the recession of the early 1980s, Lisa Kahn of the Yale School of Management found that an increase in unemployment produces a significant and enduring negative wage effect.

The chart below illustrates this effect: a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value.

Entering Labor Force During Recession Has Enduring Effect on Wages:
For the 1982 Cohort, $100,000 NPV Loss in First 20 Years of Career


Data from Kahn 2009

In other words, if you graduate in a recession without a decent job offer or with no job at all, even after 15 years and an economic recovery your wages will not have caught up to someone who graduates during good times.

As Matt Yglesias rightly argues:

If you’re graduating from college this spring, you’ll be sitting around at the age of thirty-five still suffering from the fact that Susan Collins, Olympia Snowe, Ben Nelson, and Kent Conrad decided to make the stimulus bill stingier in order to better bolster their credentials as preening centrists. When thinking about short-term inflation-unemployment tradeoffs, this sort of thing is crucial to keep in mind. Inflicting a high unemployment rate on the population has incredibly punitive and deleterious long-run consequences for young people.

book-section-book-cover2 Dwight Furrow is author of

Reviving the Left: The Need to Restore Liberal Values in America

For political commentary by Dwight Furrow visit: www.revivingliberalism.com

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