The Lasting Scars From Graduating in a Recession

The Issue:

Recent college graduates starting out their professional careers are particularly vulnerable to the economic conditions that prevail when they leave school. Young workers graduating into a recession face worse employment prospects and tend to receive lower earnings relative to luckier peers who graduate just before or just after the recession. What is more, the differences in employment and earnings can persist for several years leading to significant earnings losses over graduates’ careers when compared to their counterparts who graduated during better times. While these patterns have been evidenced across several previous recessions, emerging research is finding that during the Great Recession the impact on new college graduates was larger than would have been expected, even after taking into account the greater severity of the downturn. Furthermore, employment losses for graduates around the Great Recession have been worse, more persistent, and have shown no recovery for more recent graduating cohorts.

The experiences of college graduates in the late 2010s raise concerns about the prospects facing those graduating during the COVID recession.

The Facts:

• Why might recent college graduates entering a weak labor market be adversely impacted in ways that persist well beyond the end of the downturn? The research on the mechanisms that link lasting career effects, known as labor market scarring, to economic conditions at entry is sparse. But there are several ways in which a poor early start, possibly including time spent in unemployment, can put college graduates in jobs with fewer training and promotion opportunities, resulting in lasting disadvantage. When unemployment is high, highly qualified graduates may be forced to accept lower-level starting jobs or work that is not the best match for their skills, leading to lower earnings and productivity. On the flip side, firms are more willing to invest in hiring and training workers with little experience during tight labor markets, potentially raising recent graduates’ skills and experience in ways that enhance their future productivity and earning potential. Importantly, one way in which young workers — who are highly mobile — may recover from early setbacks is through switching jobs. But their ability to move to a better-paying job (and the length of time they have to spend working at a firm at the bottom of the job ladder) will depend to some extent on the speed with which the labor market recovers following a downturn (see here).
• The negative effect on wages for workers graduating into a recession is largest during the first year out of college, fading gradually during the course of a decade. For instance, one study that looked at U.S. college graduates who graduated between 1974 and 2011 found that earnings are roughly 10% lower in the first year for those who graduate into an economy with a 4 percentage point higher unemployment rate (the increase seen in a large recession). This effect partially persists during the first years of a career, averaging to roughly 1.8% earnings loss per year over a decade. The decreased earnings in the study were the result of a combination of wage reductions and hours reductions — workers were about 5 percentage points less likely to be working full-time their first year out of college when they graduated into a recession, though this effect did not persist beyond the first three years after graduation. Beyond wages and work hours, there is evidence that cohorts that graduate into recessions have statistically and substantively lower employment rates throughout their careers.
• The effects of graduating into a recession vary across majors. College majors differ widely in the skill requirements of their degrees and how these skills relate to jobs, as well as in how much demand for positions varies with the state of the economy. There is evidence that workers who graduate with degrees in typically high-earning majors, such as civil engineering or accounting, have tended to experience less severe consequences than workers with degrees in average- (journalism or engineering technology) or below-average earning majors (fitness and nutrition, commercial art and design). Those who graduated between 1974 and 2011 in fields that typically earn below the mean experienced earnings losses during a recession that were about 50% larger than those of the average major, according to the study. As a result, the earnings differences between majors widened during recessions. The difference in the earnings impact of graduating into a downturn across majors was the result of a combination of differences in wages, hours worked, employment, and occupational earnings power, across fields. 
• The Great Recession had an impact on the careers of recent graduates that was larger than what would have been expected given the trends observed in earlier periods, even after taking into account the greater severity of the Great Recession. Young people fared particularly poorly between mid-2007 and late 2009. In studies that we conducted separately we find consistent evidence that the impact of the Great Recession on new graduates was significantly larger in earnings and employment rates than previous recessions would have predicted. For instance, the drop in the employment rate of those aged 22 in 2010 was at least twice as large as expected according to the findings of a study that looked at people who were born between 1948 and 1997, observing them at ages 22 to 40 using data from the census' Current Population Survey. The effect of entering the labor market during the Great Recession on earnings was also much greater than would have been expected. The negative impact of the unemployment rate on the earnings of those who graduated between 2004-2011 was between 2 and 3 times the size of earlier periods, according to a separate study. Moreover, the relative advantage high-skilled majors had experienced when graduating into previous recessions was cut in half, indicating that negative impact was more evenly distributed across majors.
• The employment rate of new graduates failed to recover following the Great Recession, potentially reflecting other underlying trends. The cohort that entered the labor market in 2014 had employment rates that were 3 percentage points lower than expected based on past business cycles. Rather than improving, by the time the class of 2018 entered the labor market, the shortfall had grown to 5 or 6 percentage points. While recent cohorts have not suffered in terms of earnings, these patterns in employment seem to indicate that there has been an additional change to the prospects of recent entrants, over and above what is consistent with normal recession effects. Such a change seems to have predated the Great Recession. Since 2005, each successive cohort of new entrants into the labor market has had lower employment rates, relative to older workers in the same labor market, than those before (see here).