The career effects of graduating in a recession

When I entered the labour market as a young graduate in South Africa in the early 1990s there were plenty of jobs to pick and choose from.     If Ihad graduated twenty years later my life story could be very different.   Researchshows that entering the labour market during a recession can have negativeconsequences that take years to overcome, if they are overcome at all.

An economic recession is tough on everybody, but is particularlytough for young people entering the labour market for the first time.   Withoutany work experience to their name they have to compete with all the other newentrants as well as job seekers already in the labour market. Young people tendto be the ‘first out’ and ‘last in’ during times of economic recession.

It is unsurprising then that during the recession the youthunemployment rate has soared.   The unemployment rate for 15 to 24 year oldsreached nearly one in five in New Zealand during 2011. The longer thisunemployment persists, the greater the threat of a long-term scarring effectdue to youth becoming discouraged and less employable.  

While it is the unskilled new labour market entrants who aremost at risk during a recession, a recent academic paper by Oreopoulos, vonWachter, and Heisz shows that skilled graduates can also be significant losers.  During a recession, graduates typically start out with employers that aresmaller on average and pay less.   In the early years of employment, the earningsof those that graduate (and manage to find a job) in a recession are on averagenearly 10% lower than those who graduate during growth years, at the samepoints in their careers.     These losses slowly recede, halving within fiveyears and for most graduates have dissipated by ten years.  

Luck clearly matters as the authors show that the wagedeficit experienced by recession graduates is strongly influenced by economicconditions in the very first year after leaving university.

Other factors are less influenced by luck.   Without a doubt,those with a tertiary qualification do better in the marketplace but the typeof qualification earned is a significant determinant of the extent of incomeloss.   Those with degrees in low demand in the labour market suffersignificantly larger and much more persistent earnings losses than those withhigh demand qualifications. Those who graduate with the highest predictedearnings, like doctors, lawyers and engineers tend to be the least affected.   Thosewith the least marketable qualifications may experience permanent earningslosses when graduating in a recession.

Another study by Yale academic Professor Lisa Kahn showsthat starting work during a recession reduces job mobility at a vital time in aperson’s career.   Job mobility is crucial in the early years as it helps theworker match their skills with the needs of the employer and settle on aparticular line of business or industry.   On average, those beginning work intough economic conditions remain for longer tenures at their jobs and areunable to fully shift into better positions after the economy picks up.   Whilemobility is reduced the research shows that those actively changing jobs canmore quickly overcome the wage deficit incurred by the recession.

If career prospects are heavily influenced by economicconditions at the time of graduation does it pay to postpone entering the labourmarket until the economy recovers?   Professor Kahn estimates that foregoing ayear or two of earnings and waiting for better opportunities could result in asmaller overall loss than the losses associated with taking a poor job during arecession.  

For those that can afford to wait, further study is alogical choice. The returns to further education are high although they vary accordingto their marketability.   Employers seeking new recruits for quality jobsgenerally prefer fresh graduates over the unemployed or underemployed.   Furtherstudy is clearly an option taken up by many young Kiwis as enrolments in postgraduate qualifications have soared in recent years (see graphic).

Students who graduated during the current recession face atough start to their career. But there are a few strategies that can limit thelong term scarring.   Job mobility is important and every step should be takento avoid being stuck for too long in jobs in which you are underutilised.   Delayingentry into the labour market by enrolling for further education or developingother life skills is preferable to accepting an inferior job.   Earning topgrades and being more marketable than the rest is more important than ever.  The message is clear; choose what you study carefully.


Source: Ministry of Education

Enrolments in post graduate qualifications in New Zealand have soared as students delay entry into the labour market

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