College Graduates and the Terrible Labor Market

Aw hamburgers.

A new Federal Reserve Bank of San Francisco paper, Recent College Graduates and the Labor Market by Bart Hobijn, Colin Gardiner, and Theodore Wiles, argues that unemployment is particular bad for those just graduating from college, and how this puts pressure on structural or “recalculating” arguments of unemployment:

The current labor market outcomes of recent college graduates closely mirror those observed during the 2001 recession and the subsequent jobless recovery. This is important because recent college graduates are not subject to the kinds of structural factors that have been posited as the main sources of weakness in the overall labor market. Unemployment rates during the 2001 recession are widely recognized as cyclical in nature. Similarities in the experiences of recent college graduates in the labor market during the two recessions and recoveries are evidence that high unemployment rates in the current downturn and recovery are also mainly cyclical.

(h/t Mark Thoma, who has additional comments) Check it out.

Children: Teach them well and let them lead the way. Or not.

I say hamburgers because Roosevelt Institute intern Charlie Eisenhood and myself were working on a similar paper. Looks like it’s getting absorbed into another project. I’m going to dump Eisenhood’s summary of the long-term effects of graduating into a recession that we had in a draft form to help supplement this argument, which lots of people are talking about on the internet right now, because it can’t be said enough.

Eisenhood dug up the data for what I think is the most shocking graph. Here’s the employment-population ratio for 20-24 year olds with a college degree, unadjusted monthly (they don’t produce it adjusted) and then yearly average:

This is a cohort with mobility, fresh college degrees, low health care costs, low wage rigidity, etc. etc. I don’t put the flashlight here to ignore the pain that those without college degrees have in this economy. But if young people with college degrees can’t survive in the post-recession era, nobody can.  And this dynamites the idea that education alone, instead of monetary and fiscal policy, are the way out of our current high unemployment.

I’ve been on the kick of watching the employment rates of 20-24 year olds with college degrees as a barometer for our economy’s health for some time. Some people on the right get that this is going to kill a generation – David Frum in particular has done great work. But in general I point out that everyone on the right is always screaming about the Europeanization of the U.S. economy. Ironically, they have been screaming about the part where we could get universal health care and some decent trains, and not the part where the young generation who are supposed to start building their careers, innovating and creating the future of the economy are sitting idle. The part where a generation becomes permanently detached from the formal labor markets. An economy of insiders and outsiders.

Blog-Level Literature Summary

Handing the microphone off to Eisenhood:

Even considering both un- and underemployment rates may not be enough to describe the impact of the recession. As an Economic Policy Institute briefing paper points out, the unemployment rates might “underestimate the severity of the labor market problem for young college graduates because they do not indicate whether they are employed in a job that matches their skill level.[1]” That can mean lower wages and a more arduous upward mobility path.

Research suggests that this effect is very real. Beaudry and DiNardo (1991) found “that every percentage increase in the [national] unemployment rate is associated with a 3-7 percent drop in entry-level contract wages.[2]” Kahn (2009) found an estimate on the high end of that spectrum, discovering an “initial wage loss of 6 to 7% for a 1 percentage point increase in the unemployment rate measure.[3]

Oreopoulos, Von Wachter, and Heisz (2006) found a smaller, but still strong effect in a study of Canadian graduates. They determined that “a typical recession – a rise in unemployment rates by five percentage points in [their] context – implies an initial loss in earnings of about 9 percent…[4]

Unfortunately, the recession’s effect is not limited just to the initial job search and wages. The negative impact persists far beyond that. Kahn found that the effect “falls in magnitude by approximately a quarter of a percentage point each year after college graduation. However, even 15 years after college graduation, the wage loss is 2.5% and is still statistically significant.”

Oreopoulos again found a smaller impact – a wage effect that “halves within five years and finally fades to zero by 10 years” – but attributed the discrepancy between his finding and Kahn’s “partly due to [Kahn’s] focus on graduates entering the strong recession of the early 1980s.” That provides little solace to students graduating in this recession, considering that it is deeper and markedly more prolonged than the 1981 downturn.

Job mobility is also affected. Kahn found a “negative correlation between the national unemployment rate and occupational attainment (measured by a prestige score) and a slight positive correlation between the national rate and tenure.” She concludes that “workers who graduate in bad economies are unable to fully shift into better jobs after the economy picks up.[5]” Worse, Oreopoulos found permanent wage effects on workers with low expected earnings (based on occupational prestige)[6].

Considering that Devereux and Hart (2006) determined that wages are notably more procyclical among job movers (particularly those changing employers) than among job stayers[7], longer tenures in periods of growth are likely to depress wages.

It’s important to note that it’s not just lower-skill workers who experience these effects. Oyer (2006) showed that “macroeconomic conditions have a large effect on the likelihood of [Economics Ph.D.’s] obtaining desirable academic positions[8]” – those who searched for jobs in periods of high unemployment were more likely to take a position at a lower-ranked institution. Once again, it appears that the initial placement has a long-term effect on the workers career. As Oyer puts it, “it appears that getting a good initial job has a causal effect on having a good job later. His research suggests that those Ph.D.’s in better first jobs are more productive in their research, leading them to better future jobs, perhaps through the mechanism of increased human capital.

[1] EPI, The Class of 2010.

[2] Beaudry, Dinardo. The Effect of Implicit Contracts on the Movement of Wages Over the Business Cycle: Evidence from Micro Data. 1991.

[3] Kahn. The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy.

[4] Oreopoulos, Von Wachter, Heisz. The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates. 2006.

[5] Kahn.

[6] Oreopoulos.

[7] Devereux, Hart.

[8] Oyer. Initial Labor Market Conditions and Long-Term Outcomes for Economists. 2006.

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18 Responses to College Graduates and the Terrible Labor Market

  1. Ned Baker says:

    Great post. Lots of food for thought.

  2. Zorkmid says:

    Could you show similar graphs, but for cohorts sorted by field of study (hard or soft)? I think it would be very interesting to see whether STEM majors are still much more employable than liberal-arts and other soft-field majors.

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  5. Ebenezer Scrooge says:

    Our host is mostly right, but there is one confounding factor: educational inflation. I’m not worried about it here, because the graph only goes for a decade, and only concentrates on the last four years. But it could confound a longer-term graph of this sort.

  6. sherparick says:

    I suggest emmigration, although there will be lots of competition from Ireland, the UK, Spain, Greece, and Italy. Possible destinations: Australia, Canada, Hong Kong, Singapore, India, South Africa (if we are staying in the English-speaking universe). For those with the gift of language, Germany (with the birth dearth there is a skilled labor shortage), Brasil, Vietnam, and of course, China.

  7. These are great points because all we’ve been hearing from the media is that the unemployment problems are due to a lack of skills. The fact that there are long term consequences had been definitely overlooked.

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  9. TA4eva says:

    The 2006 article which this post cites, “Initial Labor Market Conditions and Long-Term Outcomes for Economists,” argues that during poor academic labor markets, recent economics Phds are forced to take professorships at less prestigious institutions than would otherwise have been the case — with dire consequences for their careers.

    Count me as skeptical of this argument. For one thing, less-prestigious departments usually avoid hiring top-ranked PhDs, viewed as likely to treat the low-ranked department as a “stepping stone” to something better. In other words, Louisville doesn’t -want- the recent PhD from Harvard. They want the recent PhD from someplace similar to Louisville. For another thing, while I can realistically see economists looking their noses down at those who were unwise enough to get their degrees during a recession (since, you know, economists are notorious a-holes), I have a tough time imagining this playing out in most other disciplines. In the humanities, you write a few well-reviewed books and, regardless of what school you’re currently teaching at, you should be able to get a job offer from someplace better. If you look at the career arcs of tenured profs in the English departments at Harvard or Yale, you’ll see that plenty of them started out teaching at some place much less prestigious than Harvard and Yale. And plenty of them got their degrees during a rough academic labor market (e.g. the mid 70s).

  10. TA4eva says:

    I should add: sometimes landing one’s first academic post at an ultra-prestigious university can actually be a BAD thing for one’s academic career. Ultra-prestigious departments are far more likely to deny tenure. Plenty of otherwise brilliant, promising scholars collapse under this sort of pressure, and would have actually been much better off taking a first job at some place a little more easy-going.

  11. LAG says:

    There are a couple of thoughts that come to mind. First, I would be interested in seeing a breakdown of job prospects by degree type. I doubt that these trends hold across the board. An English major with a concentration in postmodern feminist science fiction is probably sucking right now for work. (Hope you get something to feed to the loan monster, honey.)

    Second, I hear you saying, “I don’t put the flashlight here to ignore the pain that those without college degrees have in this economy. But if young people with college degrees can’t survive in the post-recession era, nobody can,” but I’m not convinced. I know some skilled trades are hurting, but when you need a plumber or electrician, you probably are going to pay pretty well for the work. And s/he can definitely get a good-paying job in the oil fields in the Dakotas, something not true of a degree-holding sociology, history, poli-sci, etc, major who’s not quite up to speed on that physical covered in muck work stuff. So, this sounds like a pro-degree prejudice instead of data supported conclusion.

    • rj squirrel says:

      What LAG said – I just dropped $4K on 2 guys/4 hours who trenched and laid a sewer line. No college but superb with a backhoe; young fellas with families, houses, and complaints of too much work (one had done a 16-hour shift the previous day). I would postulate that young people who are reasonably responsible, have a REAL skill, and possess a clean-ish record will fare much better than young people with only a new credential. Plenty of young folks in the military doing just fine. Being able to actually DO something also allows you to work off the books – uh, or so I’m told ;)
      Your recent/new graduate is worthless for a few years; and if it’s a generic (e.g. “Business”) or useless (“Womyns Studies”) degree ……………………..
      You can’t outsource a backhoe.

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  13. Dee G says:

    Isn’t this also a logical consequence of a shift to the “knowledge” economy? They have no “knowledge” of any value, so of course they are going to be a risk to hire until they actually gain some work experience that gives them value…but they can’t also start up their own busienss with just their college degree. This is also why the legal market is so bad. It is not as though the average unemployed law school graduate can go hang up his or her own shingle and go into business for themselves, and choose to represent poor clients until they gain experience, for example. They come out of law school cluseless about how to actually practice law…and yet have massive student loan burdens to boot.

  14. ic says:

    A neighbor’s kid, a high school straight A, entered a state U majoring in General Engineering, couln’t do higher math, changed major to Economics; got a job as a management trainee, downsized in the recession; retrained in a community college to use CAD-CAM, found a job, downsized; retraining to become a pharmacist. Future competitors are robots which can identify and count pills, and mix special compounds. Prescriptions will be filled by mail order huge pharmacies with robots working 24/7. AT age 30, he will be a fully credentialed pharmacist with no experiences. His job is already taken by robots.

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  16. Jaim says:

    “An English major with a concentration in postmodern feminist science fiction is probably sucking right now for work. (Hope you get something to feed to the loan monster, honey.)”

    Yeesh, this canard is so tired, even going back to the 90′s when I graduated with an English degree focusing on 20th century American poetry (LOL!).

    English majors from good schools or better yet, who worked hard, will have developed writing and communications skills. Further, with even a little bit of networking, they’re going to know somebody out there who needs a copywriter or an editor at a level that the business degree types probably can’t hack. For starting salaries sure, business or hard science majors will come out on top, but there are entire industries in New York, DC (especially DC), LA, etc. that are based on finding entry-level humanities types who can write. (And if you spent some time learning how to program or do web design, even better.)

    I’m not trying to downplay how bad it is out there, but if engineering and hard science degrees were the tickets to easy money that some people reflexively claim them to be, and have for decades, we’d have a lot fewer humanities graduates.

    All of that said, law school used to be a typical fall-back position for a new humanities grad., and that’s certainly not looking like a great option these days. Further, as bad as it is for college grads ca. 2011, I challenge you to show me how a kid’s prospects without a degree can lead to anything better than Wal-Mart these days (where they’re probably competing with college graduates for entry level jobs, dontcha know). It’s pretty clear that college grads don’t just give up when they can’t find a nice, entry-level white collar position. No, they take the blue collar ones, leaving those with less education irrevocably in the dust, forever.

  17. sbourg says:

    What a HORRID bit of writing. Scatter-shot, no topic points, and major lapses in logic. Who proofread it for him, and perhaps would’ve said: This is as clear as mud. ??

    And the factual inaccuracies are astounding. The article linked to ‘David Frum’ certainly implies he’s NOT a fiscal conservative. And fiscal conservatives ARE worried/concerned/horrified of the unemployment caused by decades of problems with our govt interference into the free market of companies and jobs. Conservatives understand this MUCH MORE CORRECTLY than fiscal liberals. Period.

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