Stay in School: The Consequences of Graduating During a Recession

     The immediate and intuitive effect on those graduating from college in a stagnating economy is obvious: they are less likely to be hired, especially for the most desirable jobs. However, how do those who graduate during a recession fare over the course of their careers compared to graduates during periods of economic growth? Yale School of Management Professor Lisa Kahn addresses this question in her October 2007 paper titled “The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy.” Relying on detailed year-by-year occupational and educational information from the National Longitudinal Survey of Youth (NLSY) for white males who graduated from college between 1979 and 1988, Kahn followed participants for 14 to 23 years after college graduation to study the effect on employment status, occupational attainment, job tenure, wages, and enrollment in graduate schools as a function of economic conditions.   

     One uplifting finding is that economic conditions at the time of graduation have no substantial long-term effect on labor supply. As a whole, those who graduate during a recession tend to have the same probability of being employed and will generally work the same amount per year as those graduates entering the job market in a strong economy. The short-term effects of increased unemployment in a recession thus appear to be overcome by future economic expansion and growth in the job market.

Less encouraging is that while they may be equally likely to have a job, students who receive their undergraduate degrees during turbulent economic times tend to occupy less desirable positions. Using ratings of “occupational prestige” as a proxy for job desirability, Kahn found that recession graduates tend to have less prestigious jobs compared to their classmates who graduate in boom years. They also lose valuable mobility: on average, those beginning work in harsh economic conditions remained for longer tenures at their jobs and were unable to fully shift into better positions after the economy picked up.

     Recession graduates also tend to command lower salaries than their more fortunate peers. Kahn found strong negative wage effects in the short term (up to 14 years), which persist, albeit more weakly, over a period greater than 20 years. With an average loss in wages of between 1% and 18% per year, recession graduates generally earn 3% to 5% less over a 20-year period. This negative wage effect is consistent with Kahn’s other findings: employees in positions of less prestige tend to earn less and those who have worked for longer periods of time at the same job generally have slower rates of wage growth.

     Given that recession graduates appear to be destined for unimpressive and underpaid positions (if indeed they are able to secure any work at all), would students be better off waiting to enter the labor market until the economy recovers? Foregoing a year or two of earnings could possibly result in a smaller loss than the overall wage losses that Kahn predicted, and a graduate could be hired for a more desirable position. Unsurprisingly, years enrolled in school after college and the probability of attaining a graduate degree increase for those who receive their undergraduate degrees in times of higher national unemployment. Graduate school, which has been shown to increase future earnings in other studies, may be the ideal solution to combating the disadvantages of graduating from college in a struggling economy—for those who can afford to wait.