THE STASH OCTOBER 23, 2009
The OMB blog has an interesting item up about the effects of entering the labor market during a recession versus a tight labor market. On the one hand, there are the immediate effects you'd expect: lower wages and scarcer jobs. Per the item: "[A]ccording 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."
More interestingly, though, are the apparent longer-term effects. Relying on the results of this recent paper by Yale's Lisa Kahn, Peter Orszag writes that:
[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.
Apparently the reason isn't just that it takes a while to catch up from a lower starting point. It's also that people who join the labor force during a tough job market are more likely to end up in a poorly-fitting job, and with a less optimal set of skills and responsibilities--all of which can drive wages later on.
One question worth thinking about (and maybe the paper addresses it--I haven't read it): Is the effect likely to have gotten stronger or weaker as the labor market has gotten more fluid? That is, a generation ago, people were much more likely to stay at a single firm for a long period of time. Today, they're much more likely to hop around--professional life is more like serial monogamy than a 40-year marriage. I could see it going either way. On the one hand, you can imagine getting trapped in a lower, long-term trajectory if you have to stick with a single firm--maybe it's easier to break out of that trajectory if you leave the firm. On the other hand, we know that people's salaries at a new job are tied to their previous salary, so you can see how the job-hopping scenario could also produce the lower trajectory.