Graduating in a Recession

By Patrick Gourley, Ph.D.

This is a difficult time for many in the labor market, but the impacts may be most acute for those who are graduating and entering the job market for the first time. A growing body of literature in the field of economics shows that those entering the job market during a recession will have significantly lower wages. More importantly, repeated studies have found that this pay decrease can last for many years. Those who graduated in 2009, for example, most likely are still feeling the impacts. All college seniors should be aware of this and make sure they understand that, even after the U.S. economy recovers, the effects on wages will be significant.

One study found that a one percentage point increase in the unemployment rate at graduation corresponds to a six percent decrease in wages after one year. The persistence of this effect varies, but even studies that find relatively small effects conclude the lower wages persist for seven years. Other studies have found the effect persists for as long as 15 years. Needless to say, the total wage loss in terms of dollars adds up quickly and can easily equal the equivalent of several years of unemployment. The results are highest for those from less advantaged backgrounds, from which we draw many of our students. Also of concern is that many of these studies rely on smaller recessions than the current recession, or the Great Recession, of which data are just now becoming available. However, one of the few papers to examine Great Recession graduates found that wages are still 7 percent lower than they would have been after three years. I suspect the effects from the current recession may be even higher.

Patrick Gourley, Ph.D.

Assistant Professor, Pompea College of Business

Altonji, Joseph G., Lisa B. Kahn, and Jamin D. Speer. “Cashier or consultant? Entry labor market conditions, field of study, and career success.” Journal of Labor Economics 34.S1 (2016): S361-S401. CoCkx, Bart. “Do youths graduating in a recession incur permanent losses?.” IZA World of Labor (2016). Davis, Steven J., and Till M. Von Wachter. “Recessions and the cost of job loss.” No. w17638. National Bureau of Economic Research (2011). Kahn, Lisa B. “The long-term labor market consequences of graduating from college in a bad economy.” Labour Economics 17.2 (2010): 303-316. Oreopoulos, Philip, Till Von Wachter, and Andrew Heisz. “The short- and long-term career effects of graduating in a recession.” American Economic Journal: Applied Economics 4.1 (2012): 1-29. Schwandt, Hannes, and Till Von Wachter. “Unlucky cohorts: Estimating the long-term effects of entering the labor market in a recession in large crosssectional data sets.” Journal of Labor Economics 37.S1 (2019): S161-S198.

Given that the unemployment rate in 2020 is projected to double that of the Great Recession, it is crucial that graduating seniors make the most informed decisions. For those who are currently job searching and have not found gainful employment, a master’s degree, far from costly, could easily pay for itself. Students currently on the job market are potentially subjecting themselves to years, if not decades, of lower wages. I do not believe I am acting as an alarmist when I say that a portion of those who enter the job market in 2020 will never see their wages fully recover. Unlike the Great Recession, which had a slow recovery, many are projecting that, within a year, the current crisis will have abated. That means those who enter the job market in May 2021 could have vastly better labor market outcomes.

All graduating seniors who have not found jobs should at the very least apply to master’s programs. Then, if a great job comes through — take it! But, if not, it would be much better to be increasing your human capital in a graduate program than remaining unemployed for months.