Graduating In A Recession : Article Assessment of “The Short- and Long-Term Career Effects of Graduating in a Recession”
Graduating In A Recession : Article Assessment of “The Short- and Long-Term Career Effects of Graduating in a Recession” In “The Short- and Long-Term Career Effects of Graduating in a Recession,” Oreopoulos et al. study the earnings losses faced by the unlucky college students that graduate during recessions.
Motivated by previously studied claims that unfavorable market conditions may influence earnings by decreasing the quality of initial job opportunities, mobility between firms, and potential for future promotions, this study seeks to take existing literature further by “distinguishing the long-term effect of the very first unemployment rate … from the role of persistent conditions in the labor market affecting them in later years” (14).
The ultimate research goal of this study is not only to quantify the long-term effects of the initial unemployment rate new graduates face upon entering the labor market, but also determine the reasoning behind this observed earnings decline. To answer this fundamental research question, this study analyzes Canadian university graduates to conclude that finishing school in a recession significantly but not always permanently lowers future earnings for college graduates, and that these losses are intensified for graduates from less prestigious schools and those with less profitable degrees.
In order to study the effects of economic recessions on earnings, this study focuses on the graduates’ outcomes for ten years after graduation by analyzing matched data on 70% of male Canadian university graduates between 1976 and 1995, a uniquely large dataset compared to previous economic studies. The degree, major, and alma mater of each graduate is utilized alongside time-series data on the graduate’s income tax records and payroll information from 1982 to 1999. For the regression analysis of this longitudinal data, the primary dependent variable is annual earnings at a given year, and the independent variable is the unemployment rate upon graduation for the province of first residence after exiting college. To avoid omitted variable bias, the regression controls for region of residence, year of graduation, years of potential labor market experience, and calendar year.
Through this regression analysis, the article ultimately concludes that the unemployment rate in the first year after graduation significantly contributes to a decline in long-term earnings for recent graduates. The article also notes that recession shocks have a greater effect on immediate graduates than workers who have been in the workforce for a few years. Whereas the results show that top tier graduates, as measured by prestige of school and expected degree value, tend to make a near full recovery, graduates in the lowest quintile experience permanent losses. Indeed, the study concludes that less advantaged groups experience losses of a magnitude of three to four times that of the most advantaged groups of college graduates. These heterogeneous results are supported by analysis that recessions decrease the availability and quality of initial job opportunities available to graduates, where quality is measured by the size of the firm and its median pay. Whereas top tier students catch-up on earnings by moving to higher quality firms, less advantaged graduates struggle to move to better firms and further fall behind since the time they spend searching for better opportunities leads to lost time in accumulating industry or firm particular skills.
Whereas these conclusions seem reasonable, both the study itself and our own analysis note limitations in the internal and external validity of these results. Firstly, in the regression analysis determining the effect of the initial unemployment rate on future earnings, this study cites two major recessions in the early 1980s and 1990s. We feel that two recessions is not sufficient to claim a robust relationship between the effect on earnings of entering the labor market in a recession; each recession has unique causes, recovery processes and industry effects; therefore, two recessions occurring close in time to each other is not a sufficient representation of recessions as a whole.
Additionally, we felt that certain claims made by this study such as “some workers never recover” are unsubstantiated because this study only analyzes earnings ten years after graduation (27). Whereas ten years is surely a long time to gain substantial insight, Figure 6: Years since graduation, shows a convergence of earnings, which may signify that after ten years earnings will converge and no permanent earning losses will persist. Lastly, this study claims that 40-50 of lasting earnings losses can be attributed to decreased quality of employers. We felt that limiting firm quality to be defined by the size of the firm and the wages to be a simplification that calls into question the validity of this claim; employees’ quality is not solely defined by firm size and average pay but should also take into account exit opportunities, potential for promotion, and mentorship. We additionally felt that the study did not sufficiently evaluate careers outside of typical employee employer structures such as freelance work, the gig economy, and the startup space.
Despite these mishaps, we praise this study for upholding its results after checking for robustness and performing sensitivity analysis. By defining employment in different ways such as including discouraged workers and using the unemployment rate of the college’s region rather than that of the graduate’s first job, this study proves its results are robust in the face of different definitions of unemployment. Additionally, this study determines that the effect of unemployment rates on students’ post-graduate earnings while they are in school is insignificant, disproving the notion that the selective timing of graduation affects earnings beyond the unemployment rate upon entering the workforce. Furthermore, this study examines whether using the average unemployment rate across several years after workforce entry would capture different results, finding that the conclusions of this study are valid in distinguishing the effects of the unemployment rate upon graduation from persisting high unemployment rates due to recession.
In terms of external validity, the study is clearly limited to Canadian male university graduates; therefore these results cannot be generalized to either women or high school graduates. Additionally, these results are specific to Candian men with four-year degrees, but the study found that including men earning higher degrees or college dropouts did not compromise the findings, therefore extending the external validity of the study.
Although specific to Canada, this study is published in an American journal and oftentimes alludes to the United States, citing similar research papers focusing on the United States. Whereas the study notes that there is less interregional mobility in Canada than in the United States, it fails to mention other key differences between Canada and the United States such as different post-recession economic recovery, unique social safety net policies, variations in industry focus, and differences in college education structure (13).
Ultimately, this study achieves some internal and external validity, but falls short definitively of proving all its claims. This research question can be improved by increasing the scope of this study to different geographies, but also increasing the length of the study to see longer term impacts beyond ten years after graduation and capture the results of more than just two recessions.
Another methodology to assess this research question would be to focus on the net worth of graduates rather than their wages. Whereas this study only captures the wage impact of graduating during a recession, evaluating this question through the lens of net worth would allow for better capturing the compounding long term effects of wage loss early in a graduate’s career both in terms of building wealth and potentially paying off student loans.
Bibliography
Oreopoulos, Philip, Till von Wachter, and Andrew Heisz. 2012. “The Short- and Long-Term
Career Effects of Graduating in a Recession.” American Economic Journal: Applied Economics, 4 (1): 1-29.
Graduating In A Recession : Article Assessment of “The Short- and Long-Term Career Effects of Graduating in a Recession”
