Elsevier

Labour Economics

Volume 17, Issue 2, April 2010, Pages 303-316
Labour Economics

The long-term labor market consequences of graduating from college in a bad economy

https://doi.org/10.1016/j.labeco.2009.09.002Get rights and content

Abstract

This paper studies the labor market experiences of white-male college graduates as a function of economic conditions at time of college graduation. I use the National Longitudinal Survey of Youth whose respondents graduated from college between 1979 and 1989. I estimate the effects of both national and state economic conditions at time of college graduation on labor market outcomes for the first two decades of a career. Because timing and location of college graduation could potentially be affected by economic conditions, I also instrument for the college unemployment rate using year of birth (state of residence at an early age for the state analysis). I find large, negative wage effects of graduating in a worse economy which persist for the entire period studied. I also find that cohorts who graduate in worse national economies are in lower-level occupations, have slightly higher tenure and higher educational attainment, while labor supply is unaffected. Taken as a whole, the results suggest that the labor market consequences of graduating from college in a bad economy are large, negative and persistent.

Introduction

The immediate disadvantage of graduating from college in a poor economy is apparent. Even among employed persons, those who graduate in bad economies may suffer from underemployment and are more likely to experience job mismatching since they have fewer jobs from which to choose. What is less clear is how these college graduates will fare in the long run relative to their luckier counterparts. The disadvantage might be eliminated if workers can easily shift into jobs and career paths they would have been in, had they graduated with more opportunities. However the disadvantage may persist if the importance of early labor market experience outweighs the later benefit of a better economy for factors such as promotions and training. If this is the case, we might expect to see long-run differences in labor market outcomes. A poor early economy can also affect educational attainment. If there are fewer jobs (or worse jobs) available, then the opportunity cost of staying in school is lower. Thus it is reasonable to expect that graduates in a poor economy will return to school at higher rates than graduates in a better economy.

This paper studies the long-term consequences of graduating from college in a bad economy. Specifically I examine workers who graduate before, during and after the recession of the early 1980s. Since college graduates are skilled workers, using them makes it more feasible to test different training and human capital investment models. This could potentially result in more interesting outcomes than using a group with fewer training opportunities (especially given the large scale and scope of the recession I am exploiting). In addition, studying college graduates allows for an analysis of the graduate school decision as a function of economic conditions at the time of college graduation. Prior research has linked schooling choice to decreased labor market opportunities, however, focus has been primarily on the decision to complete high school or attend college.1 To my knowledge no work has been done on the graduate school decision.

I use the National Longitudinal Survey of Youth (NLSY79) to study labor market outcomes and educational attainment for white males who graduated from college between 1979 and 1989. The NLSY79 allows me to follow participants for at least 17 years post-college graduation, and contains a wealth of information on individuals (including an aptitude test score and year-by-year, detailed work and school information). I analyze wages, labor supply, occupation, and educational attainment as a function of economic conditions in the year an individual graduated from college. Both national unemployment rates as well as state unemployment rates are used. The state regressions include state and year fixed effects so are useful in providing variation that is independent of national trends.2 However, these unemployment rate measures potentially suffer from an endogeneity problem: students may take into account business cycle conditions when choosing the time and place of college graduation. I thus instrument for the national unemployment rate with birth year and for the state unemployment rate with birth year and state of residence at age fourteen.

I find persistent, negative wage effects using both the national and state unemployment rates lasting for almost the entire period studied. Using national rates, both OLS and IV estimates are statistically significant and imply an initial wage loss of 6 to 7% for a 1 percentage point increase in the unemployment rate measure. This 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. Using state rates, the OLS results are insignificant but the IV estimates imply a 9% wage loss which persists, remaining statistically significant 15 years after college graduation. Looking at other labor market outcomes, I find that labor supply (weeks supplied per year, and the probability of being employed) is largely unaffected by economic conditions at the time of college graduation (both national and state). However, I do find both 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. This is suggestive that workers who graduate in bad economies are unable to fully shift into better jobs after the economy picks up. Lastly, years enrolled in school post-college and the probability of attaining a graduate degree increase slightly for those who graduate in times of higher national unemployment.

This paper adds to previous work in several areas. A small but growing literature looks at the effects of finishing schooling during recessions and finds persistence to varying degrees. Oyer, 2006a, Oyer, 2006b look at the effects of completing an MBA or an economics Ph.D., respectively, during a recession and find persistent, negative effects in both of these niche markets. Oreopoulos et al. (2006), the closest to the current paper, study the effects of graduating from college in a recession using Canadian university–employer–employee matched data and find strong initial negative effects which remain for up to ten years before dissipating. However, though they exploit an extremely rich data set, Canada has different institutions making it difficult to determine the relevance of their work to the US labor market. For example, Murphy et al., 1998, DiNardo and Lemieux, 1997 point out that the US and Canada experienced diverging trends in wage inequality during the 1980s and 1990s; the period both papers study. The US saw a sharper rise in wage inequality. Given a major driver of rising inequality has been a rise in residual inequality, it is reasonable to expect wage differentials across college graduation cohorts to differ across countries, both in magnitude and persistence.

This paper is also relevant to the cohort effects literature (see Baker et al., 1994, Beaudry and Dinardo, 1991) which looks within firms and finds that the average starting wage of a cohort or national unemployment rate when a cohort enters is negatively correlated with wages years later.3 Lastly, the current paper is applicable to the literature on youth unemployment, which seeks to disentangle the effects of state dependence (early unemployment) on adult outcomes from individual heterogeneity. Neumark (2002) studies this in the NLSY79, instrumenting for early job attachment with local labor market conditions at time of entry, and finds positive effects of early job stability on adult wages.4 I find that young workers suffer persistent, negative wage effects when experiencing turmoil upon entering the labor market. This suggests that state dependence is important, supporting the previous literature.

This paper contributes new results on the long-term effects of cohort-level market shocks. It is the only paper, to my knowledge, that looks at this effect for college graduates, an important share of the labor market, in the United States. I isolate a significant shock, the 1980s recession, as well as cross-sectional state variation, and find that luck truly does matter for these workers.

The remainder of the paper is structured as follows. Section 2 reviews existing theories that can explain long-lasting effects from a poor early labor market experience. Section 3 provides a brief description of data and methods, more of which can be found in the appendix. Section 4 presents results for wages, educational attainment, occupation and labor supply. Section 4 also includes two robustness checks, one addresses whether there is differential selection into college across cohorts and the other comparing these findings to an analysis of the 1990s recession using the March CPS. Section 5 discusses the results in relation to the theories outlined in Section 2 and concludes.

Section snippets

Theory

Different theories lead to different expectations about the long-run effects of a poor early experience in the labor market. If a person experiences initial unemployment or job mismatching and is able to switch to the “correct” job when the economy picks up, he or she will have lost only a year or two of accumulated labor market experience. This loss can potentially be overcome quite quickly if we assume diminishing marginal returns to experience. Search theory provides a possible explanation

Data and methods

The data set used in this paper is the National Longitudinal Survey of Youth (NLSY79).9 In 1979, 12,686 youths between the ages of 14 and 22 were interviewed and followed annually until 1994 and biennially thereafter. The most

Results

Table 2 shows means of selected variables in the first full year after college graduation by unemployment rate group for both national and state rates. Clustered standard errors are in parentheses. Statistical significance between the high and low groups and the medium and low groups is indicated in the high and medium columns, respectively, while statistical significance between high and medium is indicated in the far-right columns. Looking first at the national rate groups, it is clear that

Conclusion

The results in this paper strongly support the hypothesis that graduating from college in a bad economy has a long-run, negative impact on wages. I also find a negative effect on occupational attainment and slight increases in both educational attainment and tenure for those who graduate in worse national economies. Labor supply is essentially unaffected using both national and state unemployment rates. Wage loss ranges from 1% to 20% each year, relative to the cohorts with the minimum state

Acknowledgments

I am grateful for helpful comments from George Baker, Dan Benjamin, James Heckman, Caroline Hoxby, Larry Katz, Kevin Lang, Fabian Lange, Steve Levitt, Derek Neal, Chris Nosko, Emily Oster, Yona Rubenstein, Hugo Sonnenschein, Mike Waldman and seminar participants at Harvard University, the University of Chicago, Yale University, and the Midwest Economic Association 2003 annual meetings.

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