Will the downturn have a scarring effect on graduate jobseekers?

In the SMH last Friday, there was a warning that the economic downturn may have a scarring effect on new jobseekers:

“Invariably in a recession we have this problem where a generation can get lost,” said the deputy director of the Melbourne Institute, Mark Wooden.

Most at risk are youth from disadvantaged areas who, in the past, have stood a chance of finding decent-paying jobs and learning skills they will hold for life.

Though they are not ‘disadvantaged’ in the sense meant by the SMH article, I have wondered in the past about graduates who enter the labour market during a recession. Does it have has long-term effects on their career success?

More than at other times, during recessions new graduates need to take jobs that don’t use their qualifications but give them an income. At the very least, they delay accumulating experience that should be rewarded in future professional or managerial jobs. At worst, employers for jobs that would use the graduate’s qualifications might infer from a CV of full-time clerical or sales jobs that there is a reason the graduate has been overlooked for more demanding or responsible positions. The early bad luck of graduating into a recession could have a lasting, scarring effect on job success.

The early 1990s recession provides a guide as to what might happen in this downturn. The Graduate Destination Survey records that 1992 and 1993 were the shocker years for graduate employment. From the mid-1980s to 1990, un- or under-employment of graduates had been around 10% (the measure is percentage of graduates who are looking for full-time work who have found it). In 1992 and 1993 un- or under-employment was nearly 30%.

If I assume that someone going straight from school to university would graduate at about age 21, this affected people who were born in 1971 and 1972, who would have been in their mid-30s at the time of the 2006 census. I had two census tests of how well they are doing, occupation and income. The strongest test would be if a slightly younger group was doing better, but any marked difference would be interesting.

For occupation, I judged success on the proportion of graduates working as managers or professionals. And it does seem possible that there is a small scarring effect, with those born in 1971 and 1972 slightly less likely to have a mangerial or professional job than those born in 1973. It could just be a fluke, however.

Age Professional or managerial
30 73.28%
31 73.80%
32 74.45%
33 74.89%
34 74.72%
35 74.60%
36 74.96%
37 75.54%

For income, I judged success as earning $1,600 a week or more. Here, there is no evidence of scarring. The proportion of graduates with those earnings keeps on climbing through their mid-30s.

So if there is any scarring effect it is very small. Graduates working in non-graduate jobs is common, but when you graduate doesn’t seem to make a big difference in the long term.

8 thoughts on “Will the downturn have a scarring effect on graduate jobseekers?

  1. 1600$ a week is about 83k a year. Given that the average wage is 50k, isn’t that kind of a high bar to set? Surely the bar should be set at somewhere around the maximal wage for an unskilled worker?

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  2. A good thing then that I had to repeat a few uni subjects and didn’t enter the workforce as a graduate until 1994. 😉

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  3. Factory – I’ll take a look at that later, but my thinking at the time was that as I was not getting much of a result on occupation I would look to see if there were signs of late starts to careers, reflected in fewer people moving into the high income brackets. This turned out not to be the case.

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  4. Being lucky enough to be born in one of those obviously unlucky years, I think one of the other main differences was that it was really hard to find part-time work when studying, no matter how much you wanted it. Alternatively, things like rent were cheap and it was possible to live on Austudy, so there may be some differences between the coming problems and 1992 (the recession may also not be as bad, the labor market is freer, there is a larger services sector, the cohort of people of people in that age group is comparatively smaller etc.).
    .
    Also, in case you have it, it would be good to look at long-term unemployed, because these numbers might not be large enough to affect the overall figures, but they are an important category for poverty.

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  5. Andrew

    An interesting discussion.

    I think you need to do something a bit more complicated to get more of a definite answer, however.

    Ideally, what you want to look at is how different cohorts have fared at the same stage in their post-university career, not at how people of different ages are faring at the same point in time. I don’t know if this is possible, but you can construct quasi-cohorts from the Census data – you might need an ARC grant to finance this, however.

    Also when you look at graduates in 2006 do you exclude graduates who migrated to Australia after the 1990s recession?

    Another issue is that 2006 was one of a number of very good years for employment – the income surveys for the period 2000-01 to 2005-06 show quite remarkable increases in incomes and employment compared to the past. so it’s possible that the extent of scarring from the 1993 recession was less marked in 2006 than it has been in the past or might be in the future.

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  6. Peter – I agree, this is a blog post written in an evening using what data I could find for free, not an ARC-funded research project! Ideally I would have actual graduation dates, but these are not included in the census so I used age as a proxy. It is possible that with actual dates I would have found a more marked effect.

    A commenter who has taken to responding via email sent me a Canadian study which has the statistical bells and whistles, but found that while there was significant initial earnings loss, on average recession graduates recovered after 8 to 10 years. This is consistent with my initial finding, and with your suggestion that 2006 was a good year.

    This is reasonably encouraging both for those graduates and in demonstrating the long-term efficiency of the labour market in identifying capable people.

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  7. 2009 might be a good year for graduates to do some backpacking. No employer holds this against graduates. In 2010 they will be seen as fresh graduates, unsullied by a year of under-employment.

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  8. I am the mystery commenter! 🙂

    The abstract of the study using a sample of Canadian graduates is provided below:

    This paper analyzes the long-term effects of graduating in a recession on earnings, job mobility, and employer characteristics for a large sample of Canadian college graduates using matched university-employer-employee data from 1982 to 1999. The results are used to assess the role of job mobility and firm quality in the propagation of shocks for different groups in the labor market. We find that young graduates entering the labor market in a recession suffer significant initial earnings losses that, on average, eventually fade after 8 to 10 years. Labor market conditions at graduation affect firm quality and job mobility, which can account for 40-50% of losses and catch-up in our sample. We also document that higher skilled graduates suffer less from entry in a recession because they switch to better firms quickly. Lower skilled graduates are permanently affected by being down ranked to low-wage firms. These adjustment patterns are consistent with differential choices of intensity of search for better employers arising from comparative advantage and time-increasing search costs. All results are robust to an extensive sensitivity analysis including controls for correlated business cycle shocks after labor market entry, endogenous timing of graduation, permanent cohort differences, and selective labor force participation.

    There’s also another study using a sample of Stanford MBAs, the abstract of which is provided below:

    I show that stock market shocks have important and lasting effects on the careers of MBAs. Stock market conditions while MBA students are in school have a large effect on whether they go directly to Wall Street upon graduation. Starting on Wall Street immediately upon graduation causes a person to be more likely to work there later and to earn, on average, substantially more money. The empirical results suggest that investment bankers are largely “made” by circumstance rather than being “born” to work on Wall Street.

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