Monday, January 11, 2010

Should you come out of college this year? 

My colleague Jim Weber points out an interesting story in Newsweek on earnings of those who enter the labor force during a recession.
Some optimists�pointing to a recent spate of positive economic data, including increases in car sales, upticks in factory production, and a robust stock market, say no: the downturn simply hasn't been bad enough, for long enough, to create the next Depression generation. Yet there is powerful evidence that belies this argument; a National Bureau of Economic Research (NBER) paper released this past September looking at data from 1972 to 2006 shows that even one really tough year experienced in early adulthood is enough to fundamentally change people's core values and behaviors. Meanwhile, there's an entire body of research to show that recession babies not only invest more conservatively, they tend to make less money, choose safer jobs, and believe in wealth redistribution and more government intervention.
The research on attitudes comes from Paola Giuliano and Antonio Spilimbergo, and NBER has a summary of the research. Ungated version is here. They find that a college age student who lives through a severe recession believes more that luck plays a role in lifetime income than hard work. This leads to divergent views on the role of government, believing both that government should do more about income distribution but distrusting government's ability to do so. The effect is most pronounced when the "recession shock" strikes an 18-25 year old, and is much less of a shock to older adults.

Now the question really is whether it's the beliefs that do this, or stickiness of labor markets. A pure neo-classical story says that the shock to one's income in a recession is temporary and it should not matter (much) whether you come out of college in a recession. But if there are long-term contracts and searching for a job is costly, coming out of a school in a recession could depress earnings for years, regardless of what one believes. See this paper for one strand of evidence that the neoclassical model doesn't bear up too well: graduates in a recession earn about 8-10% less than those who come out in a boom, and it may take a decade for the difference in earnings to disappear. Even OMB director Peter Orszag has been reading this research, concluding
The evidence thus suggests that a recession hits young people particularly hard, knocking them off course with effects that last for years to come. As we rebuild a new foundation for economic growth, it�s critical that we keep this in mind.
Yes, keep it in mind, but what's a government to do about it? If it is the result of beliefs, government can't really do much. You could say it should prevent deep recessions, but it does not appear they are capable of preventing these. And if it's all sticky wages and long-term contracts, then the answer is to not sign those and jump jobs frequently. Like the ballplayer who signs a one-year contract in a bad market or jumps to a lesser league overseas, the college graduate can either be sure to take jobs that have easy exits or go to graduate school.

I graduated college in 1979 just as we began the first of two recessions in 1980 and 1981-82. Were it not for that, I probably would have married my high school sweetheart right away, found a job and stayed in my home town. That bad economy might have been the best thing to happen to me. But I am in academia, one of the most risk-averse career choices one can make.

By the way, I write this at the start of a new semester in which we have a record number of seniors in our undergraduate capstone course. Does this support or refute the hypothesis?

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