October 23, 2018

Temporary economic downturns have long-lasting consequences

The pain is felt most by workers already earning the least

PROFESSIONAL success, we are often told, is won through natural talent, hard work, and determination. But luck also plays a part. Sometimes this is manifested in the booms and busts of the business cycle. Studies show that students who graduate from university during a recession start out earning significantly less on average than those who complete their studies during better times. These lower earnings persist for many years.

A new NBER working paper finds that the economic cost of recessions for young workers is not borne equally across the workforce. Using US Census data from 1976 to 2015, economists from Northwestern University and the University of California, Los Angeles estimate that workers who enter the labour market during a recession—defined as a downturn that raises unemployment rates by three percentage points—earn about 11% less on average at the start of their careers. This drop in earnings lasts for 10 years and generates cumulative losses worth about 60% of one year’s salary. Such effects are particularly large for high school dropouts and non-white workers. College graduates fare much better, experiencing losses that are only about half as large as the typical worker (see chart).

America’s social safety-net ameliorates some of this economic pain, but not all of it. Young workers who join the labour market during a recession, for example, are more likely to make use of the Supplemental Nutrition Assistance Programme (SNAP), formerly known as “food stamps”, which helps boost household income. These unlucky workers are also more likely to enroll in Medicaid, a public health-care insurance scheme, which can temporarily substitute for employer-provided insurance. Yet in spite of all these public programmes, the harmful effects of recessions for young workers are significant and long-lasting. The authors find that recessions push up poverty rates among young workers for five years after they enter the labour market. Further proof that successful people do not always make their own luck.

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