Scarred for Life? Long-term Effects of Graduating in a Recession for Low and High Educated

Abstract

Economic conditions at time of labor market entry have been shown to have large negative effects on labor market outcomes for an extended period of time. These effects for the average labor market entrant may mask substantial heterogeneity across groups, as some may be better able to accommodate adverse conditions upon labor market entry than others. This paper estimates the long-term effects of economic conditions at labor market entry on income and employment for high and low educated separately up to 40 years after graduation. We use regional variation in the unemployment rate and proxy for time and location of labor market entry using birth region and nominal duration of education. For both high and low educated labor market entrants between 1971 and 1988, we find short-lived negative effects immediately after graduation. These negative effects on earnings and employment remain for high educated in the long run, but not for low educated who benefit in the long run. We hypothesize that high educated entrants downgrade during recessions, which shifts low educated entrants to other, less cyclical sectors. These sectors shield low educated entrants from later recessions, which can explain the long-run gains low educated recession entrants experience. We empirically test the mechanism and find that 20-40 years later low educated recession entrants are employed in less cyclical sectors. Joint paper with Anne C. Gielen.