Paper Talk: The Woes of the Class(es) Before Us

I’m thinking about topics for my macro paper, and I came across an interesting paper on the economic conditions that students face when they graduate, and how it affects their career choices.

The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy

Well, that’s us! The ’10s, the ’11s, the ’12s, and probably us ’13s will graduate in a pretty bad economy, where job prospects are poor and competition for jobs is stiffer than ever. The paper has some interesting findings, most of which don’t bode too well for us recession grads.

This paper uses the NLSY (bless the NLSY) but only uses data on white male college graduates. I’d be interested to see results for all demographics, just to know whether white male college grads have it easier or worse than the rest of us. Nevertheless, the abstract itself says it all – the scarring effects are “large, negative and persistent.”

Recession grads make a significantly lower salary (a 1 point increase in the unemployment rate at graduation implies a 6 or 7% decrease in wages), have lower-level jobs, BUT have higher tenure and educational attainment. Let’s turn to the Roy model for some answers!

The Roy model theorizes that graduates choose between the business sector (jobs) and the academic sector (more school!) when they graduate. If economic conditions take a turn for the worse, a student’s expected returns from the business sector will be negatively effected, while we are assuming that the expected returns from the academic sector stay relatively constant. I’m not sure I fully believe this assumption, but I guess it is true that professors and graduate students cannot get laid off, so we’ll let it rest.

So yes – when the economy dips, the academic sector becomes relatively more attractive and people consume more education. This also translates to higher competition during recessions, and higher productivity graduate cohorts as a result. Imagine the long-term impacts on productivity during recession years – the strength of PhDs spikes up approximately every five or six years after a big recession.

I’m working on digging deeper into this question, because I’m so intrigued by the chain-reaction-y feel of the whole thing. The economy shudders – college grad decisions shift – aggregate productivity shifts as talent reallocates itself – we see productivity booms years down the road. Far-reaching implications, for sure.

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