IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/12159.html
   My bibliography  Save this paper

The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates

Author

Listed:
  • Philip Oreopoulos
  • Till von Wachter
  • Andrew Heisz

Abstract

The standard neo-classical model of wage setting predicts short-term effects of temporary labor market shocks on careers and low costs of recessions for both more and less advantaged workers. In contrast, a vast range of alternative career models based on frictions in the labor market suggests that labor market shocks can have persistent effects on the entire earnings profile. 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 with different predicted earnings using matched university-employer-employee data from 1982 to 1999, and uses its results to assess the importance of alternative career models. We find that young graduates entering the labor market in a recession suffer significant initial earnings losses that eventually fade, but after 8 to 10 years. We also document substantial heterogeneity in the costs of recessions and important effects on job mobility and employer characteristics, but small effects on time worked. These adjustment patterns are neither consistent with a neo-classical spot market nor a complete scarring effect, but could be explained by a combination of time intensive search for better employers and long-term wage contracting. 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.

Suggested Citation

  • Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2006. "The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates," NBER Working Papers 12159, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12159
    Note: CH LS
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w12159.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:fth:prinin:386 is not listed on IDEAS
    2. James G. MacKinnon & Russell Davidson, 1999. "Artificial Regressions," Working Paper 978, Economics Department, Queen's University.
    3. Paul Beaudry & Thomas Lemieux & Daniel Parent, 2000. "What is Happening in the Youth Labour Market in Canada?," Canadian Public Policy, University of Toronto Press, vol. 26(s1), pages 59-83, July.
    4. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 705-746.
    5. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q I), pages 32-49.
    6. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
    7. Christopher Ferrall & Julian Betts & Ross Finnie, 2006. "The Role Of University Characteristics In Determining Post-graduation Outcomes: Panel Evidence From Three Recent Canadian Cohorts," Working Paper 1055, Economics Department, Queen's University.
    8. David Card & Thomas Lemieux, 2000. "Adapting to Circumstances (The Evolution of Work, School,and Living Arrangements among North American Youth)," NBER Chapters, in: Youth Employment and Joblessness in Advanced Countries, pages 171-214, National Bureau of Economic Research, Inc.
    9. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September.
    10. Oi, Walter Y. & Idson, Todd L., 1999. "Firm size and wages," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 33, pages 2165-2214, Elsevier.
    11. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    12. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
    13. Black, Dan A. & Smith, J.A.Jeffrey A., 2004. "How robust is the evidence on the effects of college quality? Evidence from matching," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 99-124.
    14. Gary Solon & Robert Barsky & Jonathan A. Parker, 1994. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 1-25.
    15. Kahn, Lisa B., 2010. "The long-term labor market consequences of graduating from college in a bad economy," Labour Economics, Elsevier, vol. 17(2), pages 303-316, April.
    16. Derek Neal, 1998. "The Link between Ability and Specialization: An Explanation for Observed Correlations between Wages and Mobility Rates," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 173-200.
    17. David E. Bloom & Richard B. Freeman, 1986. "The "Youth Problem": Age or Generational Crowding?," NBER Working Papers 1829, National Bureau of Economic Research, Inc.
    18. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    19. David Card & Thomas Lemieux, 1997. "Adapting to Circumstances: The Evolution of Work, School, and Living Arrangements Among North American Youth," Working Papers 765, Princeton University, Department of Economics, Industrial Relations Section..
    20. Neal, Derek, 1995. "Industry-Specific Human Capital: Evidence from Displaced Workers," Journal of Labor Economics, University of Chicago Press, vol. 13(4), pages 653-677, October.
    21. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
    22. David Neumark, 1998. "Youth Labor Markets in the U.S.: Shopping Around vs. Staying Put," NBER Working Papers 6581, National Bureau of Economic Research, Inc.
    23. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
    24. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555, Elsevier.
    25. Albaek, Karsten & Sorensen, Bent E, 1998. "Worker Flows and Job Flows in Danish Manufacturing, 1980-91," Economic Journal, Royal Economic Society, vol. 108(451), pages 1750-1771, November.
    26. Neal, Derek, 1999. "The Complexity of Job Mobility among Young Men," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 237-261, April.
    27. Ossama Mikhail & Curtis J. Eberwein & Jagdish Handa, 2003. "Testing and Estimating Persistence in Canadian Unemployment," Econometrics 0311004, University Library of Munich, Germany.
    28. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
    29. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
    30. Paul Beaudry & David A. Green, 2000. "Cohort patterns in Canadian earnings: assessing the role of skill premia in inequality trends," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 907-936, November.
    31. Farber, Henry S, 1994. "The Analysis of Interfirm Worker Mobility," Journal of Labor Economics, University of Chicago Press, vol. 12(4), pages 554-593, October.
    32. Stacy Berg Dale & Alan B. Krueger, 2002. "Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1491-1527.
    33. Robert H. Topel & Michael P. Ward, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 439-479.
    34. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 397-407, August.
    35. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc.
    36. Robert Gibbons & Lawrence Katz, 1992. "Does Unmeasured Ability Explain Inter-Industry Wage Differentials?," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 515-535.
    37. Paul Oyer, 2006. "The Macro-Foundations of Microeconomics: Initial Labor Market Conditions and Long-Term Outcomes for Economists," NBER Working Papers 12157, National Bureau of Economic Research, Inc.
    38. Davidson, Russell & MacKinnon, James G., 1989. "Testing for Consistency using Artificial Regressions," Econometric Theory, Cambridge University Press, vol. 5(3), pages 363-384, December.
    39. Paul J. Devereux, 2001. "The Cyclicality of Real Wages within Employer-Employee Matches," ILR Review, Cornell University, ILR School, vol. 54(4), pages 835-850, July.
    40. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
    41. Arthur M. Okun, 1973. "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 207-262.
    42. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 315-333.
    43. Robert Gibbons & Michael Waldman, 2004. "Task-Specific Human Capital," American Economic Review, American Economic Association, vol. 94(2), pages 203-207, May.
    44. James R. Hines & Hilary Hoynes & Alan B. Krueger, 2001. "Another Look at Whether a Rising Tide Lifts All Boats," Working Papers 833, Princeton University, Department of Economics, Industrial Relations Section..
    45. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January.
    46. Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1995. "A Comparison of Changes in the Structure of Wages in Four OECD Countries," NBER Chapters, in: Differences and Changes in Wage Structures, pages 25-66, National Bureau of Economic Research, Inc.
    47. John M. Abowd & Robert H. Creecy & Francis Kramarz, 2002. "Computing Person and Firm Effects Using Linked Longitudinal Employer-Employee Data," Longitudinal Employer-Household Dynamics Technical Papers 2002-06, Center for Economic Studies, U.S. Census Bureau.
    48. Rosella Gardecki & David Neumark, 1998. "Order from Chaos? The Effects of Early Labor Market Experiences on Adult Labor Market Outcomes," ILR Review, Cornell University, ILR School, vol. 51(2), pages 299-322, January.
    49. Daniel Aaronson & Sara Christopher, 2004. "Employment growth in higher-paying sectors," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Sep.
    50. David M. Cutler & Lawrence F. Katz, 1991. "Macroeconomic Performance and the Disadvantaged," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 1-74.
    51. Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1993. "A Comparison of Changes in the Structure of Wages," NBER Working Papers 4297, National Bureau of Economic Research, Inc.
    52. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-689, August.
    53. repec:fth:prinin:343 is not listed on IDEAS
    54. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
    55. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Extent and Consequences of Job Turnover," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1994 Micr), pages 177-248.
    56. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall.
    57. Wayne Vroman, 1977. "Worker Upgrading and the Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 229-252.
    58. Kristen Keith & Abagail McWilliams, 1999. "The Returns to Mobility and Job Search by Gender," ILR Review, Cornell University, ILR School, vol. 52(3), pages 460-477, April.
    59. Harry Krashinsky, 2002. "Evidence on Adverse Selection and Establishment Size in the Labor Market," ILR Review, Cornell University, ILR School, vol. 56(1), pages 84-96, October.
    60. Richard B. Freeman, 1981. "Career Patterns of College Graduates in a Declining Job Market," NBER Working Papers 0750, National Bureau of Economic Research, Inc.
    61. Robert E. Hall, 1974. "The Process of Inflation in the Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(2), pages 343-410.
    62. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2012. "The Short- and Long-Term Career Effects of Graduating in a Recession," American Economic Journal: Applied Economics, American Economic Association, vol. 4(1), pages 1-29, January.
    2. Stefan Bender & Till von Wachter, 2006. "In the Right Place at the Wrong Time: The Role of Firms and Luck in Young Workers' Careers," American Economic Review, American Economic Association, vol. 96(5), pages 1679-1705, December.
    3. Shin, Donggyun & Shin, Kwanho, 2008. "Why Are The Wages Of Job Stayers Procyclical?," Macroeconomic Dynamics, Cambridge University Press, vol. 12(1), pages 1-21, February.
    4. Bachmann, Ronald & Bauer, Thomas K. & David, Peggy, 2010. "Labour Market Entry Conditions, Wages and Job Mobility," Ruhr Economic Papers 188, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Till von Wachter & Stefan Bender, 2008. "Do Initial Conditions Persist between Firms? An Analysis of Firm-Entry Cohort Effects and Job Losers Using Matched Employer-Employee Data," NBER Chapters, in: The Analysis of Firms and Employees: Quantitative and Qualitative Approaches, pages 135-162, National Bureau of Economic Research, Inc.
    6. Beartice Brunner & Andreas Kuhn, 2009. "To Shape the Future: How Labor Market Entry Conditions Affect Individuals’s Long-Run Wage Profiles," NRN working papers 2009-29, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
    7. James R. Hines & Hilary Hoynes & Alan B. Krueger, 2001. "Another Look at Whether a Rising Tide Lifts All Boats," Working Papers 833, Princeton University, Department of Economics, Industrial Relations Section..
    8. Brunner, Beatrice & Kuhn, Andreas, 2009. "To Shape the Future: How Labor Market Entry Conditions Affect Individuals' Long-Run Wage Profiles," IZA Discussion Papers 4601, Institute of Labor Economics (IZA).
    9. Beatrice Brunner & Andreas Kuhn, 2009. "To shape the future: How labor market entry conditions affect individuals' long-run wage profiles," IEW - Working Papers 457, Institute for Empirical Research in Economics - University of Zurich.
    10. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    11. Stephanie Lluis, 2005. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 725-768, October.
    12. Ronald Bachmann & Thomas K. Bauer & Peggy David, 2010. "Labour Market Entry Conditions, Wages and Job Mobility," Ruhr Economic Papers 0188, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    13. repec:zbw:rwirep:0188 is not listed on IDEAS
    14. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    15. Xin Jin, 2014. "The Signaling Role of Not Being Promoted: Theory and Evidence," Working Papers 0314, University of South Florida, Department of Economics.
    16. Christodoulopoulou, Styliani & Kouvavas, Omiros, 2022. "Wages, compositional effects and the business cycle," Working Paper Series 2653, European Central Bank.
    17. Daniel J. Benjamin, 2015. "A Theory of Fairness in Labour Markets," The Japanese Economic Review, Japanese Economic Association, vol. 66(2), pages 182-225, June.
    18. Beatrice Brunner & Andreas Kuhn, 2010. "The Impact of Labor Market Entry Condition on Initial Job Assignment, Human Capital Accumulation, and Wages," NRN working papers 2010-15, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
    19. Jin, Xin, 2014. "The Signaling Role of Note Being Promoted: Theory and Evidence," MPRA Paper 58484, University Library of Munich, Germany.
    20. Koenig, Felix & Manning, Alan & Petrongolo, Barbara, 2014. "Reservation wages and the wage flexibility puzzle," LSE Research Online Documents on Economics 60613, London School of Economics and Political Science, LSE Library.
    21. David Card & Ana Rute Cardoso & Joerg Heining & Patrick Kline, 2018. "Firms and Labor Market Inequality: Evidence and Some Theory," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 13-70.
    22. Note: For best results & the figures should be printed on a non-Postscript printer. Hoynes & H., "undated". "The Employment, Earnings, and Income of Less-Skilled Workers over the Business Cycle," Institute for Research on Poverty Discussion Papers 1199-99, University of Wisconsin Institute for Research on Poverty.
    23. James Hines & Hilary Hoynes & Alan Krueger, 2001. "Another Look at Whether a Rising Tide Lifts All Boats," Working Papers 833, Princeton University, Department of Economics, Industrial Relations Section..

    More about this item

    JEL classification:

    • J0 - Labor and Demographic Economics - - General
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12159. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.