Yale study: Starting career during recession can damage salary for decades

What happens to bright young things when they graduate college in the middle of an economic downturn? According to Lisa Kahn, assistant professor of economics at the Yale School of Management, it's not a pretty picture. While it might seem like things will be looking up as soon as the economy revives, her findings show that the damage from entering the job market during a recession can last up to 20 years.

Khan says salaries for new employees are directly related to the unemployment rate. Using data from the National Longitudinal Survey of Youth, she calculates that those graduating during hard times earn 6 to 8 percent less in their first year on the job for each percentage-point increase in the unemployment rate. That means a 1982 graduate entering the job market when the unemployment rate stood at 10.8 percent earned, on average, 23 percent less than a worker graduating in May 1981 when unemployment was 7.5 percent.
In the long run, this has immense consequences which are difficult to overcome. In comparing groups of graduates who entered the work force during economic downturns with their luckier counterparts who graduated in better times, Kahn found that there is a major difference in the amount of money earned over time. "One striking fact," she says, is that "over 17 years after college those groups have a $100,000 difference in earnings."

The problems begin as soon as a new graduate comes face-to-face with a tough job market and begins making compromises. "People leaving school in a recession are starting at a lower-level job and at a lower earning level," because there just aren't that many jobs around, says Kahn. In many cases, graduates end up taking jobs unrelated to their career plan. "By the time you switch back into your field," says Kahn, "you are behind."

Those who join the workforce in better days, meanwhile, continue to progress in their higher-level and higher-paying jobs where they can hone their skills and receive pay raises and bonuses based on their higher original salaries.

Even for those who do manage to find their dream job during a recession, there may not be much reason to gloat. "What if you are in a recession and you are the one lucky guy who finds a great job right away?" asks Kahn. "You will never know if you would have done better in a boom time. My work shows that, on average, throughout the entire sample, you would have been doing better."

Another factor that adversely affects job prospects is the fear associated with searching for a new job. Studies show that those who regularly move between jobs increase their salaries and get ahead faster. Kahn found that those who had a tough time finding a job in the first place are less likely to put themselves back on the market -- even once the economy has improved. "They change jobs less often, and when you are young you are supposed to change jobs more often," says Kahn. "You need to find the right fit for you, and that's often how people increase their salaries."

Unfortunately, the picture is not looking good for today's job-seekers. As Kahn points out, there are many similarities between the '82 recession and our current situation: "They both affected skilled workers, as opposed to other recessions we've had that affected lower-class and blue-collar workers like steel and auto workers." And while many countries are now pulling out of recession, the jobless figure remains astonishingly high. Last month, the unemployment rate stood at 9.7 percent, compared with 9.8 percent in August 1982. In December of that year, unemployment hit a terrifying high of 10.8 percent.

Frighteningly, the 9.7 percent estimate doesn't even include unemployed people who have simply given up looking for work or have taken on low-paying, part-time gigs to try to make ends meet. When the U.S. Bureau of Labor Statistics includes people who are not working full time but would like to be, the unemployment figure for August jumps to 16.8 percent.

For those unlucky enough to be sending out resumes for the first time right now, the Yale professor has lots of advice: "Go back to school if you can stomach it," she says. "Be mindful that you might not be reaching your full potential right now, and always be thinking, 'Should I move? Maybe there's a job out there that I would be better suited to.'" Recessions make people fearful, so they tend to settle for jobs that don't stretch them; to overcome that pitfall, you need the right mindset. As Kahn puts it: "Don't accept the status quo."
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