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

117 Pages Posted: 14 Jul 2008

See all articles by Philip Oreopoulos

Philip Oreopoulos

University of Toronto - Department of Economics; National Bureau of Economic Research (NBER); Canadian Institute for Advanced Research (CIFAR)

Till von Wachter

Columbia Business School - Economics Department; IZA Institute of Labor Economics

Andrew Heisz

Government of Canada - Analytical Studies Branch

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Abstract

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 using matched university-employer-employee data from 1982 to 1999. The results are used to assess the role of job mobility and firm quality in the propagation of shocks for different groups in the labor market. We find that young graduates entering the labor market in a recession suffer significant initial earnings losses that, on average, eventually fade after 8 to 10 years. Labor market conditions at graduation affect firm quality and job mobility, which can account for 40-50% of losses and catch-up in our sample. We also document that higher skilled graduates suffer less from entry in a recession because they switch to better firms quickly. Lower skilled graduates are permanently affected by being down ranked to low-wage firms. These adjustment patterns are consistent with differential choices of intensity of search for better employers arising from comparative advantage and time-increasing search costs. 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.

Keywords: job search, hysteresis, college graduates, cost of recessions

JEL Classification: J62, J64, J31

Suggested Citation

Oreopoulos, Philip and von Wachter, Till and Heisz, Andrew, The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates. IZA Discussion Paper No. 3578. Available at SSRN: https://ssrn.com/abstract=1158975 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Philip Oreopoulos (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Canadian Institute for Advanced Research (CIFAR)

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Toronto, Ontario
Canada

Till Von Wachter

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Andrew Heisz

Government of Canada - Analytical Studies Branch ( email )

120 Parkdale Avenue
24th Floor, R.H. Coats Building
Ottawa, Ontario K1A 0T6
Canada
613-951-3748 (Phone)
613-951-5403 (Fax)

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