The Long-Run Effect of Entering the Job Market During a Recession – Evidence from Cohort Analysis

Abstract

Economists have recently been interested to study the long-run effect of recession on job entrants. Some papers find that those who enter the labor market during a recession earn a lower income in the subsequent years, but that negative effect on income disappears over time. On the other hand, some papers find that the low income of these job entrants remain persistent even in the long run, which implies that those who enter the job market during a recession bear the brunt of low income throughout their lives. However, few papers study the underlying reason behind the lower wages earned by this recession cohort. In this paper, I identify two job cohorts – one that enters the labor market during a long recession, and the other that enters the labor market during favorable economic times and study their income evolution using pooled regression. Using the regression results, I run some Oaxaca-Blinder (1973) decomposition to identify the underlying reasons behind the lower wages earned by the recession cohort. The results indicate that men who enter the labor market during a recession earn a lower returns on individual characteristics (education, race and experience) when compared with those who enter the labor market during favorable economic times. This is robust to changes specification of the analysis, indicating that the lasting wage shortfall of men during a recession is due to the lower returns to education and experience that they face.