Entering the labour market in a downturn

The year of leaving education is largely independent of the economic cycle: it depends on age and path, not on strategic choice. It therefore provides a quasi-random variation in conditions at entry.

That property allows similar people entering the labour market under different conditions to be compared, which is rare in labour economics. It is not perfect: some people prolong their studies when jobs become scarce, and researchers correct for this by using the expected rather than the actual graduation date.

Work by Philip Oreopoulos, Till von Wachter and Andrew Heisz on Canadian data, published in 2012, that of Lisa Kahn on American graduates who entered during the recession of the early 1980s, and other work on European data, finds a substantial initial earnings loss for cohorts entering in recession.

That loss fades gradually, over a period measured in years and sometimes a decade, and it is more marked for less qualified people. English-language research speaks of a scarring effect to designate this lasting trace of past economic conditions.

The loss runs mainly through the starting firm: disadvantaged cohorts begin in lower-paying firms and catch up by changing employer, which takes time. Robert Topel and Michael Ward had shown as early as 1992 that mobility between employers accounts for a large part of wage growth early in careers.

Part also runs through the quality of the match between training and post, which is poorer when the choice is constrained, and whose effects persist.

The result establishes that part of the earnings gaps between comparable people comes from something over which they have no control, which contradicts purely individual readings of trajectories.

It also provides an argument for policies targeting labour market entrants during recessions, whose evaluations find varying effects by scheme. It does not, however, say what share of the gaps observed within a given cohort is due to economic conditions rather than other factors.

Estimates vary by country, depending on employment protection, the role of seniority in pay and mobility between firms.

French work, which can draw on the Génération surveys run by Céreq, the public centre for research on qualifications, following cohorts of school leavers since the 1990s, finds the direction of the effect, with magnitudes and recovery durations that differ from those observed in North America, a reminder that these results do not transfer mechanically.