Bad Times, Bad Jobs? How Recessions Affect Early Career Trajectories
Studies find that if a worker enters the labor market during an economic downturn versus a period of expansion, they likely will have more difficulty finding a high-paying job, because the availability of such jobs is strongly procyclical. The earnings penalty for starting a career during bad times is both substantial and persistent. Indeed, this paper finds that a typical recession causes entrants to experience a 6 percent loss in earnings cumulated over the first 15 years of their careers. But, the authors ask, to what extent do non-pecuniary characteristics of jobs offset some of those earnings losses? They address this question by relying on population-scale linked employer-employee administrative data from Germany to estimate both the pecuniary and non-pecuniary impact of entering the workforce during a recession.
- In Germany, while a typical recession causes labor market entrants to experience a 6 percent loss in earnings cumulated over the first 15 years of their careers, 24 percent of that earnings loss is compensated for by non-pecuniary amenities.
- About 8 percent of the overall earnings losses faced by workers who enter the labor force during a recession is explained by reductions in economic rent sharing.
- Market-wide factors account for about 68 percent of the overall earnings penalty experienced by recessionary labor market entrants. Employers are responsible for the remaining 32 percent, a finding that underscores how recessions substantially change the types of employers with which workers match.
- Industry, occupation, and location characteristics such as workplace injury risk and local differences in the quality of life explain the majority of the observed amenity gap between workers who enter the labor market during good economic times and those who enter during bad times.
- Job creation at low-pay, high-amenity employers is less procyclical than it is at high-pay, low-amenity employers. This difference is driven primarily by increases in hiring as opposed to reductions in separations, indicating that labor force entrants flow toward high-amenity employers in recessions and toward low-amenity employers in expansions.
This paper’s findings concerning employer provision of non-pecuniary amenities indicate that focusing on earnings losses alone overstates the welfare consequences of labor market entry during recessionary periods. The authors note that their findings are specific to Germany, which differs substantially in terms of employment protections, unemployment benefit generosity, job-search assistance, retraining programs and health-care provision compared with the United States and Canada, two other countries for which researchers have conducted studies on recession-induced earnings losses.
In addition, the authors point out that although Germany has strong active labor market programs for employment and retraining, their estimates of recession-induced earnings penalties in Germany are comparable to those found by a previous study of Canada, where such programs are less widespread. The findings therefore suggest that worker-focused policy interventions may not mitigate the earnings losses that workers experience if they enter the labor market during a recession.
Workers who enter the labor market during recessions experience lasting earnings losses, but the role of non-pay amenities in either exacerbating or counteracting these losses remains unknown. Using population-scale linked employer-employee administrative data from Germany, we find that cohorts entering the labor market during a recession experience a 6 percent reduction in earnings cumulated over the first 15 years of labor market experience. We implement a revealed preference-based estimator of employer quality that aggregates data on the universe of worker moves across employers to find that one-quarter of recession-induced earnings losses are compensated for by employer-specific non-pay amenities. Our paper shows that the welfare cost of labor market entry during recessions can be less severe than pecuniary estimates would imply.