Q: You were the first person to systematically study the career impact of college graduates entering the labor market in a recession. The work has gotten a great deal of attention. Could you explain your findings?
We intuitively understood that students graduating into a bad economy have a tough time getting that first job. Looking at data to figure out whether there are long-lasting effects to entering the labor market in a recession, it turns out there are very long-lasting negative effects. I took existing panel data for a nationally representative sample of people who graduated from college in the 1980s were followed for the next 20 years. I could see that those graduated in better economies (for example, 1987 and 1988) had very good opportunities and the ones who graduated into the recession of 1980 and 1981 had very bad opportunities. And down the line, they didn't catch up. I found that for a one-percentage-point increase in the unemployment rate, new graduates earn 7% less at the start of their careers. This effect dissipates some as workers gain labor market experience. But even almost 20 years later, those who graduated with a one-percentage-point higher unemployment rate are earning about 2% less. When you compare the unluckiest (the 1980 and 1981 grads) to the luckiest (1988 grads) the earnings gap, almost 20 years later, is 10%. And earnings losses over the entire career add up to more than $100,000 in present discounted value. It's not entirely clear why there would be such long-lasting effects. Here are some possible factors: It's very typical for a young worker to have four or five jobs in their first five to ten years of experience. Most career advancements happen by moving across firms. Workers who enter firms in recessions don't move as often. The jobs they accept might not be exactly in the field that they'd be best at or wanted to be in. And the firm is paying less because of the weak market. What ends up happening is these young workers take a less-than-ideal job at less pay and stay there for longer. It's counterintuitive, but could be contributing to the long-lasting impacts.
Q: What should individuals do to give themselves the best chance in a down market?
In order to get around this effect of graduating in a recession, people get an extra year of school on average. It makes sense: if you don't have good labor market opportunities, the opportunity cost is low. With that extra degree or professional certification, they do about as well as the typical college graduate in a better time. My advice beyond that would be, don't accept the status quo. People should be asking, "Is this the job I want?" If you find the best job match, you're going to be the most productive. They should be searching very hard for the right job. Do they have the right skills? Are they in the right location? Are they making the right connections? They should be willing to accept less compensation, with so many people looking for jobs and firms being really reluctant to hire. At the same time, if things aren't working out, people have to realize, it's not their fault. It's a recession.
Q: What should we be watching in the current market and going forward?
We have 9% unemployment. There are 14 million people looking for work. By far the most fundamental issue is that we need to create jobs. We need firms to want to hire.
Q: What will get companies to start hiring?
I wish I knew. We've had two false starts. In early 2010, things looked great. We saw signs that this was a pretty normal, but deep, recession and we were going to have a pretty normal recovery. We started growing jobs, and then the stimulus ran out. The stimulus was supposed to boost the economy so that it would take off. Instead, it boosted and then nothing. There are lots of short-term factors shaping the situation. Right now, uncertainty at home and in Europe makes firms less likely to hire, makes people less likely to spend money. Rising gas prices earlier in the year didn't help. But those are just small things. The question is, when are firms going to start hiring? And they're going to start hiring when they think that there's going to be demand for their products, but there's going to be demand for their products when people think they're going to have jobs. Bigger picture, we have these long-run shifts in the American economy. We have an aging workforce. We have a shift from manufacturing to services. We have a huge expansion in healthcare and in innovation-type firms—the Googles, Yahoos, Microsofts. As cheap labor became available overseas, the U.S. decided its comparative advantage was in high-skilled labor. We started making goods and services that required a more skilled workforce. Where do we go from here? Basically, the U.S. has to keep evolving and innovating. Going back to the question of what to look for going forward, there's an issue to keep an eye out for once we do have hiring again. If Sony accidentally produced 10 times as many TVs as they were supposed to, it wouldn't be too much of a problem. They lower the price of the TV and clear the inventory. If you accidentally produced 14 million people looking for jobs, it takes time to find the right person for each job. There's going to be a huge bottleneck.
Q: How do labor markets differ from other markets?
A labor market is a market like anything else. But there are some important features of a labor market that make it stand out. It is a two-sided matching problem. Employers are looking for workers, and workers are looking for firms. And there are lots of informational problems. Those informational problems are like getting a used car. You don't know why the person wants to give up the car. Maybe it's a lemon. Except with the labor market you have the uncertainty on both sides. That creates some very interesting features of how to allocate all of these workers to all of these employers in the most efficient way possible. Problems exist because of frictions; for instance, it's impossible for me, as an employee, to search for every possible employer on the planet and know exactly how I would fit at each of those firms. Similarly, it's impossible for each of those firms to know exactly how they would feel about me if I were working for them. Those issues continue to be extremely important. The sorting and matching process that goes on is a very long process. That's why workers move around a lot, until they find the right fit for them. The information structure separates the labor market from some other markets. I've been looking at one aspect of information asymmetry. When you work for a firm, they learn a lot about you, but I've shown that outside firms are not learning as much. That has consequences for whether you want to move to another firm. Let's say you've already proven yourself to your current firm. You haven't yet proven yourself to the outside market, because, in some instances, they can't really see how well you've been doing. So you might be less likely to move. You might have worse opportunities because of it. There might be some matches that don't take place, even though they would be efficient, because they don't have the information. It's an issue that's very hard to measure and quantify.
Q: How effective are companies in evaluating their current employees?
[This article has been reproduced with permission from Qn, a publication of the Yale School of Management http://qn.som.yale.edu]