Does the year you graduate influence your future pay cheque?

By Katharine Mullock.

Blog45.0Previous posts (Youth Skills day 2015 and Investing in Disadvantage Youth) addressed some of the challenges posed by youth who are not employed or enrolled in education or training programmes (the so-called NEET group).  This group has increased in size since the recession: from 13.5 per cent of youth age 15-29 in OECD countries before the recession, to nearly 15 per cent in 2015 (OECD Employment Outlook 2016, forthcoming).  Rising NEET populations are one important reflection of the labour market difficulties that recent graduates may face during a recession.

But even among young people who are successful at finding jobs during a recession, new research suggests that the chances of finding a job that is a strong fit with one’s skills are worse.  Even more troubling – the negative effects of these poor initial matches can persist for years.

A growing literature shows that labour market conditions at the time of labour market entry can have large and persistent effects on an individual’s career.  For instance, Oreopoulos, von Wachter, and Heisz. (2012) and Kahn (2010) find evidence that the wages of young people who graduate during poor economic times are lower than those of young people who graduate during economic booms, and these negative wage effects can persist up to 20 years after entering the labour market.  How can a short-term shock like a high unemployment rate lead to long-term career losses?

A recent paper offers a convincing explanation for the persistent effects of short-term labour market shocks.  Using Norwegian panel data, Liu, Salvanes and Sorensen (2015) find evidence that mismatch between the fields of study of graduates and those demanded by hiring industries can explain persistent wage penalties associated with graduating during a recession.  The authors claim that youth have a higher likelihood of field-of-study mismatch when they graduate during a recession.  This claim is consistent with previous work, Montt (2015), showing that fields of study which are more “saturated” (i.e. have more graduates in the corresponding occupational group relative to jobs available in the occupational group), are more likely to have more mismatched employed workers.  When employment declines, more fields become saturated, and the incidence of field-of-study mismatch increases.  Simply put, workers are more willing to accept jobs for which their skills are not a strong fit when their employment prospects are dim.

The authors of the Norwegian study find that a one-percentage-point increase in the regional unemployment rate at the time of graduation leads to a 2.1-percentage-point increase in the probability of field-of-study mismatch in the first two years following graduation (see chart).  Furthermore, while these effects decline over time, they are still evident ten years after graduation. This reflects that while some initially mismatched youth are able to move to a new job or industry which matches their field of study, many others are unable to do so and remain persistently mismatched.

In concrete terms, a young person who graduated when the regional unemployment rate was high, say at 10%, has a nearly 13-percentage-point higher likelihood of being mismatched in terms of their field of study in the first two years after graduation than someone who graduated when the unemployment rate was closer to 4%.   Ten years after graduating, they still have a 9-percentage-point higher chance of being mismatched in terms of their field of study.

The authors find that field-of-study mismatch is able to explain the wage penalty that persists for up to 10 years following graduation during a recession (at least for the case of Norway).   Using  cross-national data, Montt (2015) also found that field-of-study mismatch entails a wage penalty, but only if it is accompanied by overqualification, i.e. only if workers who cannot find work in their field of study must accept jobs that are below their qualification level.

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The paper by Liu, Salvanes and Sorensen (2015) suggests that efforts to better integrate today’s youth into the labour market should not be limited to the 15% who are NEET, but should also target young people who were among the “lucky” ones able to find a job.  As the title of Liu, Salvanes and Sorensen’s paper suggests, having “good skills in bad times” should not condemn a young person to a prolonged period of wage penalty and job dissatisfaction. Policies are therefore required to reduce field-of-study mismatch, at least to the extent that it is associated with overqualification. These include career counselling services, on-the-job training, vocational training and apprenticeship programs, and reducing barriers to mobility to enable workers to move easily to different jobs, industries and regions for work.  Also, considering that field-of-study mismatch is associated with reduced wages when workers are overqualified, it is important to establish comprehensive qualifications frameworks that help employers to recognize the transferability of skills across fields of study.

 

References

Kahn, L.B., 2010.  The long-term labor market consequences of graduating from college in a bad economy.  Labour Economics.  17 (2), 303-316.

Liu, K., Salvanes, K., Sorensen, E.  2015.  Good skills in bad times:  Cyclical skill mismatch and the long-term effects of graduating in a recession.  European Economic Review. 84, 3-17.

Montt, G.  2015.  The causes and consequences of field-of-study mismatch.  An analysis using PIAAC.  OECD Social, Employment and Migration Working Papers.

Oreopoulos, P., von Wachter, T., Heisz, A., 2012.  The short- and long-term career effects of graduating in a recession.  American Economic Journal of Applied Economics. 4 (1), 1-29.

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One thought on “Does the year you graduate influence your future pay cheque?

  1. A thoughtful and well researched article. Is it not time entrepreneurs and corporate leaders hire and train new graduates to build a strong future?

    Like

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