As economic doldrums drift into a fourth calendar year, pundits debate which groups have been hit hardest. Retirees? Homemakers who have returned to work? Blue-collar men caught in the He-cession? To this list, another group has been recently added: the young and expensively educated. In October, for example, BusinessWeek ran a much-discussed cover story called The Lost Generation, claiming that workers in their twenties were bright, eagerand unwanted. Around Labor Day, the AFL-CIO published a report announcing that young workers were experiencing a lost decade.
Some commentators have even raised the specter of what happened in Japan during the long recession of the 1990s. Japanese companies stopped hiring, many twentysomethings subsisted on contract work or parental largesse, and by the time the economy picked up, these young adults lacked the résumés to be attractive for career-track gigs. In Europe, chronically high youth unemployment, even in good times, likewise creates social instability. Now, American twentysomethings wonder, could it happen here? Is the U.S. economy about to waste the productivity of a whole generation?
Every year, about 1.5 million people graduate with U.S. bachelors degrees. In general, they enter the labor market and assume that there will be enough desirable jobs to absorb them. But in order for new entrants to find jobs, there have to be job openings, says Heidi Shierholz, an economist at the Economic Policy Institute, and there simply havent been many. There were 2.4 million job openings advertised in August 2009, according to the Labor Departmentthe lowest number since it started keeping track in 2000. With 7.3 million jobs lost from December 2007 to October 2009, everyone starts competing down the line, says Caroline Ceniza-Levine, owner of SixFigureStart, a career-counseling service. If you have to look for people, why not look for the unsolicited, more experienced people who are coming in droves? They take the entry-level jobs. That means that people who would normally seek entry-level jobs compete just to find survival jobs.
A survey from the National Association of Colleges and Employers found that only 19.7 percent of members of the class of 2009 who had applied for jobs had one by graduation season, compared with 26 percent for the class of 2008 and a still-not-stunning 51 percent for the class of 2007. No question, for many companies, college grad hiring is on hold, says John Challenger, CEO of outplacement firm Challenger, Gray and Christmas. (However, the unemployment rate for people with bachelors degrees is still lower than for those with only a high school diplomain October, 4.7 percent versus 11.2 percent.)
The result is an economic inefficiency: a mismatch between jobs and potential, particularly among the young. People who graduate during a boom are more likely to land jobs that challenge them to the extent of their abilities. The early years of a career are when people invest most heavily in building their skills, so young people landing these jobs work hard to meet high expectations. For the rest of your career, you reap the benefits, says Lisa Kahn, an assistant professor of economics at the Yale School of Management. Society benefits, too, as these workers later use their human capital to create innovations for employers or launch their own start-ups. Even if these fortunate graduates lose their jobs at some point, theyve built skills and connections in their chosen fieldsattributes that make reemployment likely.
People who graduate during a recession, though, often have to take jobs that dont tap their potential. They develop the skills relevant to these lower-level jobs, rather than skills for jobs that would challenge them. Or they survive on help from family and dont learn much at all. If they switch to better jobs later, theyll be behind the learning curve.
Kahns research has found that among American college-educated white men, every percentage-point rise in the national unemployment rate corresponds to a 6 to 7 percent reduction in initial earnings. This means that those who graduate when the unemployment rate is 10 percent will earn roughly 30 to 35 percent less in their first jobs than those who graduate when unemployment is 5 percent. While the unlucky graduates will close the gap over time, there will still be a 2.5 percent difference 15 years later. Since college-educated white men are a high-earning crew, this ongoing gap translated into more than $100,000 in lost wages over the 17 years that Kahn studied. As she says, It really does matter when you graduated: it is much worse to experience a recession in your first year out of college than in your fifth.
Modern Japan had always had a low unemployment rate. But when its economy soured in the early 1990s, commentators observed a spike in NEETsa British acronym for people not in employment, education, or training. Most of the NEETs were 15 to 24 years old, and many assumed that these members of a pampered generation, raised in the well-to-do 1980s, simply didnt want to work. But perceptions changed as the recession dragged on. Newspapers began to carry tales of educated young people working on short contracts for subsistence wages.
A few years ago, Japanese corporations began hiring again, but they generally preferred to hire and train young people just graduating from school. This meant that the cohort that had graduated five to ten years earlier was out of luck. In 2002, the majority of NEETs were 25 to 34 years old; that is, they were the same people out of work when the recession started. A lost generation was born. (The term was coined much earlier and with a very different meaning, when Gertrude Stein applied it to American expatriates living in Paris after World War I.)
That recent American grads will follow this pattern is the worry of people like Kyle Griffin, a 2008 graduate of the College of Saint Rose in Albany, who is applying for roughly five jobs per day and has been living for months on weekly $350 unemployment-benefits checks. Or Honora Talbott, a 2007 magna cum laude graduate of Amherst, who moved to New York City in November 2008 and recently beat out 500 other applicants for a part-time job walking dogs. Few of the young people I spoke with for this article knew more than a handful of folks from the classes of 2008 or 2009 who had full-time jobs with benefits in their chosen fields. Scott Pierce, a 2008 Bates College grad who lives in San Francisco, describes a recent party for his schools alumni: All the people from 2009 who were at the thing were from San Francisco and were living at home, he saysthat is, none of the guests had moved to the Bay Area for a job.
In the meantime, unemployed young people are creating a fascinating online literature of unemployment. Pierce blogs at a site called Tales from the Recently Laid Off, where he tries to find humor in things that arent funny. Hes joined by the scribes at such colorfully named sites as Pink Slips Are the New Black, Stuff Unemployed People Like, and the 405 Club (named for the maximum weekly New York unemployment check at the start of the recession). But such creativity is cold comfort for those who have the misfortune of being born at a time that dumps them into the labor force at the exact worst time in 70 years, as Shierholz puts it.
Despite the recent spike in unemployment for educated young Americans and the prospect of somewhat lower wages over time, a true lost generation is unlikely here. One reason is that you can game when you enter the labor market by staying in school. This partly explains why people graduating during a recession narrow the wage gap with their luckier competitors: people who earn graduate degrees, which more people do during a recession, tend to earn more than those who dont.
A stronger reason to expect that todays college grads wont remain unemployed for long is the relative structural dynamism of American capitalismabove all, the extraordinary flexibility of the U.S. labor market. The World Bank Group ranks the United States as tied for first place in the world in employing workers (that is, labor flexibility). Not only do American companies have a lot of freedom to hire and fire; payroll taxes are relatively low by international standards (7.65 percent for Social Security and Medicare, plus federal and state unemployment-insurance premiums, which vary but seldom add more than a few percentage points to the total). And as the ranks of independent contractors grow, many companies dont face even those costs (or health-insurance costs) for their workers. Our system is so much more flexible, says Challenger. People are like free agents heretheres a lot less safety in your career, but the real upside is that people can then move into these jobs when times are better. And when times are better, the American economy is quite good at creating jobs.
In Japan, by contrastwhich ranks 40th in the World Bank Groups employing workers standingslifetime tenure at one company remains the norm, and its difficult to get a job except immediately after leaving school. The Japanese labor market is like a sold-out show in a theater: people arrive before the curtain rises, sit in their chairs, and dont leave. Anyone coming late tends to lose out. In France, which ranks 155th, many labor contracts severely limit hours and flexibility, high payroll taxes fund workers benefits, and social policy makes layoffs very difficult. Germany, in 158th place, has many similar policies. If you wanted to extend the theater analogy, you might add that in both France and Germany, the seats are so expensive to build that there arent enough of them for those who arent impeccably credentialed.
An economy needs entrepreneurs to start companies and absorb new workers entering the labor market, and such risk-takers dont appear in a vacuum: countries have business climates that are more or less amenable to them. The World Bank Group ranks these business climates, and also the ease of starting a business, in the 183 countries that it studied; the U.S. places fourth and eighth, respectively. Japan, with its cultural preference for large national corporations and lifetime tenure, ranks 91st in the ease of starting a business; Germany, at 84th, isnt much better.
A final reason for todays young people not to lose hope: the U.S. unemployment rate hit 10.8 percent in 1982. At the time, one might have thought that people born in 1960 would become a lost generation. But todays 50-year-olds dont appear lost in their careers.
Of course, if you have a good seat in that Japanese or European theater, you might not think its a bad arrangement, and plenty of Americans want more Japanese-style stability or European-style labor protections. President Obamas advisors appear to be among them. Among the ideas that they have floated are higher income-tax rates for high earners (which most entrepreneurs aspire to be) to fund new benefits, new payroll taxes for businesses that dont provide health insurance, and proposals to make organizing easier. In recent years, America has also seen campaigns to guarantee workers several weeks of paid vacation per year and to require even microenterprises to grant leave for caregiving and illnesses. And Congress declined to repeal a previously scheduled hike in the minimum wage this past July.
Some of these benefits are great if you have a job, and some may be socially desirable for other reasons, but all will have an inevitable economic result. Anything that makes it more expensive to employ people, or raises the cost of getting rid of them, or makes entrepreneurship less rewarding, will raise structural unemployment. And the damage will likely be most severe among those coming late to the theateryoung workers. Take the French laws that make it difficult to downsize workers. When its not employment for life, if an employer feels like they can let a worker go in an extreme situation, [the employer] is more likely to take a risk on a young worker, says Kahn, the Yale economist.
Since he announced his candidacy, Barack Obama has been a favorite among American young people. He won 66 percent of the 18- to 29-year-old vote. He may have won other demographics because devoted young volunteers lobbied their parents, cajoled people to the polls, and spread the word through Facebook. It would be ironic if his policies wound up damaging the employment prospects of his biggest fans.