Coming of age during COVID-19. Does graduating during a recession have long-lasting effects?

Photo by Vasily Koloda on Unsplash

There are encouraging predictions that New Zealand will bounce back relatively quickly from its COVID-induced recession in terms of economic growth. However, we know from previous recessions that while economic activity may rebound it can take many years for the job market to fully recover. Treasury is predicting unemployment will rise to 9.6 percent which takes it to levels not seen since the late 1980s. While many experienced workers who lose jobs will be able to re-enter the workforce over time, the situation is more tenuous for young people who graduate during recessions.

All of this is not good news for the generation that is also likely to carry the burden of paying back unprecedented levels of public debt.

Jobs and recessions

Recessions have long-lasting impacts on the job market and the current recession will have more of an impact on industries directly affected by border closures. New Zealand’s most recent recession prior to 2020 was the global financial crisis of 2008/09. In that case, it took a decade for unemployment to fall to levels seen before the GFC:

Sources: Stats NZ and RBNZ based on NZ’s Classical Real GDP Business Cycles

The GFC had an even more dramatic effect on youth unemployment which rose from 10 percent to almost 18 percent in the five years that followed. But how long-lasting is the effect for those unfortunate enough to reach working age during a major recession?

Lasting career effects in the class of 2020

Those who graduate during a recession are less likely to get a job utilising their degree and as a result, they tend to make less money in the early part of their career. These losses gradually recede, but it takes a long time. According to a large-scale study of Canadian graduates from 1976–95, the initial losses halve within the first five years but don’t completely disappear until ten years post-graduation. These first ten years of work are crucial as this is when most people experience 70 percent of their overall wage growth and have the most job mobility.

Young people are also more likely to lose their job during a downturn. Multiple studies have shown that younger workers are more likely to be let go by employers and their unemployment persists long after the crisis passes. In Australia, the single largest group hit by unemployment since COVID-19 is the under 25s with one in four young Australians are now out of work according to Indeed’s chief economist Callam Pickering. And for some of those early-career workers, this is the second bout of bad luck in just over a decade. As McKinsey Global Institute points out “the generation that first entered the job market in the aftermath of the Great Recession is now going through its second ‘once-in-a-lifetime’ downturn.”

The social impacts of failing to find a suitable job post-study are immense. Young people tend to be slower to meet the usual milestones of adulthood: living independently, finding stable employment and starting a family. For those who are unable to find stable employment, there is also a risk that they lose heart and drop out of the job market altogether, constituting a waste of human and economic potential. The financial costs on the country are high, with a 2013 report from the Sustainable Business Council estimating the cost of a young person not in education or employment (the so-called “NEET” rate) equating to $28,000 per person.

Recessions generally increase inequality

The effects are believed to be more severe for youth entering the workforce with an education level below the tertiary level. According to a New York Times article “recessions, in general, widen inequality”. Those likely to be hardest hit are minority groups and the young, particularly those without further education. A recent study from Stanford University found that high school graduates suffered greater income losses than university graduates when entering the job market during a recession. It also found that recession graduates continued to feel the effects well into mid-life, earning less than those who graduated in prosperity and working more.

What is the solution? According to the World Economic Forum, the policy response to counteracting high youth unemployment has to be multifaceted. Investing in high-quality training and education, plus targeted job creation and on-the-job learning will all be required. Targetting support to young people entering the workforce is a hard sell when there are so many other groups in need but will ultimately be less expensive than the alternative — for those individuals but also for the country as a whole.

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GDPLive is a world-first real-time GDP forecaster, which uses big data and AI to form estimates of economic activity in NZ. Go to: www.gdplive.net

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GDPLive

GDPLive is a world-first real-time GDP forecaster, which uses big data and AI to form estimates of economic activity in NZ. Go to: www.gdplive.net