Dropouts – Leaving education during a recession has severe impacts

The financial crisis led to the biggest recession in living memory: output fell by almost 5 per cent, a bigger drop than in the downturns of the early 1990s or early 1980s. As in previous recessions, younger people bore the brunt of this: the unemployment rate for those aged 18 to 29 rose by 4 percentage points and average real earnings for this group fell by 9 per cent.

Elsewhere we have documented how young people have faced a decade of poor earnings growth and reduced job prospects compared to previous cohorts. This report looks at the specific fortunes of the “crisis cohort” those who left education between 2008 and 2011. By analysing outcomes for those unfortunate enough to enter the labour market in the aftermath of the 2008-09 recession, this paper estimates how severe an impact
the downturn had on people who left education in its midst, and how long-lasting these effects were. It is also the first attempt to compare this recession with previous ones, shedding light on how the effects differ and what this can tell policy-makers about how to prepare for future downturns.

We find that people starting their careers in the midst of a downturn experience a reduction in real hourly pay of around 6 per cent one year after leaving education, and that compared to people who left education in better economic conditions their wages do not recover for up to 6 years. For those with lower levels of education, the chance of being in work falls by over 20 per cent, while for graduates the chance of being in a low-paying occupation rises.

In terms of the recent downturn, one of the most novel findings of this paper is that, compared to graduates who left education before or after the downturn, there was a more pronounced rise in people working in lower-paid occupations. The chance of a graduate working in a low-paid occupation rose by 30 per cent, and remained elevated a full seven years later. Indeed, we find that people ‘trading down’ in terms of the occupations they enter after leaving education, coupled with pay restraint in mid-paid roles, are main drivers of poor pay outcomes for those entering the labour market in a recession.
This helps explain why the impact on pay was more enduring in the recent downturn. People’s hourly wages took 50 per cent longer to recover (to the rates of pay enjoyed by those leaving education outside the downturn) after the nancial crisis than in the aftermath of the 1990-91 recession. On the other hand, youth unemployment did not rise as high as in the early 1990s, and came down much faster.

Like previous downturns, the recent recession has severely affected the prospects of those leaving education in its midst. The cohort that graduated in the aftermath of the financial crisis suffered higher unemployment and poorer job prospects than their slightly younger counterparts. Unlike previous downturns, the nancial crisis brought with it nominal pay cuts for those starting work in 2008 and 2009, particularly sluggish wage growth and a marked rise in the share of people in low- paying occupations.

This shows that the nature of the challenge has changed. The good news is that fewer young people have experienced the scarring effects of unemployment. The bad news is that a far greater proportion have endured ‘occupational’ scarring. This matters because time spent in low-paying occupations reduces someone’s future earnings prospects, not just because pay progression is weaker in these occupations but also because moving
to higher-paying occupations is relatively rare and pay effects do not immediately unwind when (if) someone does. We find that, over the past decade, the typical annual hourly pay rise for someone in a high-paying occupation who had been employed for between one and two years was 54p, far higher than the typical pay rise for someone working in a low- paying occupation (32p). Therefore although unemployment still blights the early careers of many young people – particularly those with lower levels of education – we need to do more to support those who, although avoiding unemployment, have had their earnings trajectories and job prospects damaged by time spent in low-paying work.

Chosen excerpts by Job Market Monitor. Read the whole story at Growing Pains: the impact of leaving education during a recession on earnings and employment – Resolution Foundation