Saturday, July 10, 2010

For a New Generation, an Elusive American Dream

New York Times article "American Dream is Elusive for New Generation" (July 6th, 2010) neglects forces of supply when discussing the labor market facing recent college graduates. Referring to the choices of one recent college graduate, the article notes:

Over the last five months, only one job materialized. After several interviews, the Hanover Insurance Group in nearby Worcester offered to hire him as an associate claims adjuster, at $40,000 a year. But even before the formal offer, Mr. Nicholson had decided not to take the job.

Rather than waste early years in dead-end work, he reasoned, he would hold out for a corporate position that would draw on his college training and put him, as he sees it, on the bottom rungs of a career ladder.

Interestingly, a recession resulting in a decrease in the number of jobs available to skilled workers (a decrease in the demand for skilled labor) may not be the only thing keeping college graduates from "good" work. In fact, the supply of college graduates has continued to increase over time. The graph below plots BLS records of the number of college graduates in the labor force (both employed and unemployed) over time (click here to enlarge). Such competition for work drives down wages.

In addition, we should expect the number of college graduates to increase during a recession simply because fewer job opportunities make investment in future productivity more attractive. Potential labor force members will instead spend their time in school so that when they are able to find work, they will be paid even more for their labor. The article then cites work by a Yale economist meant to worry readers that a low payoff to education now will persist into the future:

In a recent study, she found that those who graduated from college during the severe early ’80s recession earned up to 30 percent less in their first three years than new graduates who landed their first jobs in a strong economy. Even 15 years later, their annual pay was 8 to 10 percent less.

Of course, those who choose to enter the labor force during a recession are those for whom additional human capital accumulation will likely not pay off. Specifically, if everyone who does not take their first job during a recession chooses to invest in a two year law or business school degree, taking their first job after the recession passes, why would we expect them to have the same annual pay fifteen years later? The author notes this in her paper:
I also find that cohorts who graduate in worse national economies are in lower level occupations and have slightly higher educational attainment.
In fact, the author argues that such high effects persist when we assume that students cannot shift their graduation and educational attainment decision in response to economic fluctuations. Far weaker effects than those reported in the article persist when people are allowed to endogenously choose their education--OLS results suggest a long run 1.5% wage loss. Though the New York Times article may be correct in noting a long-run wage differential, it completely mis-interprets a theoretical exercise (instrumenting for year of graduation using year of birth) to make a point.

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