Don Peck in The Atlantic has a lengthy rumination on the possible impact of a lengthy or even permanent period of increased unemployment in the United States, a subject to which I’ve returned frequently here. I agree that one of the consequences is likely to be a permanent reduction in lifetime income:
But in fact a whole generation of young adults is likely to see its life chances permanently diminished by this recession. Lisa Kahn, an economist at Yale, has studied the impact of recessions on the lifetime earnings of young workers. In one recent study, she followed the career paths of white men who graduated from college between 1979 and 1989. She found that, all else equal, for every one-percentage-point increase in the national unemployment rate, the starting income of new graduates fell by as much as 7 percent; the unluckiest graduates of the decade, who emerged into the teeth of the 1981–82 recession, made roughly 25 percent less in their first year than graduates who stepped into boom times.
But what’s truly remarkable is the persistence of the earnings gap. Five, 10, 15 years after graduation, after untold promotions and career changes spanning booms and busts, the unlucky graduates never closed the gap. Seventeen years after graduation, those who had entered the workforce during inhospitable times were still earning 10 percent less on average than those who had emerged into a more bountiful climate. When you add up all the earnings losses over the years, Kahn says, it’s as if the lucky graduates had been given a gift of about $100,000, adjusted for inflation, immediately upon graduation—or, alternatively, as if the unlucky ones had been saddled with a debt of the same size.
That should result in a driving down of the cost of higher education, something that’s desperately needed, but I don’t think that’s what we’re seeing. Presumably due to a combination of the inelasticity of wages and the heavy involvement of government at different levels in education costs don’t appear to be falling.
The author also suggests the likelihood of severe lasting psychological harm, particularly to men, a further erosion of traditional marriage, and a heightened level of general animosity if conditions continue. He concludes:
We are in a very deep hole, and we’ve been in it for a relatively long time already. Concerns over deficits are understandable, but in these times, our bias should be toward doing too much rather than doing too little. That implies some small risk to the government’s ability to continue borrowing in the future; and it implies somewhat higher taxes in the future too. But that seems a trade worth making. We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come. We have a civic—and indeed a moral—responsibility to do everything in our power to stop it now, before it gets even worse.
I’m not prepared to comment on psychological or sociological consequences. I think we’re likely to see a continuing increase in the proportion of temps and part-timers who don’t have healthcare or other benefits. In the 1930’s unpaid internships, particularly for workers starting in new industries, was a commonplace and I suspect we’ll see more of that as well. Those two factors, along with continued pressure from recent immigrants (even if the rate of immigration slows), may serve to restrain wages for the foreseeable future. If, as is all but inevitable, we see rising costs of good while wages remain constrained, that would suggest a falling general standard of living.
This kind of “logic” infuriates me, because it ignores the very real possibility that the hard times are caused by, in part, the very government taxation and spending being flacked here as a cure.
I agree with your conclusion, though, that we will see a declining standard of living. I suspect that this will hit the very poor and the upper middle class hardest. The poor because they have few resources. The upper middle class are targeted by government.
Although I don’t agree with his presumed policy prescriptions, I’m not sure that I have an alternative to offer, either. In my view we’re not so much over-regulated or under-regulated as misregulated. I think we have a 1950’s regulatory regime trying to function in a 21st century environment.
I’ve already offered my preferences here enough times that I won’t recapitulate them here. I see no appetite whatever for my preferences of means-testing entitlements, taxing total compensation (rather than just wages), or reducing our global military footprint. That means either substantial tax increases or some sort of fiscal death spiral. In all likelihood both.
As someone who “emerged in the teeth of the 1981 – 1982 recession” I say to Mr. Peck: balls. And the thinly disguised logic of a government apologist.
Whenever I hear such arguments I ask myself: how is it that Vietnames refugees, with circumstances that make the misfortune of my college graduation date pale in comparison, come here and become successful?
Probably by not listening to the Peck’s of the world.
I’m with Mr. Medcalf, its far more likely that the government is an impediment, rather than a positive catalyst. I, for one, can’t think of anything the government did for me along the way to overcome that ball and chain of my college graduation date. (snicker)
Were college graduates greatly harmed by the early 80s recession? My recollection is that blue collar jobs were hurt most.
OTOH, I thought the early 90s recession hit more college graduates, even though it was milder. (10% unemployment in California, for example)
So studying the effect national unemployment has against college graduates probably needs a broader data base against various types of downturns.
Here’s something on education and employment that may interest you all.
Andy, I think the study cited is largely bogus. I put a lot more stock in employers’ behavior than I do on what they’d like interviewers to think that their behavior is. The fact is that employers are increasingly hiring based on extremely narrow skillsets.