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Joining workforce in high-unemployment year a drag on lifetime earnings

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It’s bad luck to be born 20 years before a time of high unemployment. It affects your income when you enter the workforce, naturally, but that’s not all. It can keep your earnings relatively low — and chip away at your health and happiness, as well — for a lifetime.

Many studies have documented the income effect. A typical estimate, from a 2010 study, is that every percentage point increase in the unemployment rate during the year a person enters the workforce reduces his or her wages by six to seven per cent on average. And the reduction persists, though it diminishes somewhat over time. Even 15 years on, a person’s wages are 2.5 per cent lower for every percentage point increase in the unemployment rate that happened when he or she graduated from college.

This can make for big differences among members of the same generation who are born just a few years apart. Compare a person born in 1988, who graduated in 2010, when the unemployment rate averaged 9.6 per cent with someone born in 1984 who graduated from college in 2006, when the unemployment rate averaged 4.6 per cent. The person unlucky enough to be born in 1988 had a 30-35 per cent lower wage at graduation. And at their respective 15 year reunions, the 2010 graduate is expected to be earning 12.5 per cent less than the 2006 graduate.

Similarly, the class of 1982 (a peak unemployment year) is estimated to have earned about US$100,000 less in net present value over their first 20 years of working than did similar students in the class of 1988 (a peak employment year).

People who have graduated into a weak labour market have also turned out to be less satisfied with their lives than people who graduated into stronger labour markets, according to a new analysis of five decades of European survey data, conducted by the economists David Cutler and Wei Huang of Harvard University and Adriana Lleras-Muney of the University of California, Los Angeles. Such people have also been more likely to be obese and to smoke.

Although everyone born in an unlucky year suffers, those who have relatively more education suffer less. For those without any formal schooling, entering a career during a year when unemployment is five percentage points higher than normal boosts their chances of smoking 2.5-5.5 per cent. For those with three years of college, by contrast, the chance of smoking goes up by less than one per cent. In other words, bad times today raise smoking rates tomorrow among all kinds of people, but by much less for those with more education and higher incomes.

Some previous research has suggested that people get healthier during a recession, perhaps because they drive less, because they lack the disposable income it takes to binge drink, or because the quality of health care staffing improves. The Cutler team finds a more intuitive relationship between recession and health — that bad times lead to poorer health — because it shows the connection between current economic conditions and health later on.

The economists then link their findings to a connection I’ve discussed in previous columns: the one between income (or education) and health (including life expectancy). Both within and across countries, they note, higher-income, better-educated people live longer and enjoy better health than lower-income, less-educated people do. The differences vary in size significantly across countries, though, which has been a puzzle.

Cutler’s team proposes an explanation: Country differences in the health gradient by education are driven in part by differences in labour-market conditions. Higher unemployment in country A in a given year will steepen that country’s gradient in subsequent health outcomes, since its highly educated people suffer much less harm than its less educated people do. The economists conclude that labour-market conditions (which vary from country to country) at the time a generation enters the workforce can explain 15-70 per cent of health-gradient differences across countries.

Ultimately, Cutler and team note, "labour market conditions early in life have a long-lasting effect on health as well as economic outcomes, and these effects cumulate." For macroeconomic policy makers, the long-term harm to public health from weak economic conditions increases the urgency of avoiding or attenuating high unemployment.

Since the business cycle will never be fully eliminated, though, it is worth considering what individuals can do to protect themselves and their children. One strategy that’s impossible to follow consistently is to simply be lucky: Be born 20 years before an economic boom rather than a bust.

 

Bloomberg View columnist Peter R. Orszag is chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup. He was previously President Barack Obama’s director of the Office of Management and Budget.

 

— Bloomberg News

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