That we pursue higher education for better job prospect was an entirely foreign concept to me only a couple of months ago.
My hometown is a quite little place in the west coast of Malaysia where many households have working estates/farms, who see retaining young people as the top most concern. Much like the agriculture communities in rural Victoria, Australia, or rural Alberta, Canada, in my little town even the mention of “employment” was frown upon. Everyone has a job at home waiting for them, and I knew no one who was interested in employment outcome when evaluating an institution or a study field, other than factors like how home and other friends are close by.
Gaining this new notion allows me to have another perspective on our combined state as students-turning-workers. In the past 3 Saturdays talking to high school students and parents at high school tournaments and representing the economics department at a university open house event, it surprised me how it was students who asked about job prospects but not parents.
Anyway, having said that, this post is a Halloween special. A horror story.
10 years ago, Lehman Brothers filed for bankruptcy. Already deep in the worries of the subprime crisis, the market needed this one last straw to release its fury. Blood-red capitalized bolded headlines of tumbling stock market numbers on newsstands thus announced the start of the Global Financial Crisis. First the United States, then the world over. With many firms announcing foreclosures and yet more people defaulting on their mortgages, the economy underwent a series of reactions: aggregate consumption shrunk -> aggregate output decreased -> demand for labour went down -> unemployment rate soared.
US Unemployment Rate 2000 – 2018 (16 years and over) from Bureau of Labour Statistics USA
While the crisis was not mellow on any part of the society, it arguably hit youth the hardest,
as they experienced the largest increase in unemployment rates, which persisted long after the crisis. Moreover, among the young people who could find a job during the recession, working conditions were possibly poor; they were forced to work part-time, with informal and temporary contracts, which might have resulted in low wages and little social protection. (Sironi, 2017)
10% unemployment rate, 20% youth unemployment rate (the highest ever in USA since 1956) — this was the labour market that university students who graduated that year was headed into.
Figure 2. USA Total Nonfarm Job Opening Rate 2000- 2010. Data from Bureau of Labour Statistics, USA
Job opening rate was cut in half. Existing workers were laid off. These fresh graduates found themselves in trouble: overqualified for some jobs when competing with high school leavers, and under-qualified for others when competing with laid off workers who had 10 years of experience.
Facing this grim market, the government reacted: Unemployment Extension Act of 2008 extended unemployment benefits by 7 weeks (and another 13 weeks in some). However, not all countries went Keynesian nuts. In Australia, changes in the Coalition Government Budget meant that anyone below 30 years of age would not have access to unemployment benefits for 6 months and after that would be required to engage in compulsory work for the dole. They also proposed that anyone under the age of 30 years must accept any job at all as a condition of receiving unemployment benefits. (Junakar, 2015) This means $0 reservation wage.
Predicted probability of young men being low-paid, by education and country. Chart from Sironi 2017
Predicted probability of young men being low-paid, by education and country. Chart from Sironi 2017
The charts above show convergence of the probability of being low paid for highly educated young men and women to those with other education levels. Wage differentials go down considerably while students loans and the disadvantage of a few lost employment years continue to rest on their backs.
The impact of this on society is substantial. Young people were delaying their path to adulthood. They were moving out of their parents’ houses later, getting married later, acquiring fixed asset and having children later. They are more risk averse, doing and buying things with more conservative measures. That low wage and low job security during the start of their career hung over their heads like a ghost well into adulthood.
Scary? Yes.
Will it happen again? Yes.
Can this be us? Yes.
Today, I am in my third year of university. In another 18 months I’ll graduate. With any luck, I will be heading in to a healthy economy. But the luck has to be quite substantial. The economy has been in a boom for close to 10 years, and everything looks cheery: Bank of Canada announced another rate hike just this week, Dodd-Frank era regulations rolled back, ban on JP Morgan branch expansion lifted, et cetera.
But basic business cycle theory should tell you that exogenous changes happen, and short run fluctuations are necessary responses. Malthusian theory of growth says that growth inevitably halts in the long run. Solow model predicts a balanced growth path with sustained growth in the long run, which should average across multiple recessions and downturns.
Those circumstances described above? It can be me. I don’t know about you, but looking at the graphs of positive growths for significant periods, chills – not thrills – run down my spine.
Real Gross Domestic Product: Percent Change From Quarter One Year Ago, U.S. Bureau of Economic Analysis
What exacerbates is that the current college cohort grew up in a booming market. We see a thriving business scene and we get the first jobs that we apply to (differing by geographical regions and disciplines). We splurge on gourmet food and tap our cards not looking at the subtotals at checkout lanes. We get a job knowing that it is unlikely to disappear overnight. Much like the population pre-subprime crisis, we were optimistic that the growth – this growth – will continue. We have limited vision down the tunnel, and we grow accustomed to making decision based on current conditions.
Routing back to the opening paragraphs about study decision and employment outcome, students are making decisions looking at mid-career policy analyst wage charts, and not considering what skills can be gained, or, if this is something that they’d like to do even without yielding a 6-digits salary.
This is scary. What happens when we take away all that comfort?
A resilient society is crucial to soft landings when cycles happen. Universities should educate students about bracing for changes and downfall. Students should know the difference between consumption and self-investment, be able to think for themselves what assets will carry them through hard times, and how much investment they should put in to acquire them. They should be taught to make decision with future periods in mind, and have proportionate savings to prepare for bad times. Alas, in the absence of risk awareness and education about it, we are headed to a hard adjustment.
I’ve learned that this is not a favourite college party topic, but this post is for you, my fellow peers. As they say, always get your umbrella before it rains. Prepare for the bust when it booms, and look for boom opportunities during a downturn.
Updated 15th Nov: the economy has been booming for close to 8 years, not 10.
References:
- Junankar P.N.R. (2015) The Impact of the Global Financial Crisis on Youth Unemployment. In: Economics of the Labour Market. Palgrave Macmillan, London
- Maria Sironi. (2017). Economic Conditions of Young Adults Before and After the Great Recession. J Fam Econ Issues. 2018; 39(1): 103–116. Published online 2017 Oct 17.
Written by Natasha. Last edited:2018-10-28 13:12:37