How will coronavirus affect the lifetime earnings of new graduates?

Graduating into an economic downturn can have negative consequences for young people in terms of pay and career progression throughout their lives. In response to the Covid-19 recession, many from wealthier backgrounds may opt to stay in education longer, further exacerbating inequality.

Due to the pandemic and the recession, those trying to enter the labour market for the first time over the next few years will find it extremely difficult to do so. While the low skilled school and college leavers will be most affected, so too will new graduates who are trying to start their careers during a severe economic downturn.

An initial period of extended unemployment or low wage employment during a graduate’s early career will lead to ‘scarring’, which can depress their earnings for many years to come. Hence new graduates are likely to experience substantial economic loss as a result of this crisis in both the short and long term.

What does evidence from economic research tell us?

We can expect a negative impact on the earnings of new graduates as a result of the economic downturn.
The negative impact on the earnings of the affected cohorts could last up to ten years. The crisis will therefore have long-term consequences for these cohorts.
The crisis is likely to affect the low skilled more severely. Even among graduates, those with lower skill levels, or skills that are not in strong demand in the labour market, will fare worse.
Career progression for these cohorts is likely to be affected, with less opportunity to progress to higher skilled and better-paid jobs.
Graduates from wealthier families tend to do better in the labour market, even in normal times, compared with their peers graduating from the same degree programmes but from poorer family backgrounds. Due to the downturn, it is likely that graduates from poorer households will fare worse than others as they try to enter the labour market.
A likely response to the crisis will be for young people to try to remain in education longer. For example, graduates may continue on to postgraduate study. This will be more feasible for those from families with greater socio-economic advantages, who can better support their children to do this, thereby further exacerbating inequality.

How reliable is the evidence?

New labour market entrants in a recession

Economic downturns of all kinds tend to have a negative impact on the labour market, especially for new entrants. There is well-documented evidence that wages follow the economic cycle and hence in a recession, real wages fall. The evidence also suggests that the wages of new entrants to the labour market will be most affected, and that they will experience significantly lower earnings over a long period of time as a result of trying to start their working lives in a downturn.

Using US data, a 2019 study concludes that new entrants during a recession experience a persistent wage loss that lasts up to ten years. New entrants are also likely to experience difficulty in finding a job that adequately reflects their skills (Schwandt and Wachter, 2019).

Compared with more educated workers, less educated workers experience larger negative impacts on their earnings and employment prospects in the aftermath of economic downturns (Speer, 2016).

New graduates are also vulnerable to the effects of a recession. A study from Canada concludes that recessions result in new graduates in particular paying a higher price than those already in the labour market, in terms of lower earnings and a higher likelihood of unemployment. The unlucky university graduates may be negatively affected for up to a decade (Oreopoulos et al, 2012).

Summarising the evidence on the impact of the Great Recession of 2008/09 on new graduates, a study by Cockx (2016) supports this view. He too concludes that new graduates’ earnings are depressed over an extended period of time, possibly permanently, as a result of trying to enter a weak labour market.

There is also evidence that skills mismatches rise for university graduates during an economic downturn (Liu et al, 2016). Graduates will tend to end up in non-graduate jobs. New graduates are therefore more likely to be over-educated for their jobs and find themselves in lower quality jobs than they would have done in previous years. They will have a lower probability of being able to move on to higher skilled and better-paid jobs in the future.

The likelihood of experiencing low earnings and skills mismatch is likely to vary by degree class (grade), subject of degree and institution of study, given the evidence that the labour market demand for different degrees varies substantially, even prior to the crisis (Naylor et al, 2016; Belfield et al, 2018).

Short-term effects from Covid-19

Recent work by the Institute for Fiscal Studies (IFS) highlights the impact of lockdown on sectors that disproportionately employ younger workers (Joyce and Xu, 2020). Workers under the age of 25 are much more likely to be working in sectors that had to shut due to the crisis.

This is consistent with evidence from Bell and Blanchflower (2010) that the young were also disproportionately affected by the Great Recession of 2008/09. Graduates are, on average, higher skilled and will fare better than the average young worker in the short term, but it is clear that new graduates coming on to the labour market this year will experience a very difficult labour market.

In terms of wages, graduate wages vary substantially by both degree subject and, in many countries, by the university attended. In the UK, some arts and humanities degrees did not attract a positive wage premium in the early years of a graduate’s career, even prior to Covid-19.

While on average UK graduates earn much more than non-graduates over their lifetimes, for some subjects, graduates earn no more than non-graduates (Britton et al, 2018). This suggests stronger demand in the labour market for some graduate skills than others, which also implies that graduates with degrees in particular subjects or from some universities are likely to be harder hit than others.

A study of US data examines the returns to postgraduate degrees (Altonji and Zhong, 2020). This research also finds substantial differences in labour market returns across postgraduate fields, and the returns to postgraduate degrees also depend on the subject of first degree. These differences in the returns to degrees and postgraduate degrees are related to the occupations that different graduates are able to secure. At both undergraduate and postgraduate level, degrees with high returns include economics, law, medicine and some but not all STEM (science, technology, engineering and mathematics) subjects.

It is also the case that graduates from wealthier family backgrounds in the UK earn around 10% more in their early careers compared with graduates who have the same degree but come from a poorer household (Britton et al, 2019). This may be because wealthier families can support their children to undertake a longer job search, for example, or because they have better networks. Given this, we might expect graduates from poorer households to be disproportionately affected by the downturn.

Long-term effects

Exposure to an economic shock at an early career stage has a large impact on an individual’s human capital accumulation, potentially resulting in lower wages for an extended period of time. For example, analysis of data from Austria indicates that the long-term impact of entering the labour market during a recession is a 1.3% wage penalty over the life-cycle for every one percentage point rise in the initial unemployment rate (Brunner and Kuhn, 2014).

One reason why graduating into a recession has such a negative long-term impact is that it affects an individual’s subsequent job moves: new graduates find it hard to move on to a higher quality and better-paid job. An economic downturn significantly reduces job-to-job moves in the United States (Haltiwanger et al, 2018). Job mobility is crucial for younger workers to progress to better-paid jobs, and hence an economic turndown will not only decrease the earnings of entrants but also reduce the opportunities for career progression.

In order to mitigate the negative impact of graduating during a recession, many graduates seek to continue on to postgraduate study. Goulas and Megalokonomou (2019) find that there was strong demand for higher education during the Great Recession of 2008/09 and students tended to choose degrees and subjects with better job prospects (based on data from Greece).

Analysis of data for England suggests that higher youth unemployment rates significantly increase the chances of students opting to pursue further study (Clark, 2011). Recent research, also using UK data, concludes that university graduates are more likely to decide to study engineering in periods of high unemployment and also exert more effort in their studies, leading to higher earnings after graduation (Bicakova et al, 2018).

What further evidence is needed?

Existing research has examined the impact of past recessions, including the Great Recession. But the current recession has some unique characteristics in that it is genuinely global. New research on the impact of the pandemic on the new graduate labour market is needed, given its highly uncertain and pervasive impact.

Much of the existing research concentrates on the impact of recessions on earnings and employment. Fewer studies examine career mobility as an impact of economic recession, particularly for new graduate entrants to the labour market. More research is needed to discuss how policy could help these new entrants to progress after a difficult start to their working lives.

In the Great Recession, the sharp increase in unemployment in the UK was attributed to the deterioration of the youth employment rate (Bell and Blanchflower, 2010). It is likely that this crisis will also have a severely negative impact on youth employment, including on new graduates with limited work experience. New entrants will be competing with workers who are already in the labour market and who are looking for new jobs, as seen during the Great Recession (Elsby et al, 2010).

The impact of the current crisis on different sectors over the medium and longer term remains to be seen. The prospects for new entrants to the labour market will vary by sector. More research is needed on the impact of the crisis on wage growth, unemployment, employment and inactivity rates, as well as differences in impact by sector. It is crucial to understand the impact for different types of workers (high/low skilled, different demographic groups and workers in different locations).

Research is also needed to understand the impact of Covid-19 on graduates with degrees from different institutions and in different subject areas.

Where can I find out more?

UK unemployment in the Great Recession: David Bell and David Blanchflower argue that the UK had not reached full employment prior to the impact of Covid-19.
US and UK labour markets before and during the Covid-19 crash: Analysis by David Bell and David Blanchflower, published in the National Institute Economic Review in April.
The relative labour market returns to different degrees: Chris Belfield and colleagues from IFS and elsewhere conduct a comprehensive study of the returns to different degrees and institutions.
The impact of undergraduate degrees on early-career earnings: A further IFS report by Chris Belfield and colleagues, published in November 2018.
Graduate returns, degree class premia and higher education expansion in the UK: Robin Naylor and colleagues investigate the extent to which graduate returns vary according to the class of degree achieved by UK university students, and examine changes over time in estimated degree class premia.
Is improving access to university enough? Socio?economic gaps in the earnings of English graduates: Jack Britton and colleagues investigate the socio-economic gaps in graduate earnings.
The labor market in the Great Recession: Michael Elsby and colleagues argue that increasing US unemployment during the Great Recession was mainly driven by the rising rate at which workers were looking for new jobs.
Good skills in bad time: Cyclical skill mismatch and the long-term effects of graduating in a recession: Kai Liu and colleagues find a strong countercyclical pattern of skills mismatch among university graduates during an economic turndown.
The short- and long-term career effects of graduating in a recession: Philip Oreopoulos and colleagues argue that recession leads to substantial and unequal costs for new graduates by following cohorts over years.