Abstract
This study explores the persistent effect of graduating from university in a recession on earnings and sheds light on underlying mechanisms focusing on the roles of educational mismatch and job instability. Using longitudinal data from South Korea, we estimate the short- and long-term effects of the unemployment rate in the province where the university is located at the time of graduation on labor market outcomes. The IV estimation results show that a 1% point increase in the unemployment rate at graduation decreases the initial monthly earnings by 8.77% and the earnings loss is persistent. A 1% point increase in the unemployment rate also increases the probability that the level of education required for work is lower than the university level by 7.58% points and the probability of being a temporary worker by 8.54% points. When the educational mismatch and job instability are accounted for, the magnitude of the initial earnings loss due to graduating from university in a recession decreases by 40.9%. Our results suggest that skill mismatch and job instability are important mechanisms through which entering a labor market in a recession has negative impacts on labor market outcomes for a considerable period after labor market entry.
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Notes
OECD (2021), Population with tertiary education (indicator). doi: 10.1787/0b8f90e9-en (Accessed on 19 April 2021).
Our data shows that 41.0% of women graduate later than expected and 60.9% of men graduate later than expected. We infer the reasons as follows. As there are cases where men’s military enlistment time does not coincide with the end of the semester at university, some male students inevitably take one more semester off in the situations. As a result, graduation could be delayed. Male students may need more time to re-learn the skills required in the labor market, as their studies at university are interrupted by military service.
Among the control variables, the province of current residence and the regional unemployment rate in the survey year are determined after university graduation. When the fixed effects of the province of current residence are not controlled for, the IV estimate is \(-0.0835\) (SE: 0.080). When the regional unemployment rate in the survey year is not controlled for, the IV estimate is \(-0.0886\) (SE: 0.0275).
As labor market conditions at university graduation affect the employment probability after graduation, the composition of workers can also varies depending on the labor market conditions. The effect of the unemployment rate at university graduation on earnings may reflects the composition effect. Although the composition effect may have a partial effect, we believe that it does not fully account for the effect on earnings. While the initial earnings penalty for the unlucky cohort may be explained by selectively delaying graduation by those who want to work in high-paying jobs, the persistency of the earnings penalty seems difficult to be explained: this is because, if people who want to work in high-paying jobs belonging to the unlucky cohort find the job within a few years, the earnings penalty should be completely eliminated from then after controlling for experience and job tenure. In addition, the employment rate of unlucky cohorts was significantly lower in the first two years after labor market entry, but there was no significant difference thereafter.
A job with skill mismatch is more likely to be unstable than a job without skill mismatch, and the level of education required for a temporary job may not be high, so skill mismatch is more likely to occur in temporary jobs. If this is true, the portions where the two variables account for the earnings loss could overlap. Assuming that the OLS estimates are the causal effects of job instability and educational mismatch, job instability alone accounts for 25.51% of the earnings loss, and educational mismatch alone accounts for 15.3%. The sum of the respective effects is 40.81%, which is not much different from the share (40.87%) that is accounted for when both variables are controlled. Educational mismatch and job instability each appear to independently account for a significant share of the earnings loss.
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This research was supported by the Daegu University Research Grant, 2018 .
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Bae, Y., Kim, T. The labor market impacts of graduating from university during a recession: evidence and mechanisms. Empir Econ 64, 931–958 (2023). https://doi.org/10.1007/s00181-022-02260-2
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DOI: https://doi.org/10.1007/s00181-022-02260-2