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- Labour economics presentation - Results and findings based on Oreopoulos, von Wachter and Heisz (2012) -
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The short and long-‐term career effects of gradua4ng in a recession
Daniel Song Kenneth Ho Wu Shaoyi Zhong Xian
WHAT IMPACT DOES GRADUATING DURING A RECESSION HAVE ON OUR TOTAL LIFETIME EARNINGS?
QUESTION:
• Male college graduates aged 20 and above • Canadian University students and graduates from 1976-‐1995 – Course of study ( degree type, major, date of graduaRon)
– Career informaRon (annual earnings, province of residence and receipt of unemployment benefits)
• Individual tax records and firms’ payroll informaRon from 1982-‐1999
Sampling Data
Introduc4on | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Overview
Introduc4on | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Difference across cohorts
• Graduate during recession versus those that do not
Difference within cohorts
• Advantaged graduates versus less advantage graduates • College type • Program of study • Length of study
• Lower returns on investment into higher educaRon
• Lower quality firms and fewer job opportuniRes • Poor wage adjustments within firms • Poor knowledge about workers’ producRvity by potenRal employers
• Poor iniRal firm placement • Few opportuniRes for human capital accumulaRon
How does recession affect earnings?
Introduc4on | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
ALTERNATIVE EXPLANATIONS FOR PERSISTENCE OF INITIAL LABOUR MARKET CONDITIONS
AlternaRve ExplanaRons
• Temporary worsening of labour condiRons leads to longer search for jobs
• Lower skilled workers may search less intensively aeer receiving lower quality jobs in recessions
ReducRon of Job Search Intensity
• Employers gradually learn about worker quality, increasing recovery Rme
• Faster learning about higher skilled workers can explain differenRal speeds of recovery
Rate of Employer Learning
IntroducRon | Alterna4ve Explana4ons | Model | Empirical Findings | Recovery | Conclusion | Singapore
AlternaRve ExplanaRons
• Students graduaRng in a recession spend more Rme looking for a job and less Rme acquiring job-‐specific skills
Human Capital AccumulaRon
• IniRal labour market condiRons set the starRng wage • Persistence arises if renegoRaRon is imperfect • Permanence arises if renegoRaRon is absent
RenegoRaRon
IntroducRon | Alterna4ve Explana4ons | Model | Empirical Findings | Recovery | Conclusion | Singapore
PROPOSED JOB SEARCH MODEL
• High and low ability workers – Higher ability workers receive beger and/or more frequent job offers
• Mobility costs are posiRvely related to age and tenure • Aeer an iniRal one-‐period decline in wage offer distribuRon, high-‐skilled workers recover more quickly by moving between jobs due to more transferable skills
• Smaller search intensity of low-‐skilled workers implies slower mobility to higher-‐wage firms and more accumulaRon of firm-‐specific capital (lock-‐in effect)
Proposed Job Search Model
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
PredicRons
Larger recessions = more lasRng increases in inequality and mismatch • The larger the iniRal shock, the more likely that age-‐related slowdown in search will occur before the iniRal effect dissipates, especially for lower-‐skilled college graduates
Higher inequality in pre-‐exisRng earnings = greater persistence in inequality due to iniRal shocks • Persistence due to age-‐related costs increases with the dispersion in firms’ average wages
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Model
ycrt =α +βeURcr0 +φt +θr +γe + χc +ucrt
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Model
ycrt =α +βeURcr0 +φt +θr +γe + χc +ucrt
Earnings
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Model
ycrt =α +βeURcr0 +φt +θr +γe + χc +ucrt
Unemployment Rate
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Earnings
Model
ycrt =α +βeURcr0 +φt +θr +γe + χc +ucrt
Unemployment Rate
First region of residence
Year of gradua4on
Year of poten4al labour market experience
Calendar year
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Earnings
• Current state of regional labour markets conRnue to affect earnings of more experienced workers
• Long-‐term effect of first unemployment rate + weighted sum of effects of unemployment rates faced in career
• Captures average change in earnings from graduaRng in a recession, given regular evoluRon of regional unemployment rate faced aeerwards
Dynamic Effects
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Need to isolate effect of labour market condiRons at entry, net of subsequent effects on earnings from exposure to a possibly long recession
• Allow us to disRnguish impact of labour market condiRons at entry as compared to entering the labour market at mid-‐career
Dynamic Effects
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Dynamic Model
logwcrt = φt +θr + χc +γe +βe,01UR01 +βe,23UR23 +...+ucrt
UR01 ≡ (URcr0 +URcr11) / 2, UR23 ≡ (URcr2 2 +URcr33) / 2
Effect on earnings in experience year (e) from the unemployment rate at experience year 0-‐1, 2-‐3, 4-‐5
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
EMPIRICAL RESULTS AND FINDINGS
Average Log Earning Profile
Recession
Recession
Convergence
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Strong CorrelaRon Between StarRng Wages and IniRal Unemployment Rate CondiRons
High Employment
Mean
• Persists Into Higher Experience Years
• Slowly Fades Over Time
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Empirical Table
• Strong iniAal effect ~2% • Fade AFer About Five Years ~0.4%
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Regressing Log Annual Earnings on Regional Unemployment Rates
Convergence AFer 10 Years
• Similarity Between NaAonal & Regional
• Can Exclude Unobserved Cohort Effects
NaAonal
Regional
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Controlling for Dynamic Effects Imply that important effect of iniAal unemployment rates is driven by the “first shock”
Dynamic
IniAal
Small Difference
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Stronger Effects on Labor Market Entrants
Large Difference
Experienced Entrants
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Effects on Employment
Fades Within 3 Years
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Effects on Employment
• Effects are numerically small • Temporary unemployment shocks has no persistent effects
on employment or parAcipaAon
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Losses in employment could depress wages by reducing accumulaRon of labor market experience
Effects on Employment
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Effects on Employment
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Findings: • Loss in experience due to recession is not very large
• Does not explain the persistent effect of iniRal labor market condiRons
Heterogeneity in the Effect Linear regression model to predict log earnings based on college aZended, program of graduaAon and years of study
Short-‐Lived
Persistent
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Graduates with lower predicted wages are more adversely affected by higher unemployment rates
• Year 1: 15% lower from 5% increase in UR • 7.5% aeer 10 years Bogom • Year 1: 7.5% lower from 5% increase in UR • 2% aeer 4 years Top
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Overcall Cost of Recessions
• Present Value -‐ 5% Interest Rate
• Actual (Absolute) Loss is
Greater for Most Advantages Workers
Most Advantaged Workers
Least Advantaged Workers
4 to 5 Times Difference
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
RECOVERY
Labour Mobility across jobs and industries
Let PVUS = Firm A PVPR = Firm B M = cost of switching job
RHS = Gain LHS = Cost
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Channels for recovery through first employers and job mobility
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
High-skilled workers close the gap faster than lower-skill workers
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Sensitivity analysis: Labour market entrants respond strongly to market conditions
Robust specificaRon checks
• NaRonal vs Provincial unemployment variaRon • High unemployment rates reduce job mobility amongst experience workers (Shimer, 2005)
Unemployment increases workers’ propensity to switch industries • Cyclical downgrading toward low-‐wage industries • Job mobility plays significant role in recovery process
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Magnitude of job mobility
40-‐50% of recovery aeer iniRal earnings • Control for cohort’s average firm quality and unemployment rates in cell-‐level regression
• Decomposing the persistent effect of iniRal unemployment rate • Differences and changes in firm quality • Persistent unemployment rates • Other factors
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Reduction in firm quality and market conditions explain earnings losses
Blue: Base line model Red: remaining effect of iniRal unemployment rates • 40-‐50% explained by reducRons in firm quality
Purple: addiRon of current unemployment rate • Long term effect of iniRal unemployment faded IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Discussion
• Hetrogeneous workers search for jobs at beger firms • Recovery slowed due to accumulaRon of specific capital • SecRon 1: Adjustment may differ due to workers’ skill level • Low-‐skilled workers more likely to be affected • Permanent earnings differences • Consistent with neoclassical model of gradual sorRng (Gibbons 2005)
• First job placement highly correlated to worker’s ability • Findings are consistent with nature of catch up changes once workers enter high producRvity firm
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Conclusion
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
Across cohorts
• IniRal loss : 9% • Aeer 10 years: 0%
Within cohorts
• Least advantaged graduates: 8% loss of earnings (cumulated over first 10 years)
• Middle graduates: 4% loss • Top graduates: 2% loss and below
• Labor market entrants are more adversely affected by the recession than employed workers • Mobility to beger firms main way to recover
• Excluded female graduates • Assumes that firm characterisRcs are permanent throughout
• Regression model does not have external validity – Difference in seqng – Difference in populaRon
LimitaRons
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Recession in 2008, due to sRcky wages, effects only felt in
2009 as shown through a decline in employment rate and fall in salary.
Singapore
2007 2008 2009 2010 2011p 2007 2008 2009 2010 2011p 2007 2008 2009 2010 2011p
Universities 89.8 87.3 84.7 84.8 86.4 4.7 4.0 5.8 5.9 5.0 94.5 91.3 90.6 90.7 91.4 2,750 2,850 2,700 2,900 3,000
Polytechnics
Fresh Graduates 75.3 68.5 62.8 68.5 67.0 17.7 21.3 25.7 23.0 25.1 93.0 89.8 88.5 91.5 92.1 1,700 1,800 1,700 1,800 1,850
Post-NS Graduates 82.3 76.0 71.1 81.3 80.1 10.4 11.8 16.6 14.1 14.6 92.7 87.8 87.7 95.4 94.7 2,000 2,000 2,000 2,000 2,100Institute of TechnicalEducation (ITE)
Fresh Graduates 71.1 61.9 57.6 57.8 63.5 21.8 26.3 23.5 26.9 20.6 92.9 88.3 81.1 84.7 84.1 1,217 1,300 1,200 1,291 1,300
Post-NS Graduates 79.8 76.4 78.4 78.3 79.7 14.2 14.4 10.0 12.0 10.0 93.9 90.8 88.4 90.4 89.6 1,400 1,600 1,500 1,600 1,600
Employment Rate (%)
Full–time Permanent Part–time/Temporary Total
KEY STATISTICS ON EMPLOYMENT OUTCOME OF GRADUATES FROM INSTITUTIONS OF HIGHER LEARNING, 2007–2011
Institutions
TABLE 9
Median Monthly Gross Starting Salary ($) of Graduates in Full-time Permanent
Employment
2007 2008 2009 2010 2011p
Data extracted from MOM
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Job mobility declines with age
Singapore
Data extracted (Xing & Yang, 2003)
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Out of the 117 respondents searching for other employment, 60.68% was due to low salary expectaRons
• Job mobility is crucial for helping workers get beger wages
Singapore
Data extracted (Xing & Yang, 2003)
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Job mobility is important for recovery yet many remain in current firm therefore the effects experience by Singapore graduates tend to be greater (more persistent losses in earnings)
Singapore
Data extracted (Xing & Yang, 2003)
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
• Our group feels that since Singapore is an open market, we are extremely suscepRble to recessions.
• Conversely, Singapore tend to be able to recover quickly and experience strong economic growth, therefore wages pick up quickly as well.
• We cannot determine the persistent effects on earnings losses due to a recession as there is insufficient data.
Singapore
IntroducRon | AlternaRve ExplanaRons | Model | Empirical Findings | Recovery | Conclusion | Singapore
The short and long-‐term career effects of gradua4ng in a recession
Daniel Song Kenneth Ho Wu Shaoyi Zhong Xian