The December 2020 issue of IMF’s Finance & Development predicted that the young generation of workers emerging from the detritus of the COVID-19 pandemic to enter the job market in recession will face lower income for decades, less domestic contentment, and possibly lower life expectancy.
“Entering the labour market in a recession is associated not only with significant income losses in the short term,” Hannes Schwandt and Till von Wachter wrote, “but also with broad social and health consequences that persistently hurt household finances, family formation, and longevity.”
In the aptly named article, “The Long Shadow of an Unlucky Start,” the authors studied new entrants to the new labour market from 1976 to 2015 — through economic booms and busts — to forecast the state of job prospects for the youth in the wake of the pandemic-induced recession.
“Studies of large cross-sectional and longitudinal data sets around the world find persistent effects of downturns for those who enter the job market during a recession,” they wrote.
Indeed, the pandemic has battered the global economy. According to Statistica, before COVID-19 became a worldwide pandemic, experts had predicted the global economic growth to fall from 3% to 2.4%. In 2019, global GDP was estimated at about US$86.6 trillion, so a 0.4% drop in economic growth translates to nearly US$3.5 trillion in lost economic output.
But when the virus spread worldwide, the effects were worse.
The global GDP of 2020 was predicted to be reduced by 4.5%, with the monetary DCP loss of US$76.69 billion in a best-case scenario.
“The economic damage caused by the COVID-19 pandemic is largely driven by a fall in demand, meaning that there are not consumers to purchase the goods and services available in the global economy,” according to Statistica. The pandemic had decimated industries like travel and tourism the most.
At home in Canada, the unemployment rate rose 0.2 points to reach 8.8% in December 2020, according to Statistics Canada. This was also the first drop in employment since April 2020. In provinces like Ontario and Nova Scotia, governments imposed stricter public health measures towards the end of November. As provinces implemented these measures, total work hours fell 0.3% in December 2020.
According to Schwandt and von Wachter, economists traditionally understood economic booms and busts as temporary phenomena, but such is no longer the case. The long-term impacts of entering the labour force during a recession is felt even by the highly educated: MBA graduates, PhD economists, and college graduates alike.
“Not only will the COVID-19 recession give new entrants to the job market a rocky start to their careers,” Schwandt and von Wachter said, “it will also put them at risk to make less money for decades, commit more crimes, have less satisfying family lives, and maybe even die earlier than luckier job seekers.”
The authors said that the accredited and the erudite would be forced to take jobs with lower-paying employers, and then “partially recover” by graduating to better employers. This cohort, however, will be predisposed to have low-self esteem, commit more crimes, and harbour skepticism to the government. According to the report, these fresh workers will make lower salaries for ten to 15 years after graduations and even longer.
These consequences are not experienced equally, either.
“Less-educated and non-White workers experience prolonged episodes of unemployment and temporary increases in poverty,” Schwandt and von Wachter said.
While college graduates suffer an initial earnings reduction of 6% upon entering the labour force in medium recession, high school dropouts, by contrast, experience a loss as high as 15%, according to the report.
Photo: Courtesy of the International Monetary Fund
The authors approximate that about 6.8 million young US labour market entrants seeking full-time employment in 2020 will forsake about US$400 billion in the first decade of their working lives. They said this projection is based on a rapid economic recovery in 2021 at best.
Less optimistically, should the recession continue or worsen, 2020 graduates will fall even further behind. And those entering the job market in 2021 will face the same desolation, the authors said.
Schwandt and von Wachter argued that lawmakers need to do more damage control in the next generation’s interest. Short-term interventions could involve job search assistance, incentives for part-time work, and payroll subsidies for new hires.
Medium-term solutions include welfare and support policies to alleviate the pandemic’s long-term effects, particularly for the less educated, they argued.
“Social safety net programs such as the Supplemental Nutrition Assistance Program and Medicaid seem to buffer at least some of these adverse impacts,” the authors wrote. “Yet researchers have found that recession job entrants report lower self-esteem, are more likely to drink to excess, and have higher obesity rates.”
According to Schwandt and von Wachter, negative job prospects and their societal consequences can operate in a vicious cycle: “If these social and health effects feedback into worker productivity, impacts on economic outcomes might also reappear in the longer term.”
According to their research into various US surveys and censuses going back to the 1970s, adverse earning effects from entering a job market in recession “never disappear.”
“With the unemployment rate in mid-2020 at about 10.5%, or 7 percentage points higher than in the months preceding the crisis,” the authors wrote, “this suggests that by the time today’s young workers reach the age of 40, they’ll be making 7% less every year than if they had entered the job market last year.”
Schwandt and von Wachter also found that the mortality rates of recession entrants will also rise in their early 40s, estimating that the life expectancy of the class of 2020 entrants will decline by one to one and a half years.
However, for the youth, situational awareness is just as vital as these government-led programs as they maneuver through the treacherous path ahead.
“It’s important to inform young workers about the negative long-term impacts they face and their causes,” Schwandt and von Wachter said, who advise the younger generation to look at the bigger picture and the external factors affecting their professional trajectory.
“Knowing that their challenges probably don’t reflect a lack of skills or personal failure can motivate those in less productive jobs to keep seeking opportunities and move to better jobs as the economy recovers.”
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