Research

Not a lost generation, but a 'disappointed' one: The job market's impact on millennials

Members of Generation Y — a group of approximately 70 million young people between the ages of 15 and 30 — are starting their careers in perhaps the worst job market since the Great Depression. Experts say the experience creates both immediate and long-term negative impacts, including lower salaries now and in the future. And while their reduced spending power is not expected to have a lasting drag on the U.S. economy, it does have significant repercussions for how these young people conduct their adult lives and careers.

2011-01-06

They are one of the biggest generations in American history, and they are certainly the best educated. But for Generation Y — a group of young people some 70 million strong between the ages of 15 and 30 — the future seems anything but bright. With a national unemployment rate of 9.6%, many of them cannot find jobs.

Some have had to move back home with their parents; others are scraping by with low-level work that is barely enough to pay back the four and five figure loans they took out for college. "It's not looking particularly good for Gen Y," says Matthew Bidwell, a Wharton management professor. "And I don't think it's going to go away by the next graduation season in May.

A lot of forecasts are for a slow and hesitant recovery. We're not going back to 2007 any time soon." The bad news for Generation Y, also known as the Millennial Generation, does not stop there: Numerous studies indicate that entering the job market during a recession has both immediate and long-term negative impacts.

And so members of Gen Y — who happen to be starting their professional careers in perhaps the worst job market since the Great Depression — could be set back for years to come. "We have seen from previous recessions that groups who enter the workforce during a downturn pay a persistent penalty in terms of wages and benefits," notes Bidwell. "It takes them longer to get into the workforce so they are not acquiring the skills they need.

In addition, they are more apt to take a lower level job or an unpaid internship. And once the economy improves and they land a better job, it takes these workers longer to climb the ladder because they have to learn skills they should have been developing immediately out of college. In the meantime, they are at risk of being leapfrogged by new graduates."

'Horrendous Waste of Human Capital'

The great fear of economists who study employment has to do with workers who are forced out of the labor market during a recession and never return. But with this particular generation, a more apt concern might be for those who never have the opportunity to enter it in the first place, Bidwell suggests.

"If you don't get a decent job in your first five years in the workforce, do you ever? You don't develop the stable work habits or the self-esteem to move up the corporate ladder," he says. "It's a horrendous waste of human capital." Several recent studies indicate that entering the job market during a recession has a long-lasting, negative effect on wages.

One study, by Lisa Kahn, an economics professor at the Yale School of Management, tracked the wages of white men who graduated from college before, during and after the deep recession of the early 1980s. Kahn measured how those who entered the labor force in a bad economy fared compared to those who earned their diplomas in better times.

She found that for each percentage point rise in the unemployment rate, those who graduated during the recession earned 6% to 8% less in their first year of employment compared to people who graduated during a better economy. The effect declined in magnitude by about a quarter of a percentage point each year after graduation. But, even 15 years out of school, the recession-era graduates still earned 2.5% less.

In a similar study, Till Marco von Wachter, an economics professor at Columbia University, followed a group of Canadian college graduates who entered the job market between the years 1976 and 1995. During these years, the Canadian economy, similar to the U.S. economy, experienced multiple boom times and two big recessions — the first in 1982 and the second in 1991.

His research had three key findings: First, those who graduated during a recession suffered substantial initial earnings losses of around 10% from an average downturn; second, this initial earnings loss persisted for many years, with the effect fading after about a decade.

The third finding was that the earnings pattern differed based on the major and the school of the graduates. "We ranked people based on their expected labor market success," von Wachter states.

"Those who graduated from better, bigger schools and those who had more math-intensive majors, such as engineering or hard sciences, did the best. They took a small hit but recovered after a few years. The people who majored in social sciences were in the middle [of the spectrum]."

"But those who graduated from smaller schools and who majored in humanities did not fare as well. They lost access to a career trajectory and it never came back. There seems to be a group who are permanently stuck at lower level, lower paying jobs. If they don't get access to good jobs in a critical time period, say ages 20 to 30, it appears that, on average, they never do."

His findings have a direct bearing on today's graduates. "There is no presumption that these fundamental mechanisms would differ today," he notes. "If you graduated in 2008 and there's no job growth until 2011, then you may get stuck in a lower paying job. As the economy gets better and you get access to better paying jobs, you are likely to start to catch up in earnings. This wasn't possible to do during the recession because there weren't good opportunities."

A second catch-up phase occurs on the job as young workers acquire the experience needed to move up the career ladder, he says. "What is different today is that we have a recovery where there's no improvement in the labor market: the worse the recession, the lower the starting point, the longer the recovery process."

The Graduate School Option

Some young people decide to wait out the recession by honing their skills in graduate school. Applications to professional schools, such as business, law and journalism, tend to skyrocket during a bad economy, and this downturn is no exception. According to a September 2010 report released by the Council of Graduate Schools, applications to graduate schools in the U.S. rose 8.3% from the fall of 2008 to the fall of 2009.

Over the previous five years — from 2003 to 2008 — the growth in applications to graduate schools had been fairly flat, rising by an average of less than 1% a year. The graduate school strategy is not necessarily a bad one, according to Peter Cappelli, a professor of management at Wharton and the director of the school's Center for Human Resources.

"Smart students realize this is a good time to be in school," he notes. "It doesn't necessarily mean they catch up to the people who happen to graduate in good times, but they're better off than if they had stayed in the labor market and better off certainly than if they had gone to graduate school in boom times." But Wharton finance professor Franklin Allen warns that this recession is very different from downturns of the past.

Young people who assume that a graduate degree is their ticket to a good job may be sorely mistaken. According to the GMAC Global Management Education Graduate Survey for 2010, the portion of MBA graduates with a job offer by March declined this year — the second consecutive drop after that figure saw a steady climb since 2003. Overall, half of all graduates of the class of 2010 had a job or job offer by March.

Newly minted attorneys face a similar fate: Many are competing against out-of-work lawyers for scant law firm positions and even entry-level jobs. "In a normal recession [riding it out in grad school] is fine, but in this one it's a risky strategy," says Allen. "Young people aren't getting jobs the way they used to. Even students from top schools are finding it hard. It's a difficult situation. In normal recessions, things come back relatively quickly, but that's not happening now."

A Silver Lining?

The earnings gap that these recession-era graduates contend with will not have much of an overall impact on the U.S. economy. Economists say that one group amid a very big population does not have the power to greatly effect consumption levels. But, they say, the discrepancy will have significant implications for how these individuals carry out their adult lives.

The Millennials will lack the spending power of more fortunate boom-time graduates, which means that many of their life milestones, such as buying a first house, getting married or even starting a family, will be delayed. "Everything gets pushed back," Allen notes.

"It's a problem that's not well appreciated. People's careers are being damaged. People who are in their 20s and 30s are not being promoted, they are not getting raises and they are not getting opportunities [to progress in their careers] because the people above them are not moving. They can't leave their jobs because they probably won't be able to find work elsewhere. So they're stuck. This is a serious issue: It's setting people back a few years and they never really recover."

Millennials are a generation that "expected the world would be the way it has been for the past 20 years," Allen adds. "They had expectations that they would find jobs and make lots of money. This will be a disappointed generation." Not everyone thinks this way, however. Dale Kalika, a senior lecturer at the W. P. Carey School of Business at Arizona State University, is conducting a research project focused on Millennials.

She says that while Millennials have a reputation for possessing a strong sense of entitlement, Gen Y as a whole is, in fact, very resilient. "They're self-confident; they're adaptable and they tend to be open-minded," she says. "They live in a [world] of change, so change does not surprise them — they're flexible. And this is an optimistic generation. There is a belief that one way or another, things will work out."

Moreover, says Kalika, this generation is fully aware of the kind of job market that they are entering. They understand that their careers will be much more fluid than the careers of their parents. "One thing they have going for them: They are already prepared with the knowledge that they will have many jobs — probably 12 to 15 throughout the course of their professional lives, and they will have multiple careers," she points out.

"They know that there is no such thing as job security. There's no such thing as a linear career." According to Cappelli, young people entering the labor market during good times tend to believe that all jobs come easy, and they count on big paychecks — expectations that are quickly deflated once the economy hits its inevitable bumps. Graduating into a bad economy is a more sobering experience, he says.

"We saw that people who graduated during the boom of the late 1990s — who had their pick of jobs, and were getting big signing bonuses and buying BMWs — had a hard time adjusting to the downturn," he notes. "There is something quite important about entering a labor market in a downturn.... It shapes your worldview. It makes you more modest and more realistic."

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