A new report from the Institute for Fiscal Studies (IFS) provides evidence that finishing school when labour markets are weak leads to poor subsequent labour market prospects, particularly those leaving school at younger ages. The report finds that these scarring effects are larger and more persistent for young adults from the lowest-income backgrounds.
Recent recessions have brought with them concerns about “lost generations” of young adults who will end up bearing long-lasting scars from entering the labour market at an inopportune time. This is grounded in the observation that the brunt of employment losses in these recessions have fallen on younger workers and that young workers who fail to find employment struggle to match the early career wage growth experienced by those who do.
Such concerns appear to be well founded, with a growing literature finding scarring effects in the labour market that last for up to ten years on average. These effects are thought to occur for reasons as varied as the depreciation of general human capital, psychological discouragement and worse matches between workers and firms. In addition, there is evidence of impacts on crime, substance misuse and mortality.
Young people from less advantaged backgrounds are more exposed to weak labour market conditions than college graduates in part because of the industries and sectors they are more likely to work. If this group of people also take longer to recover from labour market shocks, then it is likely that scarring effects will be more persistent.
The IFS research suggests that those leaving education, at ages 18 or 19, are particularly sensitiveness to the strength of the initial labour market. However, findings also indicate that increased educational attainment can substantially buffer a young adult from absorbing large financial losses during an early-career economic downturn.
The research also finds that negative effects are substantially larger and more persistent for young adults from lower income backgrounds, particularly those who leave education before the age of 20. This mirrors the findings in Schwandt and von Wachter (2019) where more economically vulnerable groups – ethnic minorities and non-college graduates – bore some of the largest labour market scars from a poor start in the labour market.
Additionally, it is these young adults who are also more likely to work in sectors such hospitality and retail which have been disproportionately affected by the pandemic.
To see the full report and additional commentary from the IFS, click here.