Long-Term Effects of a Recession at Labor Market Entry in Japan and the United States

Abstract

We examine effects of entering the labor market during a recession on subsequent earnings and employment for Japanese and American men, using comparable household labor force surveys. Previous analyses focus on search theoretic and implicit-contract arguments, which have their strongest effects on more educated workers. We argue that, in a country like Japan which has a dual labor market, there is an additional mechanism that affects mainly less educated workers. Namely, these workers are more likely to be trapped in the secondary sector if they graduate during a recession. We find a persistent, strong negative effect on earnings for less educated Japanese men, in contrast to no long-term effect for less educated American men; also, a substantial part of the effect for less educated Japanese men is attributed to the decreased probability of regular employment. The effect for the more educated group is more or less similar in both countries.

When does education matter? The protective effect of education for cohorts graduating in bad times

“…Whether recessions have larger or smaller effects on the lifetime incomes of low educated is not clear: in Canada, Oreopoulos, Heinz, and von Watcher (2012) find larger effects of recessions on incomes for those with lower quality of education (college and mayor) but they only study college graduates. Genda et al (2010) find larger effects on employment for the uneducated in both Japan and the US, but larger earnings effects for the highly educated in the US—consistent with Hershbein (2012) and Oyer (2006, 2008). …”

“…Unfortunately, the Eurobarometer does not ask about stress. Finally as argued in Genda et al (2010), differences across countries such as labor market institutions might mediate the impact of recessions by education. Understanding why recessions have larger effects on the less education is an important avenue for future research.…”

“…Previous literature has documented that individuals graduating in recessions have worse labor market outcomes and health outcomes for many years thereafter (Oreopoulos, Heinz and von Watcher 2012, Genda et al 2010, Kahn 2010, Kondo 2007, Kwon et al 2010, Oyer 2006, 2008, Schoar and Zuo 2011, MacLean 2013). Because education is thought to affect health in part through its effect on income and resources, we hypothesize that the health benefits of education will be lower for individuals for whom education has a smaller return in the labor market.…”

Youth, economic hardship, and the worldwide Great Recession

“…To answer this question, we can look at studies of the consequences of past recessions on socio-economic attainment by economists in the U.S., Canada, Japan, and other countries. These studies generally show that young people who enter adulthood during recessionary times generally do not make up their lost earnings and job statuses for many years or even decades; some do not at all (Oreopoulos, von Wachter, & Heisz, 2012;Genda, Kondo, & Ohta, 2010;Kahn, 2010). That the Great Recession was so much more severe than these past recessions, therefore, is sobering indeed.…”

“…Commenting on the plight of young people during the Great Recession, economist Richard Freeman remarked (Estes, 2011), "These people will be scarred, and they will be called the 'lost generation'." These words are quite stark, but they speak to the gravity of the situation at hand, the high stakes involved-not just for young people but for society as a whole.…”