The Young and the Jobless

It's not easy being young today. While America moves through an economic recovery, young workers are being left behind. And that's largely because, since the recovery officially began in November 2001, employment is down by more than a million. Of the 10 economic expansions since World War II, this is the first in which jobs have taken so long to appear. And among those hurting the most, in terms of employment and wages, are young people in the early stages of their careers. This is true among low-wage earners, who commonly suffer when the economy slows down. But it's also true among young, white-collar adults, who have been relatively immune to other slowdowns.

Why does this matter? Research shows that the greatest gains in a young person's earnings tend to occur at the start of his or her career. These early gains also have a major impact on long-term earnings, and thus set the stage for the future economic prospects of those starting out today. So today's high unemployment and large number of job losses, coupled with a consequent slower wage growth, could cause long-term damage to the upward mobility of today's youth years down the road.

A unique and troubling aspect of the weak job market is its impact on young college-educated job seekers. In the boom years of the 1990s, their employment rates -- the share of young college grads with jobs, a good indicator of the overall demand labor -- were close to 90 percent. These were the days when recruiters for information-technology and financial firms were practically hiding behind trees on college campuses, ready to abscond with the first computer-science major who happened by. College graduates' wages also rose steeply, at about 3 percent per year, as the economy expanded and unemployment dropped between 1996 and 2001.

Then the recession hit, and it was much more damaging to the job market for young college grads than for any other job market in recent history. In the much deeper recession of the early 1980s, the employment rates of young college graduates, ages 25-35, were essentially unchanged, staying around 85 percent before starting to climb in the latter half of the '80s. In the last few years, by contrast, the employment rates of young college grads have fallen sharply to historically low levels, from around 88 percent in 2000 to 84 percent in mid-2003. A front-page story in The New York Times in May carried the headline "College Graduates Lower Sights in Today's Stagnant Job Market"; the article's Web abstract, meanwhile, pointed out: "The nation's class of 2003 ... is graduating into the nation's worst hiring slump in 20 years. ... Only about 15 percent will have jobs awaiting them, half the percentage that did a few springs ago ... leaving about six out of ten seniors without long-term plans." Their real wages reversed course, too, dropping 1.5 percent in 2002.

Why such a shortage of jobs for newly minted grads, most of whom presumably carry the required skills for entry into the new economy? The reason has to do with the nature of this downturn. The 1990s boom was partly driven by the dot-com bubble, which in turn inflated an asset bubble in the financial markets. Those were the very sectors that were aggressively hiring these grads a few short years ago. When those collapsed, so did the flourishing economy and, particularly, opportunities for young college grads. Now both sectors have contracted significantly. Manufacturing is still the industry with the biggest losses since the recession hit; employment there is down by 14 percent. But information technology is right behind, down 12 percent. Adding to the problem is the outsourcing of IT jobs overseas. In the 1990s, policy-makers often argued that advanced computer skills would inoculate college-educated young workers from the vicissitudes of globalization, and those workers' experience in the late 1990s certainly seemed to reflect that reality. But the events that started this decade revealed that IT was neither recession-proof nor insulated from global pressures to cut costs and trim margins.

What about those with less marketable skills? Here the focus is on 16-24 year olds who are no longer in school, either because they dropped out or completed high school. During the 1990s boom, many of these young workers made considerable gains. The turnaround from the first part of the decade was an important development because the rhetoric among many economists at the time was that the new economy was permanently inhospitable to the non-college educated. But when unemployment sank low enough and the competition for labor rose, it turned out that many poorly educated youth and minorities could actually find jobs with rising wages.

In 1995, when things started really heating up, the unemployment rate of those 16-24 was 22 percent for dropouts and 12 percent for high-school grads. Five years later, those rates were 17 percent and 10 percent, respectively, with the largest gains found among the least skilled. For young African Americans in 1995, unemployment was a depression-level 45 percent for dropouts and 23 percent for high-school grads. In 2000 these rates fell to 33 percent and 19 percent, respectively. The numbers are obviously alarmingly high, especially in the best of times, but the trends are truly impressive. While the national unemployment rate fell less than 2 percentage points, from 5.6 percent to 4 percent, the rate for one of the most disadvantaged groups in our society -- young, black dropouts -- fell 12 points.

The recession, however, put an end to all that. Economist Andrew Sum and his colleagues write, "The onset of the national recession in early 2001 brought these labor market gains for young adults to an immediate halt, and their labor market problems have risen to a considerably greater degree than any other age group in society." For the most part, jobless rates sprang back to where they had been, if not worse. The unemployment rates of young whites and Hispanics are nearly back to their 1995 levels; employment rates have done only slightly better for minorities.

What explains the falloff? Again, it's the broad-based nature of the recession and the protracted manner of the weak recovery. While the recession was widely advertised as mild in historical terms, in some ways it has been uniquely harsh. Yes, consumption held up, but it's been isolated within a few sectors, such as housing and health care. One would be hard pressed to find an industry, occupation or region of the country that wasn't touched by the downturn. Retail trade is an important sector for non-college-educated young workers, and employment there is down by 400,000 (-3 percent) since the recession began, with half of those losses occurring in the recovery, a clear sign that what consumption has occurred has been too weak to create new jobs.

These wage and employment trends can have profound, long-term implications for the economic lives of young people because they set the foundation for a lifetime's earnings. Economists reference the "age-wage" profile -- the path that a person's earnings or income take over his or her lifetime. The conventional profile starts out with a fairly steep slope, as people move through their first few jobs, usually recording some pretty big gains, at least in percentage terms. A young person who goes from his or her first minimum-wage job to his or her first real job out of college can easily experience an hourly wage increase of greater than 100 percent. Later, income gains tend to moderate.

But if a young person starts out at a time like this, when the labor demand is weak, it can have a lasting negative impact on his or her earning power. Historical data on median family incomes shows that those young families who started out in robust times, when unemployment was persistently low, enjoyed better income trajectories throughout their prime earning years compared with those who started out in leaner times. For example, young families starting out in the 1950s, when unemployment averaged below 5 percent, experienced real median income gains of more than 50 percent, both in their early and middle years. As these families passed through their prime earning years, ages 25-54, their real family income grew by 140 percent. Similarly, the income of young families starting out in the 1960s -- another period of low unemployment, averaging 4.8 percent -- grew 60 percent in their early years, and just about doubled through their prime years (25-54). By contrast, those young families whose misfortune it was to get started in the stagnant 1980s -- average unemployment rate: 7 percent -- gained only 27 percent in their first 10 years (25-34), and 25 percent in their next 10 years. Instead of doubling throughout their prime years, their income grew by 59 percent.

The same dynamic was at play in the 1990s, at least early on. The beginning of the decade looked much like the 1980s. The income of young families actually fell slightly between 1989 and 1995. There was some relief in the middle of the decade, though, when labor markets began to heat up, productivity accelerated and the income of young families began to grow. Between 1995 and 2000, the real median family income of young people grew 2.3 percent per year in real terms. That's well behind the 1949-69 rate of 3.4 percent per year, but it far surpasses the stagnation of the 1980s and early 1990s. Yet as soon as unemployment started rising, young workers were again immediately vulnerable. By 2001, when unemployment rose from 4 percent to 4.8 percent (still below what many economists consider full employment), young families' median income fell by 1 percent. In fact, a simple analysis of the relationship between real median income and unemployment reveals an unmistakable negative pattern, with the biggest unemployment-induced income losses among the youngest families and the damage getting smaller as families age.

Given the lasting damage weak labor markets can have on the young, the central question is whether we will pull out of this jobless recovery and get back to strong, late 1990s-style growth anytime soon. The answer is starting to look like "yes" and "no," i.e., job creation will soon return but full employment won't.

The excess capacity in IT that was built up at the end of the boom seems to have been absorbed, and firms are beginning to invest again. However, part of the IT boom -- and most of it in equity markets -- was driven by pure hype and speculation, which hopefully won't return. That means that while computer and financial firms will soon be hiring young college grads again, don't expect to see them wined, dined and courted with inflated salary offers. (The recent acceleration of overseas outsourcing of white-collar jobs will also dampen demand for domestic workers, though the magnitude of the problem is as yet uncertain.)

Meanwhile, there will be no shortage of low-wage jobs for less advantaged young workers once the recovery picks up speed. The Bureau of Labor Statistics projects that seven out of the 10 occupations expected to add the most jobs over the next decade are low-wage, low-skill jobs: food preparation, customer service, retail sales, cashiers, clerks, security guards and waitpersons. The open question is what the quality of these jobs will be. That is, what will they pay, and will they offer any fringes? As we saw in the late 1990s, these jobs got a lot better when unemployment was extremely low and employers had to compete. For the first time in decades, not only did real wages rise in these occupations, they started to offer health care as well. When the labor market is tight, employers will share the benefits of faster productivity growth with even their lowest-wage workers. Unfortunately, the opposite is true as well.

The problem for these workers is that we won't be looking at tight labor markets for a while, maybe a long while. Even the most optimistic forecasts show unemployment stuck near 6 percent for the rest of this year, and declining only slightly by the end of 2004. That won't do it for those seeking decent low-end jobs. The lesson of the last boom is that for young, non-college-educated workers to get a leg up, the labor market needs to be at full employment, with the jobless rate closer to 4 percent than to 5 percent.

There are some policy initiatives that will help younger, less-skilled workers. A higher minimum wage helps to lift the wage floor for the lowest paid, and moderate increases have no job-loss effects. Young adults, especially young women, tend to earn at or near the minimum. At this point it's been six years since the last increase (to $5.15). That's the second-longest stretch without a raise since the Reagan years. Health care is too important for young workers and their families to leave to the market. I noted that the late 1990s led to an increase in low-wage jobs with health coverage, but even at the peak, only a third of the jobs in the bottom fifth offered health coverage.

Young workers currently face a particularly tough labor market, and the stakes for them are high. As the income analysis reveals, prevailing economic conditions at the start of their careers can have profound implications for where they end up. This has got to be a bitter pill for those starting out right now. For them, and for the rest of us, the sooner we take the "jobless" label out of this recovery, the better.

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