Why Young People Should Care About a Lame Labor Market
I am not as optimistic about my future as my peers tell pollsters they are. Relative to the two previous generations, Millennials have higher levels of student debt, poverty, and unemployment, and lower levels of personal income and wealth. All of this has been covered in depth by the media, but what doesn’t get nearly enough attention given its importance is how poorly the American labor market is performing for my generation.
At EPI, we talk a lot about how weak labor markets hurts workers and their families (something that even The Onion has picked up on). Heidi Shierholz has documented the impact that labor market policies have on workers in various sectors, like domestic workers, and Josh Bivens and I wrote a paper showing how the weak labor market is the main challenge for middle class families in the aftermath of the Great Recession. But it can be hard to understand how the labor market relates to readers my age. With this post, I’m going to try to make the case for why young people should care about what’s going on in the labor market, and why it makes sense for them work to make it better.
A weak labor market hurts the living standards of young people in two immediate ways. First, it disproportionately affects young people’s job opportunities. This is true in good and bad times: unemployment for younger workers is almost always about twice the overall unemployment rate. As of July 2014, the unemployment rate for young workers was 13.6 percent, while unemployment for workers ages 25-54 was 5.2 percent (relative to 10.5 percent and 3.7 percent in 2007, the last time we experienced a “strong” labor market). One of the reasons for this is obvious: young people are inexperienced relative to their older counterparts. In a time of labor market weakness, older, more experienced workers who are newly unemployed will apply to jobs they may be overqualified for, leaving young people to compete with not just their peers but also a larger pool of more experienced candidates. So even while the Great Recession officially ended in 2009, young people are currently facing one extremely competitive labor market.
Second, a weak labor market depresses wages. Employers in weak labor markets can employ a variety of tools to lower costs, such as lowering wages or hours for new employees, a practice they can get away with because the supply of qualified (and overqualified candidates) far outstrips demand. Econ 101 usually uses prices to illustrate supply and demand, but in this case, prices are your paycheck. Moreover, these lower entry wages have a staying power beyond a young worker’s first years. Think of wages over the course of your career like steps on a ladder. In a perfect world, your wages go up as you gain new skills and experience so if you enter a job at $15 per hour, the total you might make a year is $31,200; if you get a raise to $17 after three years, you’ll make $34,170 in a year. The total wages you’ve made in 5 years is therefore, $161,940. By contrast, if you enter a labor market during an economic downturn, you might get a job with wages closer to $12 per hour, which, with an increase to $14 in three years, would make your total wages $131,440 after five years. Effectively, you lost $30,500 in wages in five year simply for entering the labor market in a period of weakness—that’s a years’ worth of salary. Now, factor in how, in bad labor markets, your career ladder rungs shift downward because unemployment is higher for your age group. In effect, you either a) might not get in your intended field of work, b) might not get a job in the first place, or c) might get a series of part time jobs that only last for a few months each, which means you’re not even making a year’s worth of your hourly wage rate annually.
The current prolonged labor market weakness has lasted longer than any previous periods of severe labor market weakness (just over 5 years since the recovery began in 2009), so young workers are beginning to get discouraged and drop out of the labor force entirely, a phenomenon we at EPI call “missing workers.” As of July 2014, there are 1.1 million missing workers under age 25. Failure by policymakers to engineer a full recovery from the Great Recession means many of these workers have spent years trying to access the bottom rungs of their wage and career.
Academics have studied labor markets in severe downturns and broadly agree that both high school and college graduates entering the labor market experience greater employment and wage instability for years to follow (something my colleagues warned about in their Class of 2014 paper—see here, here and here for more reading). Of note is that while the prospects of both high school and college graduates are hindered in periods of labor market weakness, of those who find jobs, the wages of high school graduates are less affected than college graduates, most likely because many are bumping against the minimum wage floor. Research by Altonji, Kahn, and Speer found that, on average, graduating during a recession reduces earnings by 11 percent, although they expect this to fade out within the first seven years of a career. Graduating in the Great Recession, however, had nearly double the negative impact, in part, because of the large increase in “cyclical sensitivity of demand” for college graduates—there are so many college graduates now that they are not as sheltered from the negative wage and employment effects associated with labor market downturns as they had been previously.
Given the current high unemployment rate for workers across the board, it’s clear that we are still in a period of labor market weakness. Worse, ongoing improvement in the labor market is expected to be slow, meaning that young workers will continue to face the consequences of entering the labor force during a time of weakness for years to come. The good news is, it doesn’t have to be this way. High unemployment among young workers is a product of across-the-board labor market weakness, which can be fixed if policy makers adopt policies to boost aggregate demand. Young workers should therefore rally around policies that will generate demand for U.S. goods, such increased large-scale public investment and reestablishment of public-sector services and employment, as these are the keys to give young workers a chance bringing about a better future.