Research by Abigail Wozniak, Notre Dame assistant professor of economics, determined those who enter the work force during a bad economy will receive lower wages than those who enter during an economic boom, and this negative impact can last up to 10 years.
“The scarring effect is the idea that the conditions you have when you start working will affect your future [occupational achievement],” she said.
In her research, which will be published in the Journal of Human Resources this fall, Wozniak looked at almost 30 years of data of people entering the labor market. She used census data from 1980, 1990, and 2000, looking at workers five to eight years after they entered the labor force.
Wozniak said there is a correlation between the state of the economy and job wages. She said higher wages of those who enter the job world during an economic boom stick with them, and lower wages of those who begin their job during a downturn stick with them as well.
“My estimates suggest that workers lose six percent of wages for every two additional percentage points of unemployment above the average,” she said. “We’re currently about four percentage points above average, so wages for this year’s graduates will be roughly 12 percent below that of similar graduates from four years ago.”
Wozniak said this discrepancy in earnings takes time to overcome.
“The scarring effect takes about five to 10 years to overcome, but with this economic situation, it could take a bit longer,” Wozniak said. “In fact, I think it will take longer.”
Wozniak found that the scarring effect was widespread, and moved across different demographic groups.
She concluded it impacts college graduates, high school graduates, college dropouts or those with two-year degrees, as well as high school dropouts.
The scarring effect is worse for college graduates than it is for high school graduates, Wozniak, said, “probably because they transition from jobs in more of a progression.”
Job change is a major way in which one can overcome the scarring effect, Wozniak said. It is easier for those without a college degree to switch jobs and quickly overcome this negative impact, because they are not as reluctant to start over in a new job.
College graduates assume they will enter a career and then build that career over the years. Therefore, these workers are likely to stay on a certain job trajectory, making it difficult to overcome the disadvantage they started with.
In addition, it is costly for these workers to adjust to their situation by going back to school, getting a higher degree or switching jobs, Wozniak said.
“I think it’s important for workers who started in a downturn to continually look for ways to catch up, especially after the economy improves,” she said. “Think more about changing jobs, moving to a new location, or asking for a raise or promotion.”
Wozniak said it is unclear whether getting a graduate degree and hoping to enter the job market during better economic times will be beneficial to students.
“Markets may improve dramatically in a few years, but they may not,” she said. “Even if they do, students who seek to avoid market conditions by staying in school longer will miss out on several years of earnings and advancement, and they will face stiffer competition for graduate school slots and post-graduate school jobs.”
She said that sometimes, those entering the job force compare their salaries to a sibling’s who started a job a few years earlier. She said to remember not to take salary levels personally.
“There’s a perception in the U.S. that what you earn exactly [corresponds] to how good you are,” she said.
“Students and others as well should recognize that earnings are not driven entirely by individual productivity or ability. A very large component is luck. It would be wrong to believe you are earning say 10 percent less than a friend or colleague did when she started just because you are not as qualified.”
Wozniak also said that firms are not adjusting perfectly to economic changes.
“Companies try really hard to keep pay scales secret from workers,” Wozniak said. “It does happen within companies that people who enter [the company] at different times have similar jobs but are earning different things.”