A Recession Is On the Horizon. And It May Impact Young Workers For a Lifetime
May 02, 2019 by Josh Hrala
There have been many recessions and ‘market corrections’ since the end of World War II. Most of the time, these recessions last an average of 11 months. However, new research shows that younger workers who are just entering the workforce get hit with lifetime losses if they happen to experience a recession early in their careers (between the ages of 21 to 25).
This doesn’t bode well for the future, especially given that many experts are hypothesizing a recession to hit sometime in the next three years.
“More than three-fourths of an influential panel of economists said the U.S. will enter a recession by 2021, according to survey results released Monday by the National Association of Business Economics (NABE),” reports Sylvan Lane from The Hill.
“Of the 281 members of NABE, a leadership and research group for business economists, 77 percent said they believe the U.S. economy will begin to shrink within two years.”
While recessions and market cycles happen over time, little has been researched about the impacts these shifts have on young workers just making a name for themselves. Instead, much of the focus turns the other way, with countless news articles digging into how ‘prime-age’ (25-51) workers will suffer alongside 401ks and savings plans.
The good news is that a new study led by Indrajit Mitra, from the University of Michigan’s Ross School of Business, has finally shed some light on just how much young workers are hindered by these cycles, adding to previous studies about unemployment rates.
“Previous studies have found that the unemployment rate for young workers in the 21-to-25-year-old range increases twice as fast when the economy goes into a recession as the rate does for prime-age workers, defined as ages 25-54,” the university reports.
Based on these numbers, the team had a few questions: why are younger workers more impacted? And, what does this do to their overall careers?
Understanding Why Younger Workers Are Let Go
The team started by looking at what they already knew: younger workers in the early stages of their careers have the fastest growth in wages (think about going from part-time to full-time out of college, for example). However, because of this, they are also at the most risk when it comes to recession-induced layoffs because not only will this prevent them from bumping their pay, they are also the first ones to be let go.
That last part was troubling to the team. Why were so many younger workers let go over prime-age workers? And, why is it so hard for those workers to find a new role afterward?
To further understand this conundrum, the team set to out examine whether or not stock price influenced who firms hired. For example, if a stock price drops, do firms start laying off younger workers in favor of prime-age workers? Do firms basically put a hold on firing younger employees for some reason?
“Our model predicts the unemployment risk of young workers relative to prime-age workers to be more sensitive to productivity shocks when equity market risk premium is high, and in industries with more volatile stock prices,” Mitra said.
In normal language, they found that yes, when a market shake up happens, younger workers are more at risk. Previous studies have suggested that during a recession, younger workers are two times more likely to be let go than other workers. But why are they less hire-able?
Some have claimed that younger workers are hired less during recession times because they don’t work, which is obviously not a true statement that the team recognized as such.
“We thought that seemed far-fetched. People get unemployed because firms are not hiring them,” Mitra said. “We pushed this premise a step further to explain what is it that makes young workers more or less demanded by firms than prime-age workers.”
Instead, the team hypothesizes that firms tend to hire younger workers during economically prosperous times because it’s easier for them to take a risk on an unknown. For example, a college graduate who has limited experience on paper can turn out fantastic or be a disappointment. When a recession strikes and makes every new hire an important and vital decision, younger, less experienced workers are passed up.
The fact that younger workers are let go more often than prime-age workers creates a ripple effect that can hinder a young worker far into the future. This is because during the start of their careers, younger workers receive some of the biggest pay-bumps of their lives. When these bumps are taken away due to a recession, it basically pushes these raises backwards, taking longer and longer to move up.
A Bit of Good News
The team went on to say that policy intervention, such as TARP, can help young workers because these programs basically ensure that assets retain their value, allowing firms to take more chances on younger workers instead of simply playing it safe by hiring only prime-age workers.
“During deep recessions when there is intervention by policymakers—the Troubled Asset Purchase Program, or TARP, for example—what this research shows is there is a beneficial effect to doing that,” Mitra said.
“With the intervention, asset values didn’t fall as much so firms were able to hold on to younger workers.”
While there is, of course, a lot of debate about whether or not the government should intervene in these matters, the team’s findings do show that they help younger workers mitigate some of the negative impact that recessions can have on them.
The team also gave some tips for younger workers, too, which can be boiled down to: take more risks early.
“Young workers who want to preserve as much of their earning potential as possible might need to take more risk early on. Mitra and Xu found that this is true across industries. In industries where risk is higher, the compensation is typically higher,” the university reports of the findings.
“Knowing that they’ll be twice as likely to lose any job during a recession, it may make the risk of a higher salary in exchange for unemployment risk more appealing, they said.”
The team’s study uncovered a lot, such as the fact that younger workers’ fates are tied to asset value during a recession. If a firm is feeling the weight in their stock price, they will likely hire prime-age workers instead of taking any risk on a younger candidate.
This problem is compounded by the fact that younger workers are often more likely to be let go during a recession and that any disruption during this time of their careers can have lasting impact.
In the end, the team said that younger workers will likely have to take on bigger risks early in their careers so that they have a bit of a buffer should their job prospects dry up. While this isn’t the best thing for younger workers to hear, it’s a good start in solving this complex problem.
We’d also like to know more about how recessions impact workers just outside of the prime-age range, which is basically anyone 51 or older. This is an especially important question given the fact that Baby Boomers – many of whom of turning 65 or are already past typical retirement age – are working longer than ever for various reasons.
Of course, that wasn’t inside the scope of this study. It will take other teams to fully understand how recession impacts specific groups. That being said, we sure hope to have a better understanding before the next recession.
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