This morning, Goldman's Econ team, led by Jan Hatzius, set out to identify why wage growth has been elusive despite the fact that unemployment rates and other labor utilization measures signal an economy at full employment. For evidence of labor market 'slack' they decided to take a look at how recessionary college graduates handled the post-recession labor market as their lack of skills often make them the most vulnerable to a weak job market.
While the unemployment rate and other labor utilization measures signal an economy at full employment, wage growth has been weaker than expected recently, raising questions about the true degree of slack. To the extent that some pockets of excess slack remain, the cohort that came of age during the Great Recession would seem a natural place to ?nd it, given the pronounced and long-lasting effects of recessions on young workers.
In today’s daily, we review the labor market experience of the cohort graduating college or beginning careers during or immediately after the recession. Unsurprisingly, unemployment rose sharply in this segment from 2007 and 2010. However, since then, jobless rates have improved dramatically on both an absolute and relative basis – particularly over the last year – and the unemployment rate in this cohort is now under the national average. Relative wages have also partially recovered, and broader measures of utilization suggest that minimal excess slack remains in this cohort.
While not terribly surprising, they found that the young folks who graduated in the immediate aftermath of the 'Great Recession' suffered relatively steep wage degradation relative to the overall population.
Average earnings trends in the household survey show a similar pattern of underperformance and subsequent recovery. As shown in Exhibit 3, usual weekly earnings in this cohort declined by 6% relative to the population during and after the recession (on an age-adjusted basis). However, despite a partial recovery, the earnings gap remains: relative wages on this basis have only retraced a third of the post-recession decline (qualitatively consistent with the predictions of the academic literature).
But what is surprising is why those wages haven't recovered meaningfully despite the fact that unemployment rates among the same cohort have fallen precipitously.
And while Goldman didn't point this out, perhaps there are some interesting, if overlooked, clues in the following two charts that lend some insight into the behaviors and attitudes of the current millennial generation as compared to previous generations that came of age during previous recessionary periods.
The chart on the left is particularly telling if you just compare the 1981 recession to 2008. In the immediate aftermath of the recession, the unemployment gap for young people declined in both instances for the first 4 quarters of the recession.
That said, the experience beyond Q4 is quite different as the 1981 cohort experienced a massive surge in employment while millennials in 2008 simply continued to decline and only bounced slightly off the lows. Now, one could say this is an unfair comparison because the 2008 recession was deeper and more protracted than the 1981 recession. But, what we find most intriguing is that the 1981 cohort saw a massive surge in employment despite suffering the greatest wage decline of any of the recessionary periods for the past 35 years, and nearly double the experience of the 2008 recession.
Translation, when recession struck in 1981, Baby Boomers and Generation X got off their asses and took any job at any wage they could find to make ends meet. But, when recession struck in 2008, millennials simply moved in with mom as opposed to taking a job that didn't fully reward their extensive skillset garnered from 4 years of rigorous anthropology studies at a preppy New England liberal arts college.