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The recent recession has been referred to as the "Great Hangover" after the roaring times and subsequent collapse of the housing bubble only a few years ago. For recent graduates, the impact could linger on well past when the recession is over (if some recent economic research is to be believed). Graduating into the labor market during a recession can make obtaining a job more difficult initially out of college, or it can result in graduates landing a position at a pay rate below what might be commanded in a regular hiring year. What is less evident is to what extent the economic context of the initial career placement of newly minted graduates matters in determining their long-term success and earnings potential.
Lisa Kahn, a labor economist at Yale University, suggested in a 2010 Labour Economics article that graduating from college in a bad economy has persistent negative wage effects lasting far beyond when initially hired. Her results show negative wage impacts could persist well into the second decade of one's career. Using data from the National Longitudinal Survey of Youth between 1979 and 1989, Kahn finds that students graduating in worse national and state economic conditions begin in lower level occupations, have slightly higher tenure in those occupations, and possess more years of schooling.
A number of theories can potentially explain why the economic environment at the time of graduation has long-term effects on the income and job quality an individual could attain later in his career. One possibility is that in a recession, low levels of firm-specific human capital might cause workers to accumulate less job knowledge and training or suffer from depreciation of skills, which would translate into lower wages. Models by Gibbons and Waldman (2006) and Lazear (2003) suggest that even in the absence of firm-specific human capital, initial conditions can be important for long-term labor market outcomes because of the impact on task-, firm, or sector-specific skill development. Moreover, individual tastes and attitudes toward performance (work ethics, drive to succeed, etc.) may evolve based upon their experiences and work environment (Rayo and Becker 2005). In the Gibbons and Waldman (2006) model, for example, employees develop "task specific human capital"; those hired under favorable economic conditions are initially given higher value...