August Klatt: The Luck of the Draw


A college degree obtained during an expansion and a college degree obtained during a recession are two very different things.

I am pleased to host another student guest post, this time by August Klatt. This is the 8th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link. This is the 2d guest post by August. Don’t miss his previous guest post: “Is the NFL Trying to Hide Something by Injecting Bias into Head Injury Science?”

Quick, graduate as fast as you can before another recession hits. The United States has made a full recovery from the Great Recession and there hasn’t been a better time to be a college grad. Josh Zumbrun of the Wall Street Journal reports that income for college graduates is at its highest levels since 2003. The median income for recent college graduates is now $43,000, (ages 22-27) which is $3000 more than the previous year’s median. In addition, the unemployment rate for recent college grads (4.9%) is almost down to pre-recession levels. These numbers seem refreshing as I am currently a junior in college, but as we learned from the Great Recession, things can change quickly. If you have the opportunity to graduate soon, take advantage of it!

How much does it really matter whether you graduate in good times or bad times? The short answer: a lot. The National Bureau of Economic Research conducted a study to determine the effects of graduating in a recession. They concluded that recent graduates lost 9% in their wages initially, which went down to 4.5% by fives years, and showing no loss in wages by the tenth year. 

For the graph at the top, I created a projection of wages of an individual that graduates in a recession versus an expansion using the data that the National Bureau of Economic Research provided. The projection uses the most accurate data I could find, but I am not claiming that my assumptions used are perfect. I assumed a starting salary of $40,000 for the individual in the expansion, and an initial salary of $38,584 for the individual hired in the recession (9% less than the expansion individual). I also assumed the losses in wages from 9% to 0% in 10 years decreased at a linear rate. Both individuals obtained a 6% increase in wages annually, which is very reasonable considering most people see 70% of their wage increase in the first 10 years of working. One of the reasons behind these large wage increases has to do with the fact that younger professionals change jobs more frequently. According to Cameron Keng workers who stay in their jobs are getting raises of 3% on average, while workers who change companies are getting a 10% to 15% salary increase. I thought that 6% was a good middle ground to build the model off of.

The area between the two lines is the loss in wages for the individual who unluckily graduated in a recession. From this projection, the loss turns out to be a little more than a $20,000 over the 10 years. Keep in mind that I am assuming these two individuals are identical in every way, except for the timing of their graduation. That’s a lot of money to lose for being purely unlucky.

Many of these losses come from the lack of jobs available, which can lead to students taking jobs at smaller companies or ones that aren’t the best fit for them. These drops in wages also only account for the students who actually get jobs. It doesn’t account for the rise in the unemployment rate. In the Great Recession, the unemployment rate reached 7% for recent grads. That extra 2% rise in the unemployment rate represents recent grads that are making zero income that would have been making a wage in an expansion.

In the first 10 years of a career, it is likely to see 70% of the wage increases. As a college student with more than likely lots of debt, you want to take full advantage of this wage growth right out of school. There’s nothing you can do to affect the economic conditions when you graduate, but these differences in wages are real and unfortunate.