Federal Reserve Chairman Ben Bernanke says the U.S. recession is over. But even if a recovery is under way, for millions of people there's little reason to celebrate, according to studies led by Till Marco von Wachter, a Columbia University economist. His research found that the deleterious effects of a downturn on its victims can last decades and, for some, actually prove fatal. Von Wachter talked with TIME recently about his findings.
One of your studies sifted through 30 years of Social Security records following the 1982 recession and determined that earnings losses for folks laid off amid a downturn are not only high but very long lasting. Upon getting new jobs, they took, on average, annual pay cuts of 25% to 30% and even 15 to 20 years later were earning around 20% less. Why?
What can happen is that workers often cannot find another job in their same industry. If a worker had accumulated skills that were specific to that industry, then can't find a job in that industry, those skills lose their value. So that may knock down workers for a long time because it's difficult to reaccumulate skills. That can explain a third to half of the losses.
And the rest?
We were looking at workers who had a stable job at a good firm, and it usually takes a long time to find such a good job match. These types of jobs pay more, but they don't come along that easily. Once you lose such a good job, you may not find another like it. There was a component of luck in having found that matching job, and it's hard to get lucky twice.
Perhaps companies lay off mostly unproductive workers. When they're eventually rehired elsewhere for less money, maybe it's because they were overpaid before?
That is unlikely. At least from a statistical point of view, we made sure as much as possible that we didn't compare apples and oranges. We studied large layoffs, where workers who did not lose their jobs because of some fault of their own, and then we compared them to workers who had similar earnings trajectories and similar industry and age profiles.
You also followed a large group of Canadian college students and found that those who graduated during a recession initially suffered significant earnings losses, around 10%, and it took eight to 10 years for that effect to fade. Why do they take such a big hit and for so long?
In a recession, well-paying firms and industries hire fewer workers, so college graduates have to take jobs with less attractive firms. Graduates can recover by finding a new job at a better-paying firm, but that process can take a long time. Some workers never actually recover. Those who graduated from smaller, less prestigious schools or majored in the humanities may never find a job at a better firm.
So during a recession, stay in school?
It really depends on what the cost of another degree is. For many, it's not really worth it staying in school longer. But what students should be aware of is they have to remain flexible. Students have to be aware that to get back on track, they have to remain very mobile maybe switching career tracks or even moving across regions.
Clearly, a recession can shred the spending power of millions for many years. Doesn't that have negative repercussions for a U.S. economy underpinned by consumer spending?
In the short run, laid-off workers or graduates will consume much less, but so will most other people. That will stall the recovery process because everyone is waiting to see what happens. But in the long run, roughly three things help the economy improve. First of all, those not laid off the majority start consuming again. Second, a new cohort comes into the labor market and is likely to benefit from the recovery, so it's spending more. Third, those who experienced a negative shock, either from a layoff or from graduating in a recession, begin to spend again as well; however, they're likely to save less.
A recent study found that mortality rates don't increase during a recession. But your research of earnings and death records in Pennsylvania found that when high-seniority males, especially those around age 40, are laid off, their mortality rate initially jumps 50% to 100% and that while the risk abates over time, a job loss can shave 1 to 1½ years off their life expectancy. Are these studies in conflict?
No. For these people [in our group], being laid off in a recession was important because they experienced a big and long-lasting shock to their lives, including large and lasting earnings losses. Accordingly, they have a large initial increase in mortality that settles down at a permanently higher level. That isn't in conflict with the other finding. Even though middle-aged men with good, stable jobs are an important part of the labor market, in terms of the entire population, they're not a dominating fraction. In a recession, everyone holds back on alcohol consumption, smoking and overeating. Also, there are fewer work and car accidents, and that could dominate the aggregate healthier effect.
So for the overall population, there may be things peculiar to a recession that are beneficial to health and cut mortality rates, even though some segments are at risk if they lose their jobs?
That's one way to explain the difference. The other way to explain it is that the other finding didn't apply to the overall population it just applied to the elderly, who for a variety of reasons, including improved care, appear to thrive during a downturn. The aggregate may be driven by these elderly, who aren't in the labor market and aren't affected by changes in earnings.