The labor market impacts of graduating from university during a recession: evidence and mechanisms

This study explores the persistent effect of graduating from university in a recession on earnings and sheds light on underlying mechanisms focusing on the roles of educational mismatch and job instability. Using longitudinal data from South Korea, we estimate the short- and long-term effects of the unemployment rate in the province where the university is located at the time of graduation on labor market outcomes. The IV estimation results show that a 1% point increase in the unemployment rate at graduation decreases the initial monthly earnings by 8.77% and the earnings loss is persistent. A 1% point increase in the unemployment rate also increases the probability that the level of education required for work is lower than the university level by 7.58% points and the probability of being a temporary worker by 8.54% points. When the educational mismatch and job instability are accounted for, the magnitude of the initial earnings loss due to graduating from university in a recession decreases by 40.9%. Our results suggest that skill mismatch and job instability are important mechanisms through which entering a labor market in a recession has negative impacts on labor market outcomes for a considerable period after labor market entry.