Article | Fall 2007
At the Right Place at the Wrong Time: The Role of Luck in Young Workers' Careers
by Till Von Wachter (International and Public Affairs)
The first years of young workers' careers are characterized by high rates of earnings growth and high job mobility. In the United States, on average, more than seventy percent of lifetime earnings growth occurs within ten years in the labor market. During the same time, workers on average hold seven jobs, five of which occur during the first five years. Many economists interpret mobility as evidence of beneficial job search. However, others counter that the unstructured transition from school to work leads to excess mobility and slows the rate of human capital accumulation. These concerns have fueled recurring calls for programs and institutions that would allow a more structured transition into the workplace.
But to what extent-and for how long-are young workers hurt by excess job mobility? Young workers typically have the highest rates of job loss and suffer the largest wage declines in recessions. Recent studies have also found that early job displacement has a negative and long-term impact on future wages. Nevertheless, it may be premature to conclude that programs are needed to reintegrate young displaced workers into the labor force. Although these programs currently exist for older job losers, determining whether such programs are appropriate for young workers is more challenging and requires a better understanding of how losing a job early in one's career affects future wages. Analyzing wage changes among young workers is complex due to the high rate of job mobility. In particular, conventional strategies for estimating the extent and duration of wage losses among mature workers may not accurately depict the situation of young displaced workers.
In a paper published in the December 2006 issue of American Economic Review, my colleague Stefan Bender and I examine the labor market in Germany as a case study, focusing on apprenticeship training programs. In Germany, more than two-thirds of recent cohorts of school graduates participate in apprenticeship programs, which last for two years on average and include both formal and practical training. Our study introduces a new strategy for estimating the long-term wage losses suffered by young German workers who leave their training firm at the end of an apprenticeship. Similar to what has been found for the United States, comparisons of those who stay in their position and those who leave their jobs suggest that there are large permanent costs of displacement on the order of ten percent after five years.
While these findings appear to support the claim that job losses early on in workers' careers have long-term consequences, these comparisons overlook several critical issues. Accounting for these issues reveals that simple estimates may overstate wage losses. Firstly, it has been widely recognized that job leavers may be negatively selected; that is, firms are likely to choose the least capable and motivated workers when reducing their workforce. While this is also a problem for older workers, longer career histories allow us to correct for average productivity differences. For younger workers, such information is usually unavailable, as career histories are short and wages do not yet fully reflect productivity. A second issue that has received less attention by economists is that the sample of workers losing jobs is disproportionately drawn from firms with high turnover rates. To the extent that such firms attract less capable workers and offer less training opportunities, less capable workers are likely to be overrepresented in the pool of job losers, even when controlling for selection within firms. A third issue-particularly important for young workers-is that job leavers include both involuntary movers and those who moved voluntarily. Since voluntary movers tend to benefit from mobility, this would lead simple estimates to understate the effects of displacements. This turns out to be a problem in practice since it is often hard to distinguish voluntary and involuntary movers, both in practical and conceptual terms.
In order to measure the true effect of displacement, one ideally needs to understand variation in the rate of job loss that is not driven by workers' own characteristics or choices. Our estimation strategy is straightforward; while one cannot compare all workers who lose their jobs with similarly qualified and motivated workers who stay at their firms, looking at firms in distress provides a way to better understand the short- and long-term consequences of job loss. This approach allows us to estimate the costs of job loss that are not affected by systematic differences between workers who lose their jobs and those who retain them, which are brought about by sorting between or selection within firms.
Clearly, no readily available measure of firms' demand of young workers is available. Thus, to implement this idea in the German context, we use a proxy-the fraction of apprentices in the same cohort at the same firm who leave the firm at the end of training. By pooling data for several cohorts and subtracting firm-specific mean retention rates, this proxy represents year-to-year variation in the fraction of apprentices retained by each firm. Our estimation strategy then compares job leavers in firms during a period of distress with similar workers staying at the same firm at a time when the firm is doing well. Since the comparison is within firms, we eliminate permanent differences in characteristics of the firm or workers within that firm; similarly, by focusing on firm-level distress as a source of job loss, we eliminate any systematic differences in individual-level productivity.
We implement this estimation strategy by studying graduates of the German apprenticeship system from 1992 to 1994 that hold at least one job in the first five years after training. About 35 percent of apprentices leave their training firm at graduation, suggesting adverse selection of workers is potentially an important problem. Initial sorting of workers into different types of firms is relevant as well, since firms provide different amounts of training and offer different career prospects as evident from variation in turnover rates. Moreover, high mobility of apprentices in the years following training suggests that some of those leaving their training firms move voluntarily. Thus, post-training mobility occurs in a rich environment with voluntary and involuntary mobility, negative selection, and nonrandom sorting of workers into their training firm.
Using our estimation strategy based on random firm-level fluctuations in retention rates of young apprentices, we find that involuntarily displaced trainees have initially lower wages than those who stayed but that these losses disappear within five years after the end of training. Only the wage losses of workers leaving very large training firms have a persistent component, consistent with the presence of firm-size wage differentials or internal labor markets. This implies that care has to be taken in evaluating the long-term effects of early job losses, since only for certain groups the effect may be permanent, while the average worker may suffer temporary losses.
Understanding the discrepancy between estimates and simple comparisons between workers who keep their jobs and those who lose them requires closer examination of the different confounding factors. Alternative estimates of wage losses address different sources of selection within firms or initial sorting between firms. Comparison between these estimates draws a complex picture of the labor market for young workers where job search leads to voluntary mobility and true temporary wage losses from displacements, but sorting among firms and negative selection are important sources of job and wage dynamics as well. This implies important insights on early careers may be lost if either of these components is ignored.
