THE EFFECT OF AN EARLY CAREER RECESSION ON SCHOOLING AND LIFETIME WELFARE

Abstract

This article evaluates the lifetime welfare and labor market consequences of experiencing a recession during youth, using a directed search equilibrium model with heterogeneous agents and aggregate shocks. In particular, the model allows for endogenous schooling decisions over the business cycles. The counterfactual analysis shows that experiencing the 1981–82 recession in youth causes a 1.6%–2.3% loss in lifetime welfare. Endogenizing the schooling decision avoids overestimation of welfare loss because of the selection effect and the human capital effect. I also decompose lifetime wage changes into different channels: changes from schooling, work experience, and job mobility.