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It is something that has already happened in previous crises and has even more reason to repeat itself in the current scenario of economic contraction due to the pandemic: those who are unlucky enough to enter the labor market precisely in the middle of a recession are at serious risk of having to endure that burden for a long time, in the form of persistently lower wages for several years.
It is the so-called “scar effect” of the crisis in the labor market, which has been documented and proven in several studies carried out over the last decades, both internationally and specifically for Portugal.
Analyzes of the main economic crises of the last decades (and the following years) in various countries of the world reveal that those who seek their first job at the height of the crisis face “large initial effects on income, on supply labor and wages that tend to dissipate between 10 and 15 years later, “says University of California economist Till von Wachter, in a study carried out this year that seeks to synthesize current scientific knowledge on this matter, at a time where this topic may become relevant again.
There are several examples of crises in which this scar effect was very clear and, on average, in the cases analyzed by the Till von Wachter study, an increase in unemployment in a recession – an increase of between four and five percentage points in the unemployment rate – has resulted in a 10% lower initial return for those who graduated from a university at that time. Worse, this disadvantage is not immediately corrected as soon as the economy recovers: the relative loss of income for these workers takes, on average, between ten and fifteen years to be eliminated.
There are also several studies, points out the same economist, that point, in addition to the loss of income, to persistent negative impacts on indicators such as the death rate, the crime rate or the consumption of alcohol.
For Portugal, there are also studies on this topic. In 2010, Pedro Martins, an economist who was Secretary of State for Labor between 2011 and 2013, concluded (together with Gary Solon and Jonathan Thomas), based on data from 1982 to 2007, that, in Portugal, labor market entry wages they were 1.8% higher when the unemployment rate was 1% lower, which clearly reveals the problem of finding a first job when unemployment is very high.
More recently, last June, capturing the troika crisis and analyzing the impact on term wages, Irish economist Mark Regan reached similar conclusions for the group of 13 European countries, including Portugal. A 1% higher unemployment rate subtracted, on average, 2% from a worker’s starting salary. In the following eight years, this study concludes, the penalty remains at around 1%. Only after 10 years does the gap disappear.
In particular, with regard to the period of the Great Recession and the euro crisis, the economist notes that the most affected countries (Portugal, Italy, Greece, Spain and Ireland) suffered a particularly severe sanction for newcomers at work: the New graduates posted losses between 23% and 13% in each of the first 10 years of their career.
Mark Regan does not present specific data for Portugal, but a master’s thesis carried out this year at the Catholic University by Catarina Lopes, and which is part of the work to be carried out by the PROSPER research center, analyzes specifically what happened in the country during and after the crisis that hit the country from 2008 to 2012.
The conclusion is, once again, that students who have graduated in this period “were adversely affected by the initial conditions, even after these conditions ceased to exist.” The income penalty was around 8% in the first year, progressively decreasing in the following years, but “still present in 2017”. The results presented support the idea of the persistent and significant negative impacts of the Great Recession in Portugal on young people. ”, The study concludes.
New crisis, the same problem?
There is still no data available on what is happening to the wages of those now entering the labor market and it is obviously not possible to know with certainty what will happen in the long term. However, there are already some signs that what happened in the past may now be repeated.
When looking at the figures from the employment survey published by the INE, it can be seen that, as in previous crises, the jobs that are decreasing the most are those with the least seniority, less than six months, and that it is in the group older. young people, up to age 25, who lost more jobs (see box). This indicates that, for a significant number of young people, the doors of the labor market were closed with the crisis, something that, inevitably, will eventually be reflected in the salaries offered.
“Young people who are looking for their first job right now face a much more difficult scenario in the present and then that ends up persisting in the future, because the subsequent trajectory is also more difficult,” says Joana Silva, who supervised the master’s thesis. which points to the existence of a “scar effect” during the previous crisis and directs the PROSPER research center.
This economist also points out that there are more reasons for history to repeat itself now. “The fact that the recession is now more synchronized in all countries and that the situation is difficult everywhere, makes emigration not an alternative for some young people, as it happened in the previous crisis,” he says, also pointing out that On the commercial side, there may also be long-term effects. “If companies, due to the characteristics of this crisis, begin to change the combination of workers they use and stop being intensive in labor to become capital, these are changes that companies then have difficulty reversing. The consequence in these cases is a resumption without more jobs, something that is penalizing all workers, and particularly the youngest, ”he says.
For João Cerejeira, a professor at the University of Minho, the inevitability of an initial negative effect for new workers is also evident, and the speed with which this effect dissipates largely depends on the strength of the recovery.
This economist, however, sees some important differences between the current crisis and the previous one. On the one hand, although from the salary point of view, the previous crisis particularly affected the middle class and the upper middle class, this is affecting more people with lower incomes.
And at the sectoral level, if in 2011 the crisis began in construction but quickly spread to the entire economy, now “there may be sectors in which they are hiring massively, such as health, information technology, or even construction and some sectors transformation, but at the same time there are activities, such as tourism or restaurants, that are highly penalized ”. This is where it will be possible this time to focus the negative effect on those who are now beginning their active life.
There is no doubt about one thing, this persistent loss that younger workers may feel also results, as the International Labor Organization (ILO) warns, in “extensive and long-term damage to our societies.” Therefore, public policies that contradict this feat are desirable.
The economist Miguel Gouveia, at the Banco de Portugal conference held last Monday, argued that, to minimize this persistent negative effect, it would be important to take measures to promote new hires by companies, suggesting, for example, the possibility of introducing a mechanism for reducing the minimum wage applied to young people.
As for John Cherry, “public policy cannot do much in relation to the wages that are practiced now”, but before it can “play an important role in the conversion” of the new or old workers now affected. “The crisis will be persistent and help is needed, particularly with the support of education for the sectors of job transfer where the crisis will be persistent for the sectors that are better off”, argues the economist.
