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The 'lost decade' you should be afraid of

Those who enter the job market now could face lower earnings for many years.

By Money Staff Sep 22, 2010 4:59PM

This guest post comes from Pop at Pop Economics.


Much has been written about the lost decade for stocks. Right now, the S&P 500 is hovering around 1,130. Its high in September 2000 was 1,520. That's a sad stretch.

But there's another lost decade that was even more painful. And for those of you who are just starting your careers, this one was a lot more important than the S&P 500's storm. According to a recent census report, between 2000 and 2009 the inflation-adjusted median income of U.S. households dropped 4.8%. (Hat tip to The Wall Street Journal.)


The poverty rate is also the highest since 1994, and the number of people in poverty is the highest in more than 50 years (the U.S. population has grown by a lot).


I hope none of you graduated during this awful period, or are about to graduate. If you did, sit down while you read this: The starting salary for people graduating during this recession will be, on average, 17.5% lower than that of comparable peers graduating in better labor markets, according to a study (.pdf file) by Yale School of Management professor Lisa B. Kahn. The effect of their lower wages will likely persist for 17 years and cost them $70,000 in earnings over the next decade.


Few economists predict the labor market will get much better  in the next few years. So if you're between the ages of 19 and 24, you're at risk of your earnings being permanently crimped.

A 1% increase in unemployment means a 6% to 7% drop in starting wages. That's one of the conclusions from the Yale paper. Kahn measured that by looking at the 1979 National Longitudinal Survey of Youth. U.S. Labor Department surveyors interviewed a group of Americans between the ages of 14 and 22 in 1979 and have been tracking their progress ever since. Kahn was able to see how the labor market disruption of the 1980s impacted the teens' long-term performance.


In doing so, Kahn also found that graduates in a bad economy have a hard time shifting to "optimum" jobs when the labor market improves, which explains the lasting negative wage impact. Not surprisingly, recession grads are also more likely to get a post-graduate education.


The news ain't so great for older workers, either. The U.S. has historically been a place where job transitions were relatively frequent, but job bounce-backs were relatively quick. (Europe is the opposite, by the way.) This time around, the long-term unemployed -- those without a job for 27 weeks or longer -- make up half of all unemployed people. The only other time the percentage of the unemployed who were long term even cracked 25% was in the 1980s. Those of you with a job might have been at one of the 37% of companies that didn't give raises in 2009.


What to do about it

At times, a booming economy can keep all workers afloat, even the ones who are just sliding by in jobs that don't fit their skill sets. Those times are over, and it doesn't look like they're coming back soon. You don't want to still be sitting behind a desk at age 70, thinking about how the Great Recession permanently stunted your career trajectory. So how do you mitigate the impact of a dismal economy on your long-term financial future? Consider these points:


A company never freezes the wages of its top workers. The corporate message coming from your company might be that no one is getting cost-of-living increases this year. But the fact is, pay-for-performance programs are still going strong. According to Hewitt Associates, as a percentage of total wages, variable pay (that is, pay-for-performance programs) reached 12% last year, which is even higher than it was in 2006. Be good at what you do. Ask to be compensated for it. And companies will give it to you.


Sometimes you need to change jobs to get a raise. I didn't see this addressed in Kahn's study, but I bet one of the reasons it takes the wages of recession grads so long to recover is that they stay in jobs for an extended period of time. Even merit increases are based on your current wage.


Someone who starts at $50,000 during a recession will need four years of 5% merit raises to get to the $60,000 starting salary he would have gotten if he had been hired during good times. That inequity leaves the strong possibility of the underperforming 2006 hire being paid significantly more than the strong 2009 hire.


But companies will pay market rate for top-performing new hires, no matter what they were paid at their previous jobs. Hopefully, your current company is concerned about losing you and will update your wages to reflect that. If not, changing jobs might be the way to break the wage hex of the recession.


If you're young, recognize a dying industry today. Sometimes I give the Bureau of Labor Statistics a hard time for trying to predict which jobs will have the most growth a decade from now. The highest-growth professions will no doubt be in industries we haven't conceived of yet.


It's easier to recognize an industry or company in decline or going through a period of disruption. The media, automakers,  airlines, the U.S. Postal Service, pretty much anything that can be outsourced -- the list goes on. And yet, thousands of graduates enter those industries every year because they've been told to do what they love.

"Do what you love" is smart advice. But if you're a normal human, you probably have many interests. Pick the interest that offers the brightest future. Or if you pick an industry in disruption, make sure you're entering it to lead the innovation rather than to be along for the ride. At the end of the day, we're at our happiest when we're successful.


More from Pop Economics and MSN Money:

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