Introduction and Background
\label{introduction-and-background}
To some extent, when each person enters the job market is determined by
luck: timing of their birth, schooling, and training. Some people search
for a first job during a strong labor market with plentiful jobs and
substantial wage growth; others face very different circumstances,
perhaps entering during a downturn or a recession in which jobs are
scarcer and wages are lower. Over 3 million job-seekers enter the labor
force each year; thus, millions young adults entered the labor force
during the most recent downturn (the Great Recession).11See
https://www.bls.gov/emp/ep_table_305.htm
Previous literature has studied the negative effects of entering the
labor market in a recession on earnings and income for several groups:
high school graduates (Hershbein, 2012); college graduates (Kahn, 2010,
Oreopoulos, von Wachter and Heisz, 2012); Ph.D. and MBA graduates (Oyer,
2006, 2008); and prime-age male workers (Beaudry and DiNardo, 1991,
Brunner and Kuhn, 2009, Genda, Kondo and Ohta, 2010). Across these
groups, research consistently shows that the negative effects of
entering the labor market during a recession are sizeable and last for a
number of years, at least through the first one to two decades of the
workers’ careers; existing results imply large and substantial
accumulated effects. Moreover, these effects can be found beyond wages;
entering a weak labor market influences eventual post-secondary
educational attainment and also appears to result in somewhat lower
occupational status (Kahn 2010).22 Given the sequential nature
of wages, such early differences could be reflected throughout the
entire course of a worker’s career and could even influence saving for
and/or timing of retirement although the likely direction of the effects
is not clear. For example, those who enter the labor market during a
recessionary period could work longer, or could retire earlier as the
opportunity cost of doing so might be lower. Early conditions could even
influence the extent to which Social Security replaces earnings (and
thus, Social Security costs).
Most of the existing research focuses on younger workers and their
outcomes during and after relatively recent recessions; less is known
about the longer-term effects of entering the labor market during a
recession and the extent to which this timing influences wealth,
savings, or retirement. Obtaining a better understanding of the
longer-term effects of recessions on workers’ careers would be
especially valuable in the current environment, in which many young
workers entered the labor force during a severe recession; understanding
the longer-term impacts of initial conditions on workers and their
retirement decisions would provide information that could be very useful
in predicting the retirement behavior and financial preparedness of
tomorrow’s retirees.
One potential criticism of existing work is that entry into the labor
force can, in some cases, be timed based on economic conditions. For
example, Kahn (2010) finds that those who completed college during
weaker labor markets had higher levels of educational attainment (but
lower earnings); this suggests that workers may pursue additional
education during weak economies. To help circumvent this issue, we take
advantage of a novel form of exogenous variation; we examine the
long-term earnings of older veterans from the draft era. These
men had little choice about the timing of entry into the labor force;
they generally were drafted or volunteered based on world events and
they left the military at the end of fixed contracts after fairly short
terms of service (generally, terms were two to four years in length). To
focus on young workers who enter the labor force after a short time in
the military, we include only veterans who served no more than 5 years
in the military.33Most veterans, in the past and today, serve
less than five years. Veterans who serve at least 20 years are
eligible for military retirement; this benefit, which begins
immediately upon exiting the military, is likely to impact a variety
of labor market choices. To avoid the influence of retirement and to
capture those least likely to time their exit from the military (by,
for example, serving additional terms), we focus on veterans with
short periods of service. These veterans emerge from the military in
a situation that is somewhat similar to college graduates—with
recently acquired human capital but with limited (civilian) labor market
experience. Their timing of entry into the civilian labor force was
determined primarily by the end of their contracts, providing a source
of arguably exogenous variation.
Of course, some service members choose to remain in the military after
the end of large conflicts and veterans still could choose to acquire
additional education, and some even received benefits that may have
encouraged this. However, the sharp drawdowns after conflicts and the
much lower levels of post-secondary educational attainment among older
veterans mean that this problem is likely less severe than in later
cohorts. Nonetheless, we explore this endogeneity issue in more detail
below and include several relevant control variables in all of our
regression specifications.
We also note that there is a well-developed literature examining the
question of how military service influences educational attainment and
eventual civilian earnings. The literature on Vietnam-era men indicates
that among white men, military service was associated with large wage
penalties upon entering the civilian labor market; by the 1990s,
however, wages were quite similar between those who served in the
military and otherwise similar men who did not (see, in particular,
Angrist, 1990 as well as Angrist and Chen, 2011). Veterans from the WWII
era, in contrast, appear to earn more than otherwise similar
non-veterans (Angrist and Krueger, 1994). There is evidence that access
to the GI Bill results in increased levels of education; this result
holds across eras. However, at least for the Vietnam era, this increase
seems to result in little difference in terms of earnings.44For
detailed analyses of the GI Bill and veterans’ educational attainment
and earnings, see Bound and Turner (2002) as well as Angrist and Chen
(2011). Note that Loughran et al (2011) compare education and earnings
of applicants who do enter the military versus those who do not; these
authors find that military enlistment improves earnings, but delays
educational attainment and decreases the probability of obtaining a
four-year degree. While the literature comparing veterans and
non-veterans has important policy implications, it focuses on a
different question than the one we examine here; our focus is on the
long-term impact of labor market conditions at entry. Therefore, rather
than comparing veterans to non-veterans, we compare veterans who entered
strong civilian labor markets with similar veterans who entered weaker
civilian markets. Therefore, this research is in the spirit of Kahn
(2010) and similar papers.
We use the Health and Retirement Study (HRS). This dataset provides the
opportunity to examine the effects of entering the civilian labor market
during a recession on veterans’ earnings through their entire careers,
on their retirement decisions, and on their financial preparedness for
retirement (measured by wealth, including social security and pension
wealth). Our findings provide relevant information on how current
economic conditions may affect today’s young workers’ eventual
preparation for and timing of retirement, and thus should be of interest
to policy makers at the SSA. Our findings should also be of interest to
policy makers working to smooth current veterans’ transitions into the
civilian labor force. Our paper is structured as follows: In Section 2,
we describe the draft era in America; in section 3, we describe our data
and descriptive statistics, in Section 4 we present our methods and
empirical results; finally, Section 5 includes a discussion of the
implications of our findings.