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.