Adverse Economic Conditions at Labour Market Entry: Permanent Scars or Rapid Catch-up?∗

This study investigates how shocks in economic conditions at entry into the labour market affect wages of low and medium-skilled workers over a large part of their careers. We use detailed German employment data in which we follow a large sample of workers from entry up to 19 years in the labour market. Long-term effects of initial economic conditions on wages are identified using variation in unemployment rates. The latter vary over time and across regions and provide an exogenous shock to initial career experiences. The analyis is carried out using unemployment rates at different geographical levels. Accounting for smaller regions implies a trade-off between using more relevant local economic conditions and a growing problem of selection into the region of labour market entry. We find that wages are adversely affected in the first years in the labour market: entering the labour market in a recession (9% versus 5% unemployment) implies 3-4% lower wages in the first 4 years of the career, but these negative effects fade out completely in the next 3 years. The choice of timing and location of labour market entry does not seem to affect our results much. Higher unemployment rates at entry also have a negative impact on the probability of employment, again only in the early career.