Graduating during a Recession

By Jamie Fletcher

The immediate and intuitive effect on those graduating from college in a stagnating economy is obvious: they are less likely to be hired, especially for the most desirable jobs. However, how do those who graduate during a recession fare over the course of their careers compared to graduates during periods of economic growth?

Yale School of Management Professor Lisa Kahn addresses this question in her October 2007 paper titled “The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy.” Relying on detailed year-by-year occupational and educational information from the National Longitudinal Survey of Youth (NLSY) for white males who graduated from college between 1979 and 1988, Kahn followed participants for 14 to 23 years after college graduation to study the effect on employment status, occupational attainment, job tenure, wages, and enrollment in graduate schools as a function of economic conditions.

One uplifting finding is that economic conditions at the time of graduation have no substantial long-term effect on labor supply. As a whole, those who graduate during a recession tend to have the same probability of being employed and will generally work the same amount per year as those graduates entering the job market in a strong economy. The short-term effects of increased unemployment in a recession thus appear to be overcome by future economic expansion and growth in the job market.

Why are large endowments so successful?

By Jennifer Barrows

From hedge funds to investment banks, private equity firms to university endowments, virtually no financial institution has emerged unscathed from the ongoing economic turbulence.  While written before universities reported their disappointing year-end returns, the 2008 study “Secrets of the Academy: The Drivers of the University Endowment Success” by Josh Lerner of Harvard University and Antoinette Schoar and Jialan Wang of Massachusetts Institute of Technology identifies several factors that may be responsible for the disparities in endowment size across a wide range of educational institutions.

An endowment is the reserve of money that provides a university with a source of perpetual income; thus, it is important that their managers invest well to produce high returns year after year. The median return for the 1,300 schools surveyed was 6.9 percent, but some schools have clearly surpassed all the others. In 1993, the Ivy League had endowments of greater than 30 times the median size of those at public universities; in 2007, this gap increased to 70 times the median.

The researchers concentrate on investment performance as the biggest source of change in endowment size, with annual expenditures and donations being the other two major factors. Investment performance is naturally driven by the skill of the university’s endowment managers. The authors speculate that schools with large endowments and students with high SAT scores tend to attract managers with more sophisticated knowledge of financial practices. While higher SAT scores are not strongly correlated with endowment size, they may serve as proxies for attractive features such as the prestige, administrative skill, and alumni network associated with the university. These are all important incentives for more skilled managers to leave their jobs in the financial industry and lead Ivy League investment teams.