Graduating During Bad Economic Times

Fed Chairman Bernanke delivered a speech at his alma mater today, letting the graduating class of Harvard know that they wouldn't live through the same type of stagflation he saw upon graduating in 1975:

Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges. Economic policymaking has improved as well, I believe, partly because we have learned well some of the hard lessons of the past.

But one subject he managed to avoid talking about was the current job climate. Perhaps surprisingly, even Harvard grads are having a harder time finding a job this year. According to the Harvard Crimson, the percentage of seniors looking for a job that landed one declined from 73 percent in 2007 to 66 percent this year.

The problem for this year's soon-to-be alumni around the country, research has shown, is that economic conditions can do a number on your paycheck, especially for graduates of less-elite schools. In a recent update to research conducted in 2006, economists tracked Canadian men for up to 10 years after they graduated from college between 1976 and 2005. They found that a large spike in the unemployment rate led to a 10 percent fall in earnings at the beginning of a graduate's career. This wage gap lasted for about 10 years.

Another study of M.B.A. students by Stanford economist Paul Oyer to be published in the Journal of Finance, found that having the bad luck of graduating during a bear market could slash lifetime earnings. Oyer estimated that during a bull market, someone who gets an investment banking job upon graduation earned an additional $1.5 million to $5 million throughout their lives when compared to someone who graduated during a bear market. This was in the 1990's, so it's likely to be even higher now.

What should graduates this year except?

Although today's positive ADP report hinted that Friday's labor numbers might show payroll growth in May, the U.S. economy has lost jobs five months in a row.

Still, there are indications that this year's graduating class won't have it so bad. First, at 5 percent, the unemployment rate is still quite low compared to the historical average.

Second, a March survey by National Association of Colleges and Employers showed that employers expect to increase hiring by 8 percent and the average starting salary will be 4 percent higher for 2008 graduates than last year's alumni. Among the biggest beneficiaries will those holding computer science (8% hike in initial salary) and engineering degrees (6%).

But one sector that will likely be cutting back is finance. While this year's M.B.A. grads who can't land an investment banking job may be shit out of luck, Stanford's Oyer has some advice for those just entering M.B.A. programs:

These students should short the stock market upon entering school so that their portfolios hedge their expected labor income.

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