The “lost decade” you should really be afraid of

by Pop on September 18, 2010

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After 10 years, our incomes have gone nowhere.

Much has been written about the lost decade for stocks. Right now, the S&P 500 is at 1,125. Its high in September 2000 was 1520. That’s a sad stretch.

But there’s another lost decade that was even more painful. And for those of you who are just starting out your careers, this one was a hell of a lot more important than the S&P 500′s storm. According to a recent Census report, between 2000 and 2009, the inflation-adjusted median income of American households dropped 4.8%. (Hat tip to the WSJ.)

The poverty rate is also the highest since 1994, and the number of people in poverty is the highest in more than 50 years (the U.S. population has grown by a lot).

I hope none of you graduated during this awful period or are about to graduate. If you did, sit down while you read this. The starting salary for people graduating during this recession will be, on average, 17.5% lower than that of comparable peers graduating in better labor markets, according to a study by a Yale School of Management professor. The effect of their lower wages will likely persist for 17 years and cost them $70,000 in earnings over the next decade.

Few economists predict the labor market will get much better in the next few years. So if you’re between the ages of 19 and 24, you’re at risk of your earnings being permanently crimped.

A 1 percentage point increase in unemployment means a 6% to 7% drop in starting wages.

That’s one of the conclusions from that Yale paper, written by Lisa Kahn. She measured that by looking at the 1979 National Longitudinal Survey of Youth. Labor Dept. surveyors interviewed a group of Americans between the ages of 14 and 22 in 1979 and have been tracking their progress ever since. Kahn was able to see how the labor market disruption of the 1980s impacted the teens’ long-term performance.

In doing so, Kahn also found that graduates in a bad economy have a hard time shifting to “optimum” jobs when the labor market improves, which explains the lasting negative wage impact. Not surprisingly, recession grads are also more likely to get a post-graduate education.

The news ain’t so great for older workers either. America has historically been a place where job transitions were relatively frequent, but job bouncebacks were relatively quick. (Europe is the opposite, by the way.)

This time around, the long-term unemployed—those without a job for 27 weeks or longer—make up half of all unemployed people. The only other time the percentage of the unemployed who were long-term even cracked 25% was in the 1980s. Those of you who did have a job might have been at one of the 37% of companies that didn’t give raises in 2009.

What to do about it

At times, a booming economy can keep all workers afloat, even the ones who are just sliding by in jobs that don’t fit their skill sets. Those times are over, and it doesn’t look like they’re coming back soon. You don’t want to still be sitting behind a desk at age 70, thinking about how the Great Recession permanently stunted your career trajectory. So how do you mitigate the impact of a dismal economy on your long-term financial future?

1. A company never freezes the wages of its top workers.

The corporate message coming from your company might be that no one is getting cost-of-living increases this year. But the fact of the matter is, pay-for-performance programs are still going stronge. According to Hewitt Associates, as a percentage of total wages, variable pay (that is, pay-for-performance programs) reached 12% last year, which is even higher than it was in 2006. Be good at what you do. Ask to be compensated for it. And companies will give it to you.

2. Sometimes you need to change jobs to get a raise.

I didn’t see this addressed in Kahn’s study, but I bet one of the reasons it takes the wages of recession grads so long to recover is that they stay in jobs for an extended period of time. Even merit increases are based on your current wage.

Someone who starts at $50,000 during a recession will need four years of 5% merit raises to get to the $60,000 starting salary he or she would have gotten if he had been hired during good times. That inequity leaves the strong possibility of the underperforming 2006 hire being paid significantly more than the strong 2009 hire.

But companies will pay market-rate for top-performing new hires, no matter what they were paid at their previous jobs. Hopefully, your current company is concerned about losing you and will update your wages to reflect that. If not, changing jobs might be the way to break the wage hex of the recession.

3. If you’re young, recognize a dying industry today.

Sometimes I give the Bureau of Labor Statistics a hard time for trying to predict which jobs will have the most growth a decade from now. The highest growth professions will no doubt be in industries we haven’t conceived of yet.

It’s easier to recognize an industry or company in decline or going through a period of disruption. The media, automakers, airlines, the USPS, pretty much anything that can be outsourced…the list goes on. And yet, thousands of graduates enter those industries every year because they’ve been told to do what they love.

“Do what you love” is smart advice. But, if you’re a normal human, you probably have many interests. Pick the interest that offers the brightest future. Or if you pick an industry in disruption, make sure you’re entering it to lead the innovation rather than to be along for the ride. At the end of the day, we’re at our happiest when we’re successful.

This post was an editor’s pick at the Carnival of Personal Finance hosted by Investor Junkie. Thanks Investor Junkie!


{ 6 comments… read them below or add one }

Jan September 19, 2010 at 12:11 pm

Our no degree- high skill son in law was just hired at $90K. Our degreed in Physics- great university son is sitting at $60K. Makes no sense at all…

Rob Bennett September 19, 2010 at 1:53 pm

My view is that these two phenomena (the two kinds of lost decades) are connected. When stock prices are being pumped up (as they were in the late 1990s), it’s not only portfolio returns that look good. There was $12 trillion worth of Funny Money floating around at the top of the bull. That money gets translated into new businesses taking off and workers getting raises and on and on. And then it all moves in a backwards direction during the years (decades?) in which we pay back the huge collective debt we incurred during the bull market.

I think the answer is to stop doing things to encourage bull markets. Then gains from stocks would be steady and economic expansion would be steady. Steady is better. There are huge inefficiency costs that follow from pumping the economy up insanely high for a few years and thereby causing years of insanely low growth as a consequence.

Honest prices in honest markets in economies enjoying honest amounts of growth work best for all of us.


Jen September 20, 2010 at 8:07 am

This was an interesting article. The last paragraph is great advice. I think people get too bogged down in trying to pick the one thing they love and go do it, especially if they have a lot of divergent interests.

And I agree on changing jobs to get a raise. In my previous job, it would have been very slow going to reach the salary level that was average for my field. I switched companies, in part, because it came with a 25% pay increase, which put me just a bit above the average salary for my experience level.

Monique Rio September 22, 2010 at 10:33 am

Found this through TheSimpleDollar. Totally agree with the last paragraph, particularly the “if you’re a normal human, you probably have many interests” bit. I’d add that brightest future doesn’t necessarily mean greatest income. If you’re doing something you like and something other people value but it’s not something you want to master, you won’t be a top performer and you’ll probably come to hate it.

That said, it’s a good idea to pay attention to the market value of the skills you might develop.

William September 24, 2010 at 12:34 pm

I found you through the Carnival. I agreed with everything you have here except when you say that companies don’t take into account your previous salary. I have buddies in the area who figure their asking price using the average from or a similar tool, and on occasion the potential employer will come back and say that their asking price is too much of a jump from their previous salary.

I don’t think it should be that way, but apparently at least some companies do use your previous salary as a measure of your worth.

mdb September 25, 2010 at 9:11 am

I am changing jobs right now, decided Monday to send out 9 resumes, heard back from 6, choose 3 for phone interviews next week – all will be good moves. The absolute most important thing is to choose a good career and keep current. I have taken classes every year since graduating with my bachelors in 1993. I am 5 classes from my second masters.

Don’t study english.

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