Australian Treasury: Young workers face a decade of COVID pain

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The Australian Treasury has released a new report claiming that the sharp rise in unemployment associated with COVID-19 may have long-lasting effects on Australia’s youth:

This paper explores the effects of labour market conditions at graduation on an individual’s work‑life over the following decade. Australians graduating into a state and year with a 5 percentage point higher youth unemployment rate can expect to earn roughly 8 per cent less in their first year of work and 3½ per cent less after five years, with the effect gradually fading to around zero ten years on…

Given their greater sensitivity to changing economic conditions (Figure 1), those graduating in a recession likely face worse career prospects in the near term. It is less clear whether this initial setback has lasting consequences, though there are a range of reasons to think that it might. For example, the human capital of recent graduates may depreciate if their skills become redundant or are lost while they are not being put to use in a well matched job. After an initial setback, climbing back up the career ladder will take time, and may be difficult if employers fail to recognise the role of bad luck in early career struggles. These initial setbacks may be particularly damaging given the critical role of the early phase of the career — with estimates that almost 80 per cent of lifetime wage increases occur within the first decade of an individual’s career (Murphy and Welch 1990). Finally, there may be ‘psychological’ scarring with graduates adjusting down their aspirations when faced by a shock during a particularly formative period…


The aggregated data provides suggestive evidence for labour market scarring in the early years of an individual’s career. In Figure 2 we show the mean earnings of graduation cohorts at various points in their working life, alongside the youth unemployment rate at the time of graduation. The three sharpest rises in youth unemployment rates — in the early 1990s, and early and late 2000s — all coincide with flat growth in subsequent earnings. This is most apparent in initial graduate earnings, but there are suggestive echoes in later years. In particular, earnings for these same cohorts in 2 and 4 years’ time, indicated in the solid and dashed orange lines respectively, also appear to suffer relative to earlier cohorts…

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.