Goolsbee on the Business Cycle

Today's NY Times has a fascinating article by University of Chicago economist Austan Goolsbee. It discusses new research on how the state of the economy when a person leaves school affects his subsequent career. An excerpt:

Consider the evidence uncovered by Paul Oyer, a Stanford Business School economist, in his recent paper, "The Making of an Investment Banker: Macroeconomic Shocks, Career Choice and Lifetime Income" (National Bureau of Economic Research Working Paper 12059, February 2006). Dr. Oyer tracked the careers of Stanford Business School graduates in the classes of 1960 to 1997.

He found that the performance of the stock market in the two years the students were in business school played a major role in whether they took an investment banking job upon graduating and, because such jobs pay extremely well, upon the average salary of the class. That is no surprise. The startling thing about the data was his finding that the relative income differences among classes remained, even as much as 20 years later.

The Stanford class of 1988, for example, entered the job market just after the market crash of 1987. Banks were not hiring, and so average wages for that class were lower than for the class of 1987 or for later classes that came out after the market recovered. Even a decade or more later, the class of 1988 was still earning significantly less. They missed the plum jobs right out of the gate and never recovered.

And as economists have looked at the economy of the last two decades, they have found that Dr. Oyer's findings hold for more than just high-end M.B.A. students on Wall Street. They are also true for college students. A recent study, by the economists Philip Oreopoulos, Till Von Wachter and Andrew Heisz, "The Short- and Long-Term Career Effects of Graduating in a Recession" (National Bureau of Economic Research Working Paper 12159, April 2006), finds that the setback in earnings for college students who graduate in a recession stays with them for the next 10 years.

As I read this article, I wondered: How can we reconcile these facts with standard macroeconomic theory? Standard theory describes the business cycle as temporary deviations of output and employment around their natural levels. A few years after a macro shock, everything is supposed to be back to normal. By contrast, Goolsbee describes a world where macroeconomic shocks have very persistent effects on a person's opportunities.

Maybe these findings are related to the time-series literature that suggests there is a large persistent ("unit root") component in GDP. And maybe these findings can alter our view about the social cost of the business cycle.

It seems that there are some good research papers to be written reconciling the micro facts that Goolsbee describes with macro theory.