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The Effects of Graduating from College during a Recession on Consumption and Asset Holding

Daiji Kawaguchi () and Ayako Kondo ()

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Recent studies reveal that graduating from college during a recession has persistent negative effects on labor market outcomes—a phenomenon called the scarring effect. This study assesses the welfare impact of the scarring effect beyond labor market outcomes, by analyzing consumption and asset-holding behaviors. Scrutiny of the Current Population Survey and Consumer Expenditure Survey reveals that, despite a significant decline in earnings, business cycle conditions at the time of entry into the labor market does not affect expenditures or asset holdings; instead, young college graduates who face a recession tend to stay with their parents. These results suggest that the cohort-specific negative shock is absorbed by an implicit inter-generational insurance mechanism; the scarred cohort postpones the timing of leaving the parents' household to secure the same consumption and asset-holding levels as that of other cohorts.

Pages: 26 pages
Date: 2015-06
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